Amazon is one of few ecommerce marketplaces that’s capable of fulfilling the online shopping trifecta — free shipping, fast delivery and free returns.
With more than 110 active fulfillment centers just in the US, it comes as no surprise that Fulfillment by Amazon (FBA) has quickly become the leading fulfillment service for a variety of growing ecommerce businesses.
Amazon FBA allows Amazon to fulfill orders on a business’ behalf, while both the business and its customers reap the benefits. A business sends its products to an Amazon fulfillment center, a customer makes a purchase, and Amazon handles the receiving, packing, shipping, returns, and everything in between.
In this post, we’ll take a look at how Amazon FBA works and if it could be a good fit for your growing ecommerce business.
What is Amazon FBA?
Sellers have three options when it comes to Amazon order fulfillment — they can pack and ship products themselves (either Seller Fulfilled Prime or Fulfillment-by-Merchant), or they can outsource the process to a 3PL service. Amazon FBA is Amazon’s own 4PL service in which the company receives and stores inventory, and then picks, packs and ships ecommerce orders.
Amazon FBA acts as a middleman throughout the ecommerce fulfillment process, which begins when a customer places an order and ends when they receive it. If a customer requires an exchange or reimbursement, FBA leverages Amazon’s logistics network to complete the returns process. Similarly, FBA provides ecommerce customers with access to Amazon customer service.
How does Amazon FBA work?
Amazon FBA requires the use of an Amazon seller account, for which ecommerce business owners can either use their existing customer account to start selling or choose to create a new seller account with a business email. An Amazon seller account must include a phone number, government ID, internationally chargeable credit card, and bank account to deposit sales.
Once an Amazon seller account is established, the FBA process is very straightforward:
Log in to Seller Central to set up FBA. Sellers select from several FBA specialized services, like FBA Small and Light for low-cost, lightweight inventory or Multi-Channel Fulfillment for services from your own or third-party ecommerce sites.
Create FBA product listings. Sellers add their products to the Amazon catalog, create a unique product identifier (like UPC or ISBN) and SKU number, and include relevant product details (like a description and images).
Ship products to Amazon. Sellers adhere to Amazon packing guidelines and shipping and routing requirements to deliver products to a designated Amazon fulfillment center.
Amazon stores the products. Amazon houses products at one of its many fulfillment centers (for a storage fee) until an order is placed by a customer.
Amazon handles the transaction. Amazon packs and ships a customer’s order directly from its fulfillment center, updates the seller’s product inventory, and manages customer service in the event of a return or refund.
Of course, Amazon FBA isn’t free. An Individual selling plan costs $0.99 per unit sold, and the Professional plan costs $39.99 per month regardless of the units sold. Amazon also charges a referral fee of 8% to 15% for each item sold and charges a storage fee dependent on the size and volume of products. You can investigate your estimated costs with the Fulfillment by Amazon Revenue Calculator.
6 reasons why ecommerce businesses use Amazon FBA.
There must be a reason why thousands of ecommerce businesses use Amazon FBA. Here are six.
1. FBA goes beyond Amazon.
Outside of the Amazon marketplace, Amazon also offers FBA Multi-Channel Fulfillment, which allows ecommerce brands to combine multiple sales channels with Amazon’s fulfillment network. Customers can order products through an ecommerce website or an alternative third-party marketplaces like eBay. Amazon can still pick, pack, and ship those orders.
2. Access to an advanced fulfillment network
Amazon has one of the most advanced fulfillment networks in the world. In addition to clear benefits like storage in Amazon fulfillment centers and Amazon packing and shipping, FBA includes access to Amazon’s premier customer service.
FBA customer support: Rather than manage customer service, ecommerce businesses can rely on Amazon to handle phone or email customer support (day and night) for no extra charge.
FBA customer returns: Amazon fully manages customer returns via its own online returns center, so ecommerce businesses have no hassle, and customers have a simple (and free) way to complete returns.
3. Transparent shipping that consumers expect
Today’s consumer expects efficiency at no extra price. After all, 61% of shoppers say next day delivery is a priority, while 72% of customers have abandoned a purchase over shipping transparency, according to Linnworks research. Amazon FBA allows for Amazon Prime two-day shipping, free shipping and the additional perks that consumers have come to expect.
