Amazon, a company that started in 1994 as an online marketplace for books has now become one of the Big 5 in the US IT industry along with the likes of Microsoft, Google, Apple and Facebook. Amazon.com has proven to be one of the most complex, extensive and competitive marketplaces in the world. Sellers navigating the marketplace have to find ways to not only compete against millions of other retailers spread across the globe but also figure out their fulfillment processes. These Fulfillment processes would involve order management, inventory management, warehouse management and shipping management.
Amazon offers two different methods for sellers to fulfill their orders: Fulfillment by Amazon (FBA) wherein a seller can make use of Amazon’s fulfillment network to ship his/her orders on their behalf and Fulfillment by Merchant (FBM) wherein the seller can choose to do it by themselves. If you choose to go the FBM route, most sellers choose a software solution that can help them not only with fulfilling all the orders but also helps them with ecommerce automation.
In this article, we will try to cover all aspects of both these fulfillment methods and help you understand which might be the right fit for your business.
Fulfillment by Merchant (FBM)
Fulfillment By Merchant (FBM) is when a seller lists their products on Amazon and chooses to be in control of their order fulfillment process (handling and shipping process). So, instead of paying Amazon a service fee, storage charge for handling their inventory, and shipping the order to the buyer, the seller uses his/her own resources (warehouse and logistics) to send the items directly to the buyer. It is a rather advantageous method for products with lower margins, but more on that in the following sections. For now, let us understand how it works.
How does Amazon FBM work?
After the merchant has set up the seller account on Amazon and created the listings for their products, he/she gets two ways to deliver them: fulfilment done by Amazon (FBA) or, they can choose to do it by themselves and go with the FBM Amazon way.
If the seller chooses FBM, he/she is responsible for packaging and shipping the orders from their warehouse location or the place where the products are stored to the customer’s delivery address. For shipping/delivery partners they can either choose to have their own logistics solution or opt for 3rd party logistics (3PL) that are reliable and most importantly, cost-effective. Your products would also not have the Prime status (badge) displayed on the listing. The MFN (Merchant Fulfilled Network) seller is also responsible for handling the returns and providing customer service. But if you choose to go the FBM way, make sure that the shipping charges do not exceed the fees incurred with FBA, otherwise it doesn’t make sense for merchants to fulfill the orders by themselves. Okay, so the aforementioned was the process of FBM, but when should a seller opt for it?
When to Choose Fulfillment By Merchant?
The FBM method is especially beneficial when the items being sold are exclusive to the seller’s shop. This will not only help build and ensure the credibility of the product but also that of the online store. Using FBM is also beneficial for small volume businesses or products with lower profit margins or lower sales frequency. It allows sellers to choose a cheaper mode of shipping than what is offered by Amazon, still meeting the same standards or save their margins from the inventory charges levied by Amazon.
- The seller maintains a complete control over every aspect of their business.
- FBM provides the seller the freedom to run his/her business as desired. The seller has a greater grasp of inventory in stock, what sells, and what business strategy changes need to be made for greater success.
- Since FBM requires the seller to have a warehouse or a place to store their inventory, the sellers can use the same inventory stocks to run an offline retail store too.
- As an FBM seller, you are directly involved with your customers, thus having key insights and a better understanding of your customers’ requirements and complaints. This makes building your own individual brand all the more attainable and feasible.
- Since a FBM seller does not need to pay additional fees to Amazon, their margins are relatively greater. They save on fulfillment fees, long-term storage fees, a better and cheaper choice for warehouse, and reduced shipping charges. This is especially true for larger products with low-profit margins.
- Amazon often changes its fulfillment pricing and policies. With FBM you need not worry about any unavoidable losses due to such policy changes.
- There are no unexpected costs and the seller has to deal with less paperwork when working directly with the buyer.
You can also use the Amazon FBA Calculator to compare the prices between FBA and FBM.
- More than 50% of all the shoppers on Amazon are Prime members, because a quick shipping time(within 2 days) is important to them. And as an FBM seller your involvement with Amazon is limited, so your products won’t be Prime-eligible. So you are less likely to gain their business owing to perceived slower shipping time.
