by Jillian Hufford, Marketing Analyst

In 2016, Amazon generated 22.99 billion U.S. dollars in third-party seller service revenues. Third-party sellers account for 50% of paid units sold on Amazon.

That’s a lot of online orders to deliver!

To ensure accurate and on-time delivery, more sellers are using Fulfillment by Amazon (FBA) to fulfill their orders. In 2016, Amazon more than doubled the items they delivered for other sellersfrom 2015 to exceed over 2 billion items. Active sellers using their fulfillment service rose more than 70% in 2016.

You might be asking yourself, “Should I be using FBA?”

This post explains how FBA works and what you need to consider before using FBA. Keep in mind that it’s not best for everyone!

What is Fulfillment by Amazon

In simple terms, FBA works like this: you sell it, then Amazon ships it. The detailed process of Amazon’s renowned fulfillment process is:

  1. You send your items to Amazon’s fulfillment centers to store it.
  2. After Amazon receives your inventory, you can monitor it through their tracking system.
  3. The customer orders your items from Amazon or another eCommerce platform.
  4. Amazon picks and packs the sold items.
  5. Amazon ships your items by method chosen by customer and provides them tracking information.
  6. They provide customer service and return management for items.

FBA is not just for orders placed on Amazon.com. You can also use it to fulfill orders from your own site. For all your sales channels, Amazon stores your single composite inventory in its fulfillment centers and fulfills orders as they are placed.

As expected, Amazon charges you different fees to use their services. We’ll go into detail below about how to calculate those fees late. First, we’ll discuss the services that FBA provides sellers.

Benefits of Using Fulfillment by Amazon (FBA)

FBA gives users the ability to grow their business and reach more customers. Through free 2-day shipping, sellers can increase sales and save money. The top benefits or pros of FBA are:

Discounted Shipping Rates

Shipping speed and its price are two important factors that affect whether a customer decides to buy. Your FBA items can be eligible for free shipping, which puts them at the top of product listings with no shipping costs. Prime members can take advantage of Amazon Prime Free Two-Day shipping on your items. All Amazon.com customers can also receive free shipping on eligible orders.

You’ll get your products in front of more customers and they’ll know right away that they’re eligible for free shipping. You’re giving them a better incentive to buy from you.

Customer Service and Return Management

FBA users also have access to Amazon’s acclaimed customer service as part of the entire fulfillment process. Customers can contact customer support via phone or email both day and night. You’ll know you’re providing the best service you can. And, you won’t have to spend hours providing it, instead you can focus on managing your business’s operations.

Customers can process returns through Amazon’s Online Returns Center. This allows them to conveniently return items when needed. You won’t have to worry about the difficulty of reverse logistics anymore. However, you are charged for a returns processing fee for this service.

Multi-Channel Amazon Fulfillment

FBA isn’t just for selling on Amazon. You can also use FBA for your other sales channels like your own site. Your customers can enjoy flexible shipping options like one-day, two-day, and standard delivery times.

Handling fulfillment across different channels can be difficult and expensive. Letting Amazon handle it for you ensures you’re giving customers the best experience possible. Whether you’re already selling on Amazon or not, you can keep your ordering and shipping process consistent across your channels.

Customer Experience

FBA allows you to reach more customers.  You’ll win them over by giving them multiple shipping options, fast delivery as promised, an easy return process, and trustworthy customer service from Amazon.

Seeing the “Fulfillment by Amazon” logo next to your items can go a long way with customers. You could be able to increase your sales and provide a customer experience that meets their expectations.

Costs of Using Fulfillment by Amazon (FBA)

After knowing the benefits of FBA, understanding the costs of FBA helps you determine if this service is the right decision for you.

Amazon breaks their fees down by size (standard and oversize), weight, and time of year. For your items, you can expect fulfillment and storage fees to include these services:

  • Picking and Packing Your Orders
  • Shipping and Handling Your Order
  • Customer Service
  • Product Returns
  • Storage per cubic foot per month

For example, a small standard-size item (like a tablet or book) that is 1 lb. or less will have fulfillment fees of $2.41 from January-September and $2.39 from October to December to ship. Standard-size inventory storage fees are $0.64 per cubic foot and increase to $2.35 per cubic foot during the holiday months.

However, costs changes for items sold on any other channel than Amazon.com. The same tablet or book, say if sold on your own website, would instead cost you a total of $7.90 to ship in 2 days.

There are other scenarios where additional fees apply. These different instances can cause a change in standard pricing:

  • Oversized items that have Special Handing Fees per shipment.
  • There are additional storage fees for inventory stored for six months are longer.
  • Both fulfillment and storage fees increase from October to December.
  • Other fees can apply such as prep service fees or fees for processing customer returns in specific categories.
  • Clothing items incur an extra $0.40 per unit.

Use this chart to see a full list of FBA fees by product size and category. If you will use FBA for items not sold on Amazon, then use this chart for fulfillment fees for multichannel fulfillment orders.