4. Cost-effective to scale
Unlike other 3PL services that are based on a set cost, such as warehousing, sellers using Amazon FBA are only charged for the storage space used and the orders fulfilled. Even better, the cost of shipping is rolled into fees, with no extra charge for Amazon Prime two-day shipping. Other FBA specialized services, like FBA Subscribe & Save (which enables sellers to offer discounts on eligible products), are cost-effective to scale and grow your business over time.
5. Access to warehouse space
While there is cost, you have access to storage space all over the US and globally. As you grow your ecommerce business, you can move and manage your inventory with FBA, or move inventory from your warehouse to a FBA location. It's important to think about how much space you will need as you scale and if FBA makes sense for your business in those growth plans.
6. Access to Amazon customers.
FBA goes way beyond being solely a fulfillment solution, and is being leveraged worldwide as a marketing tool. At the most basic level, FBA gives you instant access to Amazon Prime customers, who are among some of the ecommerce giant’s most loyal and active customers.
Your product listings are also seen as more competitive, and you will have access to all international marketplaces on Amazon.
What are the disadvantages of using Amazon FBA?
Despite the benefits of Amazon FBA, there are some drawbacks. Consider these three.
1. Increased frequency of returns
There is a risk the ease of returns through Amazon fulfillment may increase the frequency of returns for a small business. While returns can be somewhat controlled by establishing clear expectations for products with descriptive product listings, there’s always a chance that consumers will take advantage of Amazon’s free and easy returns.
2. Unbranded product packaging
Packaging is important to the modern consumer, so much so that 72% of Americans claim that product packaging design influences personal purchasing decisions, and 81% agree that package design influences gift selection. So, imagine the potential disappointment when consumer orders of your business just to receive typical Amazon packaging.
All orders dispatched by Amazon FBA will have Amazon’s branding. This can make it difficult to impact brand awareness. However, the fact that your product is on Amazon also elevates brand awareness.
3. Keeping track of inventory
It can also be incredibly difficult to keep track of the inventory you store in Amazon's fulfillment centers. If you have an inventory management system, you'll save countless hours with automation, knowing how much and where your inventory is stored within Amazon's fulfillment centers so you don't end up with dead stock.
4. Additional monthly costs
Any ecommerce business that’s contemplating third-party warehouse or logistics will expect additional monthly costs. However, monthly fees for Amazon FBA can pile up over time, especially storage fees for unsold products. Sellers are responsible for poly bagging and bubble wrapping fragile products that are sent to Amazon fulfillment centers, and are charged a removal fee and disposal fee for any unsellable product that’s been deemed defective or damaged.
Is Amazon FBA worth it?
There’s truly no hard and fast answer for whether or not Amazon FBA is worth it. Rather, the answer relies on if your products will remain profitable after taking into account the various FBA fees. In most cases, Amazon FBA is a beneficial fulfillment option for growing ecommerce businesses that sell small products, like apparel, with high turnover.
Turnover, in general, will limit storage fees and help protect growing ecommerce businesses from long-term storage costs, as well as keep the Inventory Performance Index (IPI) score high. High turnover will also protect an ecommerce business from potential risks, such as a higher rate of returns due to Amazon’s simple exchange and refund policy.
However, if you are just starting out with FBA, only selling your best-selling products or any products with high-profit margins can be a smart way to experiment.
Overall, your decision to sell on Amazon or not will depend on the demand for the product and the overall profitability of your ecommerce business.
Linnworks and Amazon FBA
If you are looking to streamline your inventory and order management, using order management software like Linnworks makes this process more efficient, including:
Maintain accurate stock levels with Linnworks automation
Manage high volumes of orders from Amazon together with your other sales channels
Avoid overselling with an accurate view of all stock levels across Amazon and all sales channels
You can submit orders for Fulfillment by Amazon directly in the Linnworks platform from across all sales channels, not just Amazon. Within Linnworks, you have full clarity on stock levels across all of your FBA locations.