If you are managing an Amazon store, then you are fully aware that order fulfillment is a vital part of your business process. The success of your business will depend on your ability to complete customer order from purchase to delivery. Customers have high expectations when it comes to fulfillment. They expect fast and guaranteed shipping.
Delivering on your promise of efficient order fulfillment is key to customer satisfaction. 69% of online shoppers are less likely to buy again from a retailer who does not deliver an order on the date promised. As an Amazon seller, you have two options for fulfilling an order. You can ship by Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM).
A recent survey conducted by Jungle Scout found out that 66% of sellers use FBA as their fulfillment strategy while 6% use FBM to fulfill orders. Meanwhile, 29% use a combination of FBA and FBM for order fulfillment. But how do you know which is the right one for your online store? In this article, we shall cover the following topics:
- Fulfillment By Amazon
- Benefits of FBA
- Challenges of FBA
- Fulfillment By Merchant
- Benefits of FBM
- Obstacles of FBM
- FBA or FBM – Factors To Consider When Choosing
Fulfillment By Amazon
Without a doubt, Amazon is the world’s largest online retail platform. As of 2020, there are almost 3 million active sellers on Amazon. As an online retailer, you can take advantage of the platform to promote and sell your products to potential customers. Order fulfillment is vital if you want to retain the loyalty of your customers. One of the most popular order fulfillment methods is Fulfillment by Amazon or FBA.
With FBA, you send your products directly to an Amazon warehouse or fulfillment center. The facility then stores the inventory. When there is an order for the product, Amazon packs and ships it to the customer. Amazon will charge a fulfillment fee and monthly inventory storage fee. The fulfillment fee covers the costs for picking, packing, shipping, providing customer service and a monthly inventory storage fee.
To use FBA, you need to set it up in your Amazon account. You create product listings, prepare your inventory, and ship your products to the warehouse. Amazon will pick, pack, and ship your items as they are ordered by the customer.
Benefits of FBA
Fulfillment by Amazon offers the following benefits:
FBA comes with Prime Shipping for your products. Whenever a customer orders your products, Amazon will ship the item to the customers free of charge within two days. In the US alone, there are over 110 million Prime subscribers. Also, customers prefer items with the Prime badge compared to items with standard shipping. This increases the sales potential of your items.
The Buy Box is the Call to Action (CTA) that makes Amazon shoppers purchase a product on the product listing. This benefit is found on a product page and contains the price, shipping information, seller and an “add to cart” button. When there are multiple retailers selling the same item, the seller with a “Buy Box” will most likely be chosen by a customer.
Amazon shoppers buy a product 82% of the time through the Buy Box. That is why it is important for you to have a Buy Box because you are likely to win the purchase. Order fulfillment is an important factor in awarding the Buy Box to a seller. Even if they set a slightly higher price than an FBM seller, their FBA counterparts can still win the Buy Box.
With FBA, you get to enjoy multi-channel fulfillment. This means you get to sell your products outside of Amazon but still have them handle shipping and order fulfillment. This means you can create your own brand outside Amazon by selling your products from your own website. FBA allows easy integration into other channels. Amazon will maintain customer information so that you can focus on your business.
Lower shipping rates
Depending on the size and weight of your product, the shipping fees of selling through FBA is relatively lower than the cost of shipping the products yourself. Amazon is the largest online retailer in the world and as a result, it offers huge shipping discounts.
Challenges of Amazon FBA
While it has its advantages, fulfillment by Amazon also has its challenges:
You must prepare the products
While you don’t store your inventory, you need to prepare them properly before sending them to the Amazon warehouse to ensure they are accepted. You need to properly label them and comply with other requirements. Do them improperly and Amazon can reject your products. This means you may need to relabel them again and go through the same process all over again.
You’ll pay additional fees
FBA includes fees such as fulfillment fees, monthly inventory storage fees, closing fees, and order handling fees. Depending on the category, you may need to pay additional fees such as high-volume listing fees. Likewise, you need to consider the shipping cost of the product to Amazon’s fulfillment centers. Aside from that, you may also be charged with long term storage fees as well as Q4 storage fees.
Limited access to inventory
Since your inventory will be stored in Amazon’s fulfillment centers, you will only have limited access to your products. Also, tracking your inventory will be difficult unless you have a hand in the process. In addition, in case of inventory issues, you will have to rely on Amazon to resolve the problems or ship your inventory back to you.
Contrary to what most think, Amazon does not automatically collect sales tax for sellers. For you to be able to collect taxes on purchases, you need to provide your state tax registration numbers for the state where you want Amazon to collect tax for. From there, you can enable Amazon sales tax collection based on the Tax Settings in Seller Central. Amazon will store your inventory in different warehouses across various states which will comprise a sales tax nexus in those states.