Think about your business and the type of items you sell. You’re going to face additional fees if you have very large items, inventory with long-shelf lives, or want to use FBA just during the holiday season.

Since businesses are unique with many different types of items, Amazon offers a Fulfillment by Amazon Revenue Calculator that calculates the cost and possible revenue from using FBA. This tool is great if you only have a few products to compare that you already sell on Amazon. It’s also possible to look for free FBA bulk calculators to check prices for lots of items at once.

Keep in mind that Amazon changes their fees almost yearly. You want to make sure that you’re always up to date and evaluate the costs. The latest 2018 Fulfillment by Amazon Fee changes will be effective February 22, 2018.

Disadvantages of Using Fulfillment by Amazon

Even though Amazon is one of the most advanced fulfillment processes in the world, their FBA service still has a few, sometimes unrealized, disadvantages for sellers. Make sure you consider these difficulties before signing up for FBA.

Commingling Merchandise

Amazon ships products from whichever of their nationwide facilities can get the item to the buyer the fastest. This is why their advanced process is so efficient. To ensure this same efficiency for sellers fulfilling orders through FBA, you are given the option of commingling, or pooling your prodcuts.

Commingling combines qualifying products from different sellers for processing and shipment by Amazon. As a seller, it saves you time and effort you’d otherwise spend applying FBA approved labels to each of your items or paying Amazon to do it for you.

Instead of providing labels, you just use an item’s bar code that pools your products with other sellers based on the product ID. Amazon can then strategically store and ship items of the same product ID by the location that ensures the fastest-shipping time.

For example, a buyer in Ohio selects a product from a seller in Colorado. If Amazon’s system finds an identical product offered by a seller in Indiana, whose product is in a closer fulfillment center, they’ll ship the Indiana seller’s item to the buyer. The Colorado seller still gets the sale of course. Since all the items are the same, what’s the potential problem?

Product quality control consequently becomes very difficult for sellers. Scenarios have been cited where sellers are forced to close shops, received negative reviews, or even faced legal actions when counterfeited or damaged items are received by customers in lieu of the genuine item the sellers sent Amazon.

It wasn’t the seller’s fault, but still they faced the harsh consequences. To learn more about the process of commingling, read about the pros and cons of commingling for Amazon merchants.

Be aware: By default, your seller account is set to use the manufacturer barcode to track your inventory. So, your items will be commingled with items of the same products from other sellers who also use manufacturer barcodes. You must manually change your Amazon barcode preference if you don’t want to commingle your products.

Sales Tax Compliance

Another voiced issue of FBA is for sales tax compliance. Amazon doesn’t tell sellers which of their many warehouses keeps their item. They also do not provide a list of warehouses where items could be located.

Sellers are then unsure where they should register for sales tax compliance. They don’t know where items are stored or where customers are located until after the transaction is complete. This potentially exposes sellers to liability issues.

Long-Term Storage Fees and Managing Inventory

As FBA grows, space within fulfillment centers becomes more valuable. It’s no surprise then that Amazon charges you more if your inventory sits longer than 6 months on their shelves.

If your items have long-shelf lives or if you usually have stale inventory, you’re paying a pretty penny for rent to store items, especially if it’s not going to sell. It’s also hard to monitor when this inventory becomes too much of a burden on your bottom line. If you have thousands of items, it’s difficult tp keep track of how much inventory you have and what you need to cut back on.

Preparing Items for Shipment

While Amazon takes care of the entire fulfillment process for you, they only do so once they have the inventory in their hands. Sellers can struggle with preparing and shipping their items to Amazon’s fulfillment centers.

You must forecast the items you think you’re going to sell and then must properly label and ship them to Amazon. It takes more time, planning, and costs to ship your products to the right warehouses. It’s even more difficult if you’re sending out multiple products.

Alternatives to Fulfillment by Amazon

If you’re not sold on using FBA, there are alternatives worth taking the time to compare. You could use another third-party fulfillment service like Shipwire who offers the same type of services as FBA. You can compare prices for your items and choose the one that makes the most sense for you.

Sellers can also look into solutions for better managing a specific area of the fulfillment process. There are integration solutions for order managementdrop shipping, and product returns management. You can tightly integrate these process with your current retail systems like your webstore, Point-of-Sale (POS), and ERP.

If you’re interested in a more in-depth article that compares more FBA alternatives, check out our article 3rd Party Fulfillment Services: Fulfillment by Amazon (FBA) Alternatives.

Is FBA Worth the Cost for Your Business?

Fulfillment by Amazon is used by a lot of third-party sellers. But, it doesn’t mean it’s right for your business.

You have to evaluate its main benefits of faster shipping, easy returns, and potentially reaching more customers versus its service fees. Sellers also must factor in some cited issues with commingling and sales tax compliance.

For some, it might be tough choice whether to use FBA. If you do decide that FBA is right for you, learn more about how to integrate FBA more tightly with your other retail systems like your ERP, POS, and webstores.