- Shipping for Prime members is free. So as a FBM seller be careful of how you present shipping costs, because while the presence of shipping cost can be a deterrent, it’s absence can surely be an incentive to buy your product. The best and most commonly used method is to work the shipping costs into the product price and advertise free shipping.
- Higher Overheads. While FBM sellers aren’t paying FBA fees, you may still incur added expenses such as warehouse/storage rents, fulfillment costs, shipping expenses, staff expenses and utilities that may eat up your margins.
- Since FBM offers you complete control of your entire business, it can be a double edged sword. It is a positive for most companies, but if you are new or inexperienced with e-commerce or a high volume of sales or have a massive inventory, it could be a challenging task to stay on top of every single element.
- A common complaint from FBM sellers is that they often lose sales to their FBA rivals because Amazon customers prefer to buy products bearing the Prime or Fulfilled by Amazon badge. You can counter it by applying for Seller Fulfilled Prime, but it is a monumental undertaking that requires pristine seller metrics at all times and no room for error.
These charges are not straightforward and depending on their shipping/delivery options will vary greatly from seller to seller. However, mentioned below are some fixed charges that every seller would incur.
Monthly subscription fee
- Pro plan – $39.99 per month
- Individual Selling Plan – No fees
Per Item Selling Fee
- Pro Plan – No fee
- Individual seller – $0.99 for every unit sold
Every time a product unit is sold, amazon charges a referral fee. This referral fee is typically 15% of the total sales price of the product but for certain categories this percentage can go as low as 6% and as high as 45%.
Fulfillment by Amazon (FBA)
Amazon offers to handle all of your heavy lifting within FBA. This takes away the burden off of sellers and rewards them with more flexibility and time to take care of their selling practices. Sellers now have access to Amazon’s massive warehouses across the world, expertise in shipping and packaging.
Okay, sounds enticing enough, but how does it work?
How does FBA work?
- Seller sends their products to Amazon.
Across the US, Amazon has about 100 warehouses, some of which are over a million square feet in size. You must inform them about the products that you are sending, and they will guide you as to which warehouse you must ship your products to.
- Amazon sorts and stores your products.
Once Amazon receives your products, they will sort them and accordingly add them to their inventory. Your products are then stored in one of Amazon’s many warehouses, and if anything gets damaged there, Amazon will reimburse you.
- Amazon’s order fulfillment.
When a customer buys your product, Amazon takes care of the entire order fulfillment process for you. They will accept the payment and update your inventory automatically. One of Amazon’s warehouse workers (or robots) will grab your product from storage, packs it into a box and ships it to the customer’s delivery address.
- Customer service is outsourced.
Upon delivery, Amazon follows up to make sure that the customer is satisfied with the shipment and they also handle any returns or exchange requests from the customer.
Every two weeks, Amazon sums up your sales, deducts your seller fees and deposits your profits directly into your bank account.
That’s the entire process! Sounds easy right? And unlike FBM, FBA is well suited to sell almost any product, but there are a few things you need to keep in mind to ensure the success of your business.
What You Are Responsible For When Using Amazon FBA?
- Choosing which products to sell. Although you can sell just about anything, but if you want to avoid storage fees, make sure you choose products that see frequent sales.
- Keeping your inventory in stock. The seller must keep a check of their inventory levels on Amazon regularly to ensure that their products stay in stock.
- Marketing and advertising your products. You might not have to do this for a branded product, but if you’re selling your custom products, you will have to make sure that people can find them.
- Amazon has an army of loyal customers, and having a “Prime” or “Fulfilled by Amazon” badge can mean increased sales for you.
- If your sales volume is higher, you’d know that fulfillment is a very time consuming process and involves the extra cost of hiring someone to take care of packaging and shipping. With Amazon effortlessly managing your fulfillment process, you can spend more time and effort in growing your business rather than concerning yourself with packaging and shipping issues.
- Amazon’s tie-ups with the major shipping carriers enable them to avail steep discounts on shipping costs, which they pass on to their FBA sellers in the form of reduced shipping prices for transporting their inventory to Amazon warehouses. This in turn also benefits the customers in the form of free shipping or free two-day shipping on all FBA products for Prime customers.
- With FBA, sellers have access to a potentially unlimited storage space. They no longer have to worry about how much or how little storage space must their warehouse have. Because there are no inventory minimums, so a seller can send in as little as just one product.
