Unless you sell really heavy products, or have a pre-existing and robust fulfillment system, there has always been a very compelling argument to use Fulfilled by Amazon (FBA). It’s fast, it removes a whole set of challenges from your plate, and it’s trusted by Amazon Shoppers.
But 2020 has introduced a new variable. The COVID-19 health crisis pushed global supply chains and ecommerce delivery systems to the limit. Amazon's decision to suspend the restocking of it’s fulfillment centres for non-essential products left a lot of Sellers in a tough position. Diversification and strategic dependency are now key factors in looking at the trade offs between FBA and FBM.
Although FBA has a proven track record, it’s always been worth looking in detail at which strategy is best for your brands. You have to ask yourself:
- What is best for my business?
- What capabilities does it give me?
With new information in mind, we are going to answer these questions here. But first a few definitions:
Fulfilment by Amazon (FBA) — inventory is sent to Amazon’s warehouses and Amazon manages the entire order fulfilment process. “You sell it. We ship it” in Amazon’s terms.
As the Seller, you’ll set up FBA in your Amazon account. Create your product listings, prepare your products, ship your products to Amazon, and let Amazon pick, pack, and ship your items as customers order your products.
Amazon charges a fee based on product size and weight. Sellers may also incur additional long-term storage fees.
Seller Fulfilled Prime (SFP) — inventory is kept in the Seller’s warehouse and delivery is managed through an Amazon preferred carrier. The warehouse must match FBA service levels to qualify. Entry to SFP is only granted after a successful trial period. So maybe something to look at once you’ve sorted out more short-term challenges.
Fulfilled by Merchant (FBM) — as the name suggests the Seller fulfils from their warehouse but is under no obligation to match FBA delivery times. As a Seller, you’ set up an Amazon account, create your product listings and store, pack, and ship the products as customers order them on Amazon. You take responsibility for any late, missing, or damaged arrivals.
Have the goalposts moved?
There was never a perfect formula for FBA vs FBM. With the onset of COVID-19 — and Amazon’s response to it — you need to re-evaluate your fulfillment options. Your decision will depend on these current unknowns:
1. “How long will the freeze on certain FBA categories continue?”
It does look like Amazon is adding to the list of “essential” items it will stock and will gradually add more as the current situation becomes better understood. US and EU marketplaces were set to start this gradual return to normal on April 5. It took until April 13th to start the process, but it is now underway.
2. “How long will this uncertainty last?”
With current lockdowns potentially easing, the economic wheels should start turning again. However, there may be future waves of lockdown stretching over the next twelve months. If Amazon returns to prioritizing essentials — or refocusing its logistics more towards addressing medical testing and health concerns — we will all be back to square one.
Geographical differences are also important to consider. Different countries will come out of lockdown at different rates. Part of that has to do with the actual recession of illness, but also how governments decide to prioritize economics vs public health. For example, the French government just intervened in a dispute between Amazon workers and the company to keep warehouses closed until at least the 25th of April.
What view you take on how this pans out and how you cope is totally dependent on your business and its situation. If you have the scope to reconsider your fulfillment options, take the time to plan now for the longer-term. Although never easy, fulfillment planning is no longer just about customer service and cost but about building long-term resilience into your business.
The standard variables when it comes to FBA
Setting aside the current circumstances, there are a number of standard criteria that make FBA stand out as a good or bad choice for your product line. These are worth detailing independently in order to place the current situation in better context.
Volume and weight
When it comes to delivery and storage, Amazon charges by weight. So, if you sell comparatively heavy products, FBA is not a great choice. This is one reason that booksellers rarely use the option on Amazon. The difference here is dramatic and worth an example.
Example 1: A garden hose nozzle. In this instance, you are selling a relatively lightweight product. Assume a selling price of $7.99, fulfillment costs of $6.20, an Amazon fee of $1.20 and a product cost of $1.50, you would actually end up losing $0.91 per sale via FBM.
$7.99 - ($6.20 + $1.20 + $1.50) = -$0.91
However, the same product at the same price point through FBA ends up delivering a profit margin of $1.68 (21.03%). This is because the cost of fulfillment is reduced to $2.51 ($3.61, assuming a $1.10 shipping fee to get the product to the Amazon warehouse), while your other costs remain the same. For this product, selling via FBA is a good idea.
Example 2: A bookshelf. In this scenario, you are selling a heavy product. If we assume a selling price of $75, a fulfillment cost of $28, Amazon fees of $11.25 and a cost of goods at $15, you make a profit of $20.75 (27.67%) per sale.
$75 – ($28 + $11.25 + $15) = $20.75
Using FBA, that profit margin would be reduced to $14.09 (18.97%). That is because the cost of fulfillment would rise to $34.66. Under these conditions, FBA would be a bad investment.
Obviously, the specific costs of your logistical operation make all the difference. There are also regional differences in how FBA charges are calculated. Again, that’s why the FBA calculator tool is so handy.
