Whereas Amazon sells many of its own products, more than half of sales on the e-commerce platform come from third-party sellers. Many of these items are stored in Amazon warehouses and shipped by Amazon employees. This system is called Fulfillment by Amazon — or Amazon FBA. It simplifies the shipping process for sellers and provides the same service for customers as if they had purchased direct from Amazon. It also gives Amazon a greater share of the profits for every third-party sale.
The question is: for sellers, is Amazon FBA worth it?
How Does Amazon FBA Work?
Before we look at whether Amazon will be profitable for your business, you need to understand how Amazon FBA works.
Step 1: You send items to an Amazon fulfillment center. If you don’t produce your own products, the manufacturer can send them instead. There are around 100 warehouses in the U.S. Amazon will tell you where to send your items according to the type of products.
Step 2: Once Amazon has received your items, the warehouse employees will sort your merchandise and store it with a tracking code. Incidents of damage and loss are rare, but if something does happen to your products, Amazon will reimburse you.
Step 3: When a customer orders one of your items, Amazon will locate it and pack it. Your inventory will update automatically.
Step 4: Amazon will ship the item using the method the customer chooses.
Step 5: During shipment, both you and the customer will be able to track the item.
Step 6: Amazon will handle any additional customer support, such as customer questions and returns.
Step 7: You will receive payment for sales through Amazon FBA every two weeks.
It’s important to note that you can also use Amazon FBA to fulfill orders from other e-commerce platforms, like eBay and Facebook, and even for your own website.
Is Amazon FBA Still Worth Doing?
When Amazon first released its FBA service, sellers leaped at the chance to simplify the shipping process. Since then, Amazon has become much more popular, resulting in more competition and higher fees. This has led some people to question whether Amazon FBA is worth it in 2020.
To determine if Amazon FBA is worth it for you, there are few factors to consider.
1. Amazon FBA Fees
Amazon frequently updates its rates. Unfortunately, fees almost always become higher. Monthly storage fees are now at $0.75 per cubic foot from January to September and $2.40 per cubic foot from October to December.
In addition, you need to pay a minimum of $2.50 in fulfillment fees (these are instead of shipping fees) for each unit you sell. This rate is for the smallest size: no more than 10 ounces of shipping weight and 4 ounces of packaging weight. The fee for large items is $5.42 for up to 3 pounds and then $0.38 for every additional pound.
If you have oversize items (whether small, medium, large, or what Amazon calls “special oversize”), you’ll pay even more. A large oversize item, for instance, is $75.78 for the first 90 pounds and $0.79 for every additional pound.
Furthermore, certain categories of items have higher fees, such as clothing. For example, a small size item of clothing has a fulfillment fee of $2.92 rather than $2.50. The good news is Amazon eliminated its $0.40 surcharge for clothing, meaning it actually became slightly cheaper to sell clothing this year compared to last year.
Dangerous goods also have higher fees, as they require special storage and handling.
You can check out the list of fulfillment fees (which also explains what dimensions make an item oversize) to figure out how much you’ll pay for your items.
In addition, it’s important to note that you may incur other fees, such as FBA removal order fees, FBA disposal order fees, and for the FBA Label Service. There are also long-term storage fees for items that have been in storage for more than 365 days (up from the six months it was previously).
2. Your Product Range
Amazon FBA is better suited to some types of products than others. To avoid hefty storage fees, it’s best to have small items that will sell fast. Large, low-cost products may be too expensive in fees to be worthwhile.
3. Your Workload
Selling online can be a big commitment. Handing fulfillment over to Amazon may free up some of your time — after all, shipping will be one less thing to worry about.
All the same, using Amazon FBA will add a few tasks to your schedule. First, you’ll need to calculate how many items to send. It’s important to strike a balance between running out of stock and spending more than necessary on storage fees. Second, you’ll need to prepare items to meet Amazon’s requirements. This involves using the correct packaging — otherwise, you can expect to incur another fee.
4. Lower Shipping Rates for Your Customers
As one of the largest companies in the world, it’s easy for Amazon to negotiate better shipping rates with delivery services than your business ever could. Plus, Amazon Prime customers even receive free two-day shipping on all FBA orders. This makes your products far more appealing to customers. In fact, if you lack free shipping, Prime customers may buy from one of your competitors instead.
5. Customer Service
Fast shipping is just one benefit for customers. Another is a better return policy than your business would likely be able to offer. Unfortunately, the policy is great for customers, but less so for sellers: you’ll need to pay a returns processing fee whenever a customer returns an item. Still, it does mean you don’t need to deal with reverse logistics nor the messaging of customers to figure out if they qualify for a return.
6. Storage Space
If you lack space to store all your inventory, relying on an Amazon warehouse could be an excellent solution. If your products sell fast, Amazon may even offer you unlimited storage — which is never an option when paying for your own warehouse.
7. Quality Control
If you’re selling identical products to another business, you never know if Amazon will ship your customers the items you sent to the fulfillment center. This is because Amazon looks at the bar codes of items, which don’t differ according to seller. There is always the chance that a customer will receive a lower-quality product than one you sent.
Whereas you can opt out of this practice (it’s called merchandise commingling), this will likely slow down your delivery times. For instance, if a customer is on the other side of the country, Amazon will be unable to ship from the closest warehouse.
You also need to consider that you are handing over a major function of your business to another company. Whereas Amazon usually has excellent customer service, the sheer number of orders means there will always be some mistakes. If Amazon makes a shipping mistake on your behalf, your reputation could be at stake. You may receive a negative review or even lose a customer.
8. Accounting and Taxes
Accounting can be extra difficult when you use Amazon FBA. There is no way of automatically connecting Amazon FBA to your QuickBooks account, unless you pay for a tool that will do it for you. The other option to manually record fees in a spreadsheet. Depending on your sales, this could take up hours of your time.
And that’s just the start. You also need to think about sales tax compliance. Amazon can decide to move your items to a fulfillment center in a different state at any time — and you are not privy to this information. However, although sellers have voiced concerns that they could be at risk of liability issues, there have never been any problems to date.
Is selling on Amazon FBA worth it? That depends on your business. The benefits of Amazon FBA are that your customers will receive an excellent service (which may well encourage them to buy from your company again) and you’ll eliminate some tasks from your schedule, allowing you to focus on other aspects of your business.
The main downside of Amazon FBA is its cost. Furthermore, it won’t guarantee perfect customer service nor eliminate monotonous tasks. After all, you’ll still need to keep track of your inventory, ensure Amazon always has enough of every item, and provide some customer support.
Amazon FBA is definitely worth it in 2020 — for some sellers. Before you determine if it will be a profitable solution for your business, you need to calculate how much you’re likely to spend. You may even like to try Amazon FBA with just a few types of products to see if it works for your business. Then you can decide if you want to commit to the service for the long term.