Would you like to scale up as quickly as possible without having to invest lots of money in logistics and customer service? Does your start-up need to ship products at Amazon Prime speed? Do you want to gain the trust of Amazon customers without having to make large investments in your brand? Fulfilment by Amazon is the service that offers this. In this article you’ll learn about the details, including some cost issues.
What is Amazon FBA?
Amazon Fulfilment by Amazon (FBA) enables merchants to offload all of the important processes that are involved in the purchase process to Amazon, from warehousing and shipping to taking back goods.
The merchant sends their goods to Amazon’s warehouses and pays service fees for storage, sales and returns. In return, Amazon takes over all of the other steps after the goods have been shipped. The merchant remains responsible for pricing, product descriptions and so on.
How can I participate in Amazon FBA?
In order for you to benefit from Amazon FBA, you only need to fulfil a few requirements. You need a business that has been registered in your country. It doesn’t matter whether you are a sole trader, or your company is a Ltd company or an LLP.
You also need an Amazon Seller account. You can either opt for the free version or the Pro version. The financial advantage of the Pro version takes effect after you have sold 39 items. The Pro version also gives you better options for promoting your products.
You will find the registration function for Amazon FBA in your seller account. You will enjoy a degree of flexibility and can easily agree with Amazon when, and how many, goods you will send to which warehouse, and which products Amazon will ship for you.
Now create a product page for each of your products or use existing product pages. Once your goods have arrived at Amazon’s warehouse, you can offer them for sale directly via Amazon.
This service is not limited to selling through Amazon. You can also connect your existing shop to this service. To a certain extent, Amazon FBA is becoming an alternative to drop shipping. However, whilst Amazon has become associated with a better service and faster delivery times, there are also additional costs that you will need to be aware of.
How much does Amazon FBA cost?
The costs depend on the usage of the warehouse and the size of the goods. The cost calculations are made based on the average inventory volume in cubic feet – which means that larger goods will cost more.
Amazon offers a calculator to help you accurately calculate the cost of Amazon FBA. This gives you a fairly accurate idea of the cost of a particular item. Amazon makes its calculations according to different cost points. The comparison calculator enables you to compare your current costs with what you might be charged by Amazon FBA.
You should have an accurate understanding of your current costs and the margin that you will need to achieve in order to work profitably. This will help you to make an informed decision as to whether or not you will use Amazon FBA’s services.
What are the benefits of Amazon FBA?
Amazon FBA takes a lot of work off retailers’ shoulders: once the goods have been shipped to the Amazon warehouse, they no longer have to worry about logistics. This has the great advantage that the business can grow without being burdened by high investment costs.
Do I need to hire a new employee for the hotline? Do I need to expand my warehouse? How do I compensate for absenteeism without delaying deliveries? You don’t have to ask yourself all of these questions if you use Amazon FBA. The advantages of Amazon taking care of all this for you are clear, especially if you are a smaller retailer.
You will also have access to good, reliable Amazon support, which will support your customers with returns and other issues. And you will benefit from the fast delivery times with Prime. If you offer suitable products, you can make use of the money-saving subscription function on Amazon Prime and thus achieve regular sales.
There is another important factor if your business is somewhat unknown: you can profit directly from the trust that your customers place in Amazon.
Depending on what your cost structure usually looks like and what you can do without, it may be the case that Amazon FBA will be significantly cheaper for you than if you handle everything yourself. In any case, it will be straightforward to arrange the shipping of your goods.
FBA has some compelling advantages for selling on Amazon: you can ship your goods via Prime and win the Buy Box much more easily.
What are the disadvantages of Amazon FBA?
One of the big disadvantages of Amazon FBA is that you are no longer in direct contact with your customers. This makes it difficult for you to strengthen your brand.
Customers receive a standardised Amazon package with a logo. You can no longer include your own logo, promotional flyers, or small gifts that might help build customer loyalty.
While it might be cheaper to use Amazon FBA, there is a financial risk. In some cases, FBA can prove more expensive in the long term than setting up your own logistics. It is easy for beginners and start-ups to miscalculate. A sound mathematical basis for choosing Amazon FBA is therefore crucial for success.
Long-term storage fees, frequent returns for multiple orders and return orders can increase the fees that were originally calculated. That is why sufficient equity capital is necessary to optimise sales on Amazon and move into the profit zone.
It is only by having sufficient start-up capital for Amazon FBA that you will have enough time to discover and fix your areas of weakness.
Another disadvantage is the dependence on Amazon: if you set up your own online shop with logistics, you can strengthen your brand and serve different marketplaces. Those who rely on Amazon FBA, on the other hand, are strongly tied to Amazon. It is possible to forward sales from your own online shop or from other trading places to Amazon.
However, you may also have to accept changes to the terms that you don’t like because you cannot switch quickly and easily to another fulfilment solution once everything goes through Amazon.
In order to provide a similar quality of service, you will need:
- The know-how
- The storage space
- The employees
- The time to optimise processes
You should be aware that you are making a strategic decision with far-reaching consequences when you decide to use Amazon FBA. You are not investing in your own logistics, but rather depending on another entity to satisfy your customers.
Unlimited warehouse? Amazon limits your warehouse space
For a long time, Amazon FBA had a reputation for providing unlimited storage. But many sellers don’t sell fast enough, which results in warehouse space being blocked.
That’s why Amazon introduced what it calls a stock index (LBI) in 2019. Through this index, it promotes goods that sell out quickly. If you stock a lot of products on Amazon that sell poorly, it can have a detrimental impact on your LBI.
Your LBI can range from 0 to 1,000 points and is determined by the following factors:
- Sell-through rate
- What is in stock
- Inventory with no active supply
Every now and then, Amazon changes the threshold at which consequences take effect. Since July 2021, the threshold has been 500 index points. If the LBI is below this, Amazon restricts the storage capacity or reserves replenishment restrictions. Amazon gives you time to respond to falls in LBI. If you fall below this point, it is often enough to refrain from sending large deliveries that meet or exceed the stated capacity limit.
Amazon FBA allows you to ship goods at Prime speed without having to invest in logistics yourself. The shipping giant not only provides you with storage space; it also ships, labels and returns your goods for a fee, the cost of which is determined by your goods.
Amazon FBA is perfect for small retailers and start-ups, as it can help save money and effort. Ultimately, however, each company invests in someone else’s logistics instead of building their own. It’s a strategic decision that needs to be carefully considered, despite the advantages.