Over the last two decades, no business has seen as meteoric of a rise as Amazon. Their online marketplace dominates the e-commerce space, shipping millions of products to millions of Americans each and every year.
To date, the platform has over 1.5 million active sellers, with marketplaces selling to individuals all around the world. Further, Amazon boasts an estimated 112 million Amazon Prime subscribers in the United States alone, with each subscriber spending an average of $1,400 a year on the platform. Meanwhile, worldwide there are over 200 million Amazon Prime members.
Given these massive numbers, it is no wonder that so many businesses are eager to sell their products on the Amazon marketplace. It truly is a great opportunity for small businesses to sell unique products that shoppers are looking for. Plus, having an Amazon store helps boost your business’ visibility.
There are actually multiple ways you can sell on the Amazon marketplace, however, today we will be covering their most innovative option, known as the Fulfillment by Amazon (FBA) program.
Fulfillment by Amazon (FBA) vs Fulfillment by Merchant (FBM)
Amazon offers two solutions for sellers using their platform: FBA and FBM. These abbreviations stand for Fulfillment by Amazon (FBA) and Fulfillment by Merchant (FBM).
When sellers use the FBA solution, Amazon charges a monthly inventory storage fee based on the volume of products you store with them and a fulfillment fee – in return, they manage and ship you inventory for any and all purchases made through Amazon (if you use their omnichannel fulfillment offering they will also fulfill orders made on other platforms and channels, like eBay and BigCommerce).
When sellers use the FBM solution, they are responsible for storing and shipping inventory themselves. They can also use outside 3rd-party fulfillment services, which often have cheaper rates than Amazon.
What are the Pros and Cons of Amazon FBA?
As more and more sellers become Amazon FBA businesses, it makes sense to discuss some of the pros and cons associated with using the Amazon FBA solution. While there are certainly a lot of pros that come with it, there are also a number of cons that should be considered carefully by small business owners.
Pros of Amazon FBA
Removes the Burden of Shipping and Logistics – One of the pros of Amazon’s FBA service is that it completely removes the need for businesses to worry about shipping and logistics. After businesses ship their products to Amazon’s warehouses, Amazon takes care of everything.
Customer Service and Return Management – In addition to managing inventory and shipping products, Amazon also takes care of the customer service and returns components of selling online.
Amazon Prime Delivery – Nowadays, the best sellers and companies ship quickly! By being an Amazon FBA seller, your products automatically qualify for Amazon Prime shipping. This means your products will reach customers in two days or less. What’s even better is that you don’t have to pay for expedited shipping rates – they are included with the service. This is one of the biggest pros of being an Amazon FBA business since very few small businesses do enough volume in sales and shipping to be able to get inexpensive two-day shipping rates. As a result, Amazon FBA can be a great way to get access to lower shipping costs. Plus, your customers won’t have to wait long to receive your products. instead, when your customer orders a product, they will get it in two days or less!
Amazon Multi-Channel Fulfillment – By using the FBA service, not only can your business remove the need to handle the logistics of selling items via the Amazon platform but you can also remove the need to manage inventory and fulfill orders made via other platforms. Amazon is capable of fulfilling orders made on 3rd party platforms like BigCommerce and eBay.
Competitive Marketplace – Amazon is a highly competitive marketplace with millions of sellers and products. This means it can be hard to make a splash on their platform if your product is the same or very similar to other ones. As such, you’ll need to think long and hard about whether or not your product can actually be competitive in the marketplace. Additionally, unique products tend to be easier to create a following around, so if you are starting a new business, you should ensure that you are thinking about this as you develop product ideas and your business model.
Cons of Amazon FBA
Amazon FBA does have some cons that small businesses should consider before jumping into the program.
Costs – One of the biggest downsides of Amazon FBA is that it can cost a lot of money. The service isn’t great for low-cost items on account of the way Amazon fees are calculated. Be sure to make use of Amazon’s FBA calculator when deciding whether or not you want to join the program. These fees can make a difference for startup businesses that are small and looking to save money in any way possible.
Amazon also deducts their fees before making any payments to you, which means fees are not flexible and are due right away. If you don’t sell enough to cover your fees, they will charge your business credit card to pay off any outstanding balances. This can make it harder for small businesses to manage their cash flows.
Extra Returns – Amazon has an extremely open and easy-to-use return policy. As a result, it is not uncommon for Amazon sellers to see an increase in returns once they begin selling on the platform. Of course, it is this return policy that makes Amazon products so popular (for example, even if the same product is available on another site, Amazon is often the go-to merchant for customers). However, since Amazon manages your customer service and returns, it won’t create any extra work for you.
Storage Fees – Amazon likes to move through inventory quickly and efficiently. Letting your inventory stockpile in their warehouses will lead to your storage fees increasing. As a result, if your items sell slowly, it can be a good idea to limit how much initial inventory you send to Amazon. This can all be managed and monitored through your Amazon seller account.
How Much Does Amazon FBA Cost?
Naturally, the big question on your mind if you are considering starting a new business via Amazon FBA or looking to sell the products of your current business on Amazon is: what does it cost? Let’s quickly break down the costs associated with Amazon FBA and Amazon listings for individual sellers.
Amazon Referral Fees (Charged to Both FBA and FBM Sellers)
Amazon referral fees are a commission that sellers pay to Amazon for each item they sell. Fortunately, these fees are paid by sellers when the item is sold, not when upfront.
The fee itself depends on the category of the product, however, it is typically a flat percentage of 15% or less of the product price. Additionally, the fee tends to decrease as your sales volume increases, which means the more you sell the more you make per product!
