Do you make products that you need to ship around the world? Or do you have plans for a business that requires warehousing? Or maybe you’re interested in trying to turn products for a profit using online marketplaces. In any case, you’ve probably heard about Fulfillment by Amazon (FBA), and have considered using it to boost your reach and profitability.
FBA is a service that allows you to use Amazon’s warehouses to store, pack, and ship your products anywhere in the world. It’s an attractive prospect to small business owners who want to scale their business and compete on a national (or international) level, but there are some things you should know before you get involved.
Key Things to Know About Using Fulfillment By Amazon
On the surface, FBA sounds fantastic, but there are a handful of caveats to the efficiency and value of the system:
1. Inventory management. First, understand that Amazon isn’t going to take care of everything for you. You’ll still need to pay close attention to your inventory levels, and restock when appropriate. If you’re managing more than a few items, you’ll probably want to invest in an inventory management system that works with FBA. Otherwise, you’ll be in for a confusing mess of new orders and outbound shipments, and you’ll probably end up with shortages and overages.
2. Potential profit margins. Next, you’ll need to think about the potential profit margins you can turn when selling on Amazon. On Amazon, your products will be competing with other sellers from around the world, which means your prices may need to sink lower than usual. If your cost of production and shipment is high, your profit margins could be too low to justify the system; make sure you run the calculations before moving forward.
3. Amazon fees. Before your profitability analysis is complete, you’ll need to account for Amazon’s many FBA fees. For starters, you’ll be paying a per-order fee for order handling and a per-product pick and pack fee. You’ll pay extra handling based on weight, and will pay a storage price based on how much area you’re currently occupying. There may be additional fees for oversized items, items stored for longer than six months, items stored during peak periods of the year, and other special service fees.
4. Amazon category approvals. Some categories of products listed on Amazon require Amazon’s pre-approval before they can be listed. Depending on what products you’re offering, this could significantly slow down your listing process, and interfere with your overall sales.
5. Amazon defaults. If you’re selling the exact same product as another seller, and that seller is closer to the person buying the product, Amazon will, by default, route that order to the closer seller. This may not be a big deal for you if you’re the only seller offering a certain product, or if most of your customers are in close proximity to you, but it’s worth considering if you’re not ready for national competition.
6. Shipping costs. In some cases, you’ll qualify for part of Amazon’s free shipping program. In others, you’ll be responsible for paying for your own shipping. This can increase your costs by hundreds to thousands of dollars a month, depending on your volume and what shipping service you use (as well as what kind of deal you negotiate).
7. Production and acquisition efficiency. If you want to build a sustainable business through FBA, you’ll need to have a streamlined way to produce and/or acquire the goods you intend to sell. If you’re reselling other products, that means procuring a low, consistent price that can secure you a profit. If you’re making your own, that means stabilizing your manufacturing efforts, which could be a massive undertaking.
8. Returned and damaged items. Finally, you’ll need to consider the fact that some of your items will arrive to the customer damaged, and some will be returned. How are you going to deal with these requests? What will you do to make sure your customers remain satisfied, and ensure your average rating remains respectable? Amazon may offer suggestions, but it’s not going to run your store for you.
Is Using Fulfillment By Amazon Right for You?
FBA isn’t an inherently good or inherently bad system; it’s going to work phenomenally well for some business owners, and abysmally for others. If you don’t want the hassle of managing your own warehouse, or if you’re a small operation that needs a shortcut to get wider reach, FBA will probably help you on that journey. Otherwise, the caveats and restrictions may make it difficult for you to strike a profit while leaning on the system. Do your research before proceeding, and try not to depend on any one channel for success.
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Thanks for the guide. This is a must-read if you plan to use Amazon. This is so detailed that I must bookmark it.