High volume, high margin products
FBA also serves high margin, high volume products well. For high margin products, the fees don’t make as large of a dent, and higher volume products translate into a better ROI because you are simply paying for the space. Traditionally, FBM is best suited to merchants selling one-off items at such low volumes that no warehouse or logistical supply chain is required. It’s also worth noting that heavy items will, in most cases, leave you with a smaller margin when using FBA compared to FBM.
Your existing logistical network
Small businesses benefit tremendously from simply avoiding the overhead costs of fulfillment by using FBA. If you don’t sell enough products to warrant renting a warehouse, FBA is likely a good option for you. Conversely, really big retailers with existing logistical systems that can compete with FBA also have a reason to go for FBM.
Reasons that Sellers like FBA — if your products are a good fit
Prime eligibility and Buy Box wins
With FBA, your products were, and are, automatically eligible for Amazon Prime free two-day shipping and other Prime benefits. The quick delivery and high-quality of service maximises your chance of winning the Buy Box. In fact, the prevalence of FBA production in the Buy Box has come up in anti-competitive lawsuits against Amazon. However, there is little evidence of any preferential treatment in this regard.
Many factors determine who wins the Buy Box: from Seller rating to order defect rate, to customer response time. FBA usually works best if there are no other Sellers of the same item using FBA. Generally, an FBA Seller can set a slightly higher price than an FBM Seller and still win the Buy Box because of the better quality of service. But now, with the restrictions on FBA, FBM products are winning the Buy Box like never before, creating opportunities for some brands and problems for others.
Convenience — hands-off fulfillment
FBA provides a simplified process of hands-off packing and shipping. Depending on the size and weight of your product, the fees associated with selling FBA will typically be smaller than shipping costs you’d spend fulfilling the orders yourself. Amazon is the largest online retailer in the world, and with that comes major shipping discounts.
With FBA you can benefit from Amazon’s extensive and effective customer service network. Any negative feedback related to customer service or fulfillment will be handled by Amazon.
Watch the returns
One area of concern is returns. Amazon accepts all returns and usually provides refunds. When considering FBA, you have to be pragmatic and accept that the returns policy will potentially be abused. For some Sellers, it can feel like customers are renting their products and then returning them — leaving used stock to be dealt with. However, at least Amazon does manage these logistics.
Consider combined FBA and FBM offerings
The current situation particularly highlights the value of diversification. Some Sellers use FBA, but retain some degree of in-house shipping capabilities. That might be for particular product lines that don’t fit well with FBA pricing models, or simply to keep their options open. This also might be necessary to match order volumes occurring on other platforms — e.g. your own website, Walmart or Google Shopping.
However, setting aside those other platforms, you might consider a hybrid approach, if only to minimize risk in the current climate. Assuming you are able to source sufficient inventory and have some means of distribution at your disposal, a combination of FBA and FBM is a useful short-term fix.
Even in normal times, FBM could still be used as a back-up if FBA stock sells out. The FBA product might win the Buy Box more often, but you will have a built-in fallback to FBM — so no stock-outs.
In order to work with both FBA and FBM, you must duplicate your listing so one will be for FBA and the other for FBM. Then you send some inventory to FBA, if you can, and keep some for FBM. If your FBA stock runs out, then you can switch to FBM and fulfill orders from your own warehouse. You can also consider selling as FBA in one country and FBM in another.
Although this might seem like a great idea, it does come with some caveats. First, you might not have a fulfillment service standing by, and building one is easier said than done. However, if you are in a tight spot, there are fulfillment-as-a-service options. For example, Bezo.ai (no relation) and Adstral Fulfilment have been around for some time and are currently experiencing a spike in enrollment.
Weighing up your options
How much you want to change your operation today really depends on how long you think the current situation will go on for. It is also a good idea to look at how Amazon reacts in other territories as they exit lockdown. COVID-19 will recede slowly, and you can learn about your most important geographies by watching others.
Beyond considering the current situation, a great next move is to simply experiment with Amazon FBA calculator — as we pointed out at the beginning. It can crunch the numbers of the various factors impacting the cost of FBA and tell you an estimated ROI for using the service. It's also worth noting that not all goods are eligible for FBA, for example, hazardous goods. You need to look into your specific eligibility.
In the end, when deciding between FBA, FBM, or a combination of the two, it will come down to these factors:
- Business priority
- Fulfillment costs
- Product type
- Item weight
- Logistics performance
- Future resilience
Each of these factors will have their own particular priority for your business, and their importance will change, no doubt, over a short period of time.
We’ve all probably never had to make so many drastic business decisions in such a short period of time. There may be no right choice at the moment — just the best choice you can make. From a more standard perspective, you really just need to think about your volumes, the types of products you sell, and your business’ capability to handle a large logistical operation.