Third party Amazon sellers have two main options when it comes time to choose your fulfillment method for orders. Fulfillment by Amazon (FBA) entails that you pay Amazon to store your inventory and ship sold items to customers, whereas Fulfillment by Merchant (FBM) means you handle those responsibilities yourself.
Each business is different and one of these two methods (or a mix of both) may be more advantageous for your growing business. Here, we discuss a few pros and cons of each strategy:
Amazon encourages its sellers to take advantage of its FBA program, as it provides an excellent customer experience and reduces some of the more inconvenient aspects of online selling. However, FBA may not be the best option for everyone, and it pays to look at some of the advantages and disadvantages of the program.
- Prime Enrollment: Amazon automatically enrolls third-party sellers using FBA in their Prime Program, one of the key advantages to this method of fulfillment. It's estimated that Amazon Prime has54 million members in the U.S. alone, and Prime members are more likely to spend money than non-Prime members.
- More Time: FBA takes the burden of storing and shipping products off your hands, allowing Amazon to manage and take responsibility for these factors. For some Amazon sellers, this means more time spent focusing on business concerns and less time spent dealing with the logistics associated with selling your products.
- Buy Box Wins: Amazon considers your fulfillment method a major factor in determining who holds the Buy Box for a given product. FBA sellers can price their product slightly higher than FBM, and still win the Buy Box.
- Lower Shipping Costs: For many Amazon sellers, the fees that Amazon charges to ship products are lower than what shipping fees would be if sellers handled their logistics internally. If Amazon's shipping is less expensive than yours, FBA selling saves your business money.
- Limited Inventory Access: Without inventory on-site, sellers have less control over their products. In the case of problems with your inventory or shipping mistakes, you will have to rely on Amazon to verify product details or have your products shipped back to you from Amazon's inventory.
- Long-Term Storage Fees: In February and August of each year, Amazon goes through their inventory, and charges penalty fees for any products older than 6 and 12 months. If you have slower moving products or more than 6 months of inventory, storing those units at inventory will increase your costs.
There are a number of situations where using FBM as a fulfillment method may make more sense. Here we discuss a few of the pros and cons of FBM selling.
- New Prime Program: A new program from Amazon allows third-party sellers to enroll their products in the Prime Program when filling orders themselves. To enroll products in tehe Seller Fulfilled Prime program, Amazon will require that sellers show they can meet stricter shipping standards.
- More Inventory Control: Selling using FBM means you have complete control when complications arise. Hands-on access to your inventory allows you to navigate incorrect shipping and product quality issues without the delays associated with going through Amazon.
- Lower Costs: Amazon bases their fee structure on the size of the item being sold, so you'll need to analyze this aspect for your products. If you have a larger item with a small profit margin or a slower turn rate, you may want to fulfill this item yourself in order to save money on shipping and storage fees.
- Higher Turn Rates: Amazon's add-on program only applies to items fulfilled by Amazon and priced under $6-$8. The program requires customers to spend $25 on other products before an add-on item can be shipped, which make these items less attractive to Amazon shoppers. To avoid having your turn rates decrease for lower-priced items, use FBM for products that would otherwise be eligible as add-ons under FBA.
- Shipping Mistakes: Amazon puts a huge value on customer service, so shipping mistakes like a late or incorrect shipment will incur penalties for sellers, and even account suspension. It takes a highly disciplined shipping operation to avoid shipping mistakes,so be sure you have the right tools and team in place to accurately pack and ship orders.
- Lower Prices: Because Amazon favors FBA sellers to win the Buy Box, you may have to price products marginally lower than FBA sellers. You'll see a reduction in your profit margin and be less likely to win the Buy Box for a given product.
The advantages and disadvantages of a particular fulfillment method will likely be unique to the operation of your business. For many Amazon sellers, the best option is a diversified strategy that utilizes FBA for some products and FBM for others. To find the right mix for you, be aware of the pros and cons for each method, including the costs associated with each. As your selling on Amazon business evolves, continue to revisit your strategy and it's effect on your growing business.