- Owing to Amazon’s hundreds of fulfillment centers across the globe, you can rest assured that no matter where your customers are, the delivery is reliable and quick.
- Amazon takes care of all of your returns, from dealing with unhappy customers to inspecting returns, return shipping labels and reverse logistics, and handling all of the administrative aspects. Amazon does charge a returns processing fee, but it’s worth outsourcing that process, especially if your sales volume is higher.
- Amazon has a stellar reputation for providing excellent round-the-clock customer support via phone, chat and email.
Even though Amazon is an incredible marketplace, there are a few drawbacks you need to be aware of.
- FBA comes at a price. Amazon levies charges for both storage and fulfillment. Based on how quickly your inventory moves, you will have to optimize your sales strategy in order to minimize storage fees. You’ll have to ensure that your products are still profitable after paying Amazon’s fulfillment fees.
- Long-term storage is expensive. Storage fees aren’t too bad but if your inventory sits for too long (for over six months), you could be faced with sky-high storage fees.
- You may see higher returns. The flip side to having a relaxed returns policy is that the customers are more likely to make returns due to impulse or test buys.
- Amazon enforces some strict guidelines regarding product prep that can be rather difficult for first time sellers and requires some getting used to. Your products must be correctly entered into Amazon’s database, properly labeled and then shipped to the right warehouses.
- Since this method doesn’t afford you as much control as FBM, it can be challenging to keep a track of what products you have available, and what’s not selling.
- Keeping a track of your inventory can be difficult, especially if you sell on multiple channels.
- Sales tax calculation is quite complicated. Each state in the United States has their individual rules for sales tax collection.
Over and above the common fees shared by both the FBM and the FBA sellers, FBA sellers will incur the following additional fees.
Amazon has strict specifications for labelling all the inventory/products sent to the Amazon warehouse. To mitigate this manual process, sellers could choose to pay a little extra and opt for Amazon’s labeling service.
Same is the case with packaging your products. In case of incorrectly packaged products, Amazon would charge you unplanned prep fees and Amazon repacks your products as per their specifications.
Unlike FBM where the shipping fees are paid by customers, FBA charges shipping fees from the seller.
Returns processing fee
Processing returns are free in most Amazon categories, but not all. Also Amazon charges a repackaging fee if these returned products need to be repackaged.
Long-term storage fee
If your stocks remain unsold for more than six months in their storage facility, the seller is charged with an additional long-term storage fee.
Stock removal fee
Removal/disposal of unsold inventory off of Amazon’s warehouse is also chargeable.
Concluding thoughts - So what is better FBA or FBM?
Both have their own merits and demerits and there is no right or wrong answer to this question. And like all things in life, choose what best suits your individual needs. But it is generally observed that FBA tends to work best for high volume sellers selling products with a quick turnover yielding big margins while FBM is best suited for small scale (or quantity) sellers with products that typically yield a smaller margin.
After understanding how the two fulfillment methods work, it is safe to say that FBA sellers are likely to receive multiple orders a day, so it is better to have Amazon take care of order fulfillment, customer service and returns. If you’re choosing the FBA route, do ensure that your items are not bulky or heavy so as to not incur high FBA fees. While these fees and reduced margins are inevitable with FBA, they are certainly worth it, given that they provide you the added advantage of the Prime badge and the Buy Box advantage.
On the other hand, you are better off with Amazon FBM or Seller Fulfilled Prime if your product has low sales velocity or is too bulky requiring specialized packaging. The FBA route in such a case can do you more harm than good if your products are not handled properly. It will also bode well for your business to choose this option if you already have an established shipping network.
Therefore, the size of your business and the type of items you are selling matter a lot when it comes to deciding between either fulfillment mode. According to Jungle Scout’s 2020 State of the Seller Report, 66% of all sellers on Amazon use only FBA, 29% sellers use a combination of FBA and FBM to fulfill their orders and only 6% of sellers use only FBM to fulfill their orders.
Samveg is an engineer turned writer who strongly agrees with Professor Dumbeldore that words are the most inexhaustible source of magic. He is currently working with Orderhive. When he’s not working you can find him exploring the city using his forever hungry stomach as a compass, fixing his 1982 Yezdi, or running away from the routine on a solo trip.
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