Individual Seller vs. Professional Seller Plan (Charged to Both FBA and FBM Sellers)
Amazon also assesses an additional fee to Amazon FBA sellers based on the plan they select. The two plan options are “individual seller” and “professional seller”.
Under the individual seller plan, you’ll pay a fee of $0.99 for every product you sell.
Under the professional seller plan, you will pay a monthly fee of $39.99, regardless of how many products you sell. This means that if you think your order quantity will exceed 40 products a month on Amazon, it is more cost-effective to choose a professional seller subscription plan.
Professional sellers also get extra features. For example, whereas individual sellers can sell products in 20 categories, professional sellers can sell products in an additional 10 categories (30 categories total).
The 10 bonus categories that professional sellers can sell in are as follows: Professional Service; Sports Collectibles; Video, DVD, Blu-Ray; Watches; Automotive Parts & Accessories; Business to Business (B2B); Collectible Coins; Fashion Jewelry; Fine Jewelry; Fine Art; Grocery, Food & Gourmet; Industrial & Scientific.
Professional sellers can also win the coveted Amazon Buy Box. The Buy Box means that when a customer clicks on a product page and selects the “Add to Cart” or “Buy Now” option, it’s your product they are buying. Otherwise, they will have to look at the other options for the products where they will be able to view all the sellers offering a specific product.
If you are serious about growing a sustainable business using Amazon FBA, then you will most likely want to choose a professional account.
FBA Fee for Each Sale
As an FBA seller, you will also be subject to additional fees from Amazon, since Amazon is shipping, handling, and packing your goods.
FBA sellers are charged an FBA fee to cover these services. This fee is charged on a per-product basis each time you sell an item. The fee is based on the weight and size of your product and currently starts at $2.41 for a small (10oz or less) item. The fee reaches $5.26 for a large item (3 to 21 lbs.) before it moves into oversize pricing (certain product categories are also subject to additional fees). These fees will increase your product cost. You can consider these fees your shipping fees since they are specific to the FBA program.
FBA Storage Fees
If you were wondering if there are any upfront or initial costs for FBA sellers, this is where they kick in. While Amazon does not charge for product listings, they also charge for storing your inventory in their warehouses. This is where you will incur startup costs as a new seller on Amazon since regardless of whether you sell any items, you will still have to pay storage fees as an FBA seller.
Amazon FBA has two different types of storage fees: monthly and long-term.
Monthly Storage Fees – Amazon charges monthly fees for any inventory you are storing in their warehouse. These monthly fees are assessed on a per cubic foot basis. They will subtract these fees from the money you earned in the preceding month. If you did not earn enough to cover the fees, they will charge your credit card.
It is important to note that Amazon’s monthly storage fees increase during the holiday season. The cost of storage is approximately 3x higher per cubic foot during the months of October, November, and December.
Long-Term Storage Fees – As previously noted, Amazon does not like to hold inventory for a long period of time. They prefer items that move quickly, since products that sit around their warehouses lower their revenues and efficiency. As such, Amazon charges a fee (though really it can be seen as a penalty) for products that have been stored for 180 days or longer. This long-term storage fee is currently $6.90 per cubic foot of storage used.
Amazon then charges an additional fee for inventory stored in their warehouses for over 365 days (currently $0.15 per unit). Note how this charge is per unit instead of per cubic foot.
Long-term storage fees are assessed in the same manner that regular monthly storage fees are.
If your products are not moving that quickly, you might consider storing them yourself and only sending products to Amazon as they become depleted from their warehouse. This can help you save on fees and inventory costs.
Other Miscellaneous Fees – Certain product categories incur additional or different fees, such as media products. Sellers with a high volume of listings (thousands of listings) are also subject to additional fees. As such, you will want to investigate the fees associated with your product category and whenever you introduce a new product category within your store.
How Do You Get Started with Amazon FBA?
Getting started with Amazon FBA is fairly straightforward, and their website and customer service will walk you through it step-by-step. As a new seller, you will first set up an account and select a plan. Then the process of preparing your inventory to ship to one of Amazon’s warehouses begins.
Preparing your inventory can be confusing, so you will want to pay close attention to the instructions Amazon provides. They have a number of requirements which have to be followed.
Once you are up and running, you will be able to track and monitor everything from the seller central hub that your Amazon seller account will have. From there, you will be able to make money in no time!
Amazon Business Startup Costs
Outside of the aforementioned fees, there are no other startup costs associated with starting an Amazon business.
Obviously, you will have to pay the traditional startup costs associated with any small business (including paying for inventory, hiring and paying employees, etc.). However, you most likely won’t receive any other charges or fees from Amazon.
Operating On Amazon As Part of a Larger Business Model
Amazon can be a great way to expand your sales avenues, especially because it receives more traffic than any other e-commerce site. However, that does not mean you shouldn’t operate your own website, retail store, or sell through other avenues. As noted, Amazon can even help provide fulfillment services for other sales avenues, so if you are going to sell through Amazon you should definitely consider selling through a Shopify site using your own brand, as well as through other avenues. Don’t feel limited to Amazon – it’s just one piece of a very large e-commerce puzzle!
Running a business on Amazon can be a great idea for small businesses if the circumstances are right. However, it really all depends on the product you are selling and how it stacks up against the competition. As such, it is absolutely crucial that you conduct careful and diligent market research before deciding to sell on Amazon. With the right approach, selling on Amazon can be extremely lucrative, but with the wrong approach you could end up paying costly inventory fees with little long-term reward.
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