Multi-channel fulfillment can be costly
The cost of multi-channel fulfillment carries with it some hefty additional charges.
Fulfillment By Merchant
Fulfillment By Merchant or Merchant Fulfilled Network allows you to store and ship items yourself or outsource fulfillment to a 3rd party outside of Amazon. You are responsible for complying with Amazon’s service levels related to shipping and orders. You provide customer service and returns processing as well.
In FBM, you can still participate in Prime shipping without FBA through the Seller Fulfilled Prime. To become eligible for Prime shipping, you need to commit to 2-3 days order fulfillment at no additional cost to Prime subscribers. You must pass a trial period lasting between 5 and 90 days to prove that you can maintain the following performance standards:
- · Ships over 99% of orders on time
- · Same day handling for orders placed before order cut-off time
- · Have an order cancellation rate of less than 0.5%
- · Use Amazon Buy Shipping Services for at least 99% of orders
- · Seller must agree to the Amazon Returns policy
- · Allow for all customer service inquiries to be dealt with by Amazon
In FBM, you are the one that creates product listings as well as the one who stores, packs, and ships the product the same way Amazon customers do. You will also be responsible for any late, missing, or damaged arrivals.
Benefits of FBM
Here are the benefits of FBM:
More control over your inventory and fulfillment
With Fulfillment by Merchant, you have more control over your inventory and fulfillment process. In FBM, you have more flexibility with the replenishment schedules and stock inspections. With FBA, Amazon is known to change processes and policies which can be a form of disruption for sellers like you.
FBM gives you ownership over the entire customer experience. The use of branded packaging as well as dropping of marketing inserts into packages can only be done with FBM.
Less Amazon fees
If logistics is your core competency, FBM is the best option for you. Since the fulfillment cost is lower than FBA, it can increase your margins. Aside from that, you also don’t pay the other fees charged in FBA such as the returns processing fee, long-term storage fee, and stock removal fee.
Faster to get started as an Amazon seller
In Fulfillment By Merchant, you don’t need to pay for all your inventory at once and ship it to the Amazon warehouse. Amazon is strict when it comes to the requirements for accepting products into warehouses and it can take time to ship the products to them. In FBM, you can get your products listed on Amazon and start selling much faster than FBA.
New customers for your current business
If you are already managing a business that handles packaging and shipping, becoming an Amazon seller through FBM can open up potential new businesses. If you already have a facility for storing inventory with staff and processes for handling orders and shipping products, FBM can help you get started as an Amazon seller really quickly. The only change to your business will be an increase in orders and sales.
Obstacles of FBM
Here are the disadvantages of FBM:
You handle everything
In Fulfillment By Merchant, you are responsible for everything from product preparation to shipping. When you are just getting started, this does not seem like a big deal because you only have to pack and ship a few products. But once your business scales, it will be difficult for you to pack, label, and ship 100 products daily.
Aside from that, you will also have to label the boxes, print the addresses, and match the product being shipped. If you send a product to the wrong address, you will have to handle getting new products to the customer as well as the returns. Aside from that, you will need a storage facility either at your house or business for delivery to your customers.
Not location independent
Since you will be responsible for the shipping, you may have limited freedom for yourself. You could spend the rest of the day packing boxes and keeping up with the order. You need to be in the warehouse to ensure that the order is sent to the customer.
You compete for the Buy Box
Another huge disadvantage of FBM is that you could struggle to find customers compared to FBA since you don’t have the Buy Box feature. Without control of this feature, customers will click several links before they find your product listed on the page in order to buy from you.
Not having the Buy Box button will make it difficult for you to sell your Amazon product. However, if you are selling a unique product and there are no other sellers of your product and can get the Buy Box button, FBM may still be a worthwhile option.
You may think that you are saving money by not paying storage and shipping fees to Amazon but you still need to pack and ship it from somewhere. Good if your garage is big enough to store inventory but if there is no room, you will have to rent storage space for your inventory and pay for shipping.
You can’t offer Amazon Prime benefits
Estimates from Consumer Intelligence Research Partners reveal that there are more Amazon Prime customers than non-Prime customers. Customers searching for your products will get fast free shipping from any eligible Prime product in less than 2 days. They will only buy from sellers offering Amazon Prime benefits.
If you don’t offer Amazon Prime, customers will pay additional shipping charges and receive slower shipping. They may overlook your product and buy from sellers with Amazon Prime.
FBA vs FBM – Factors To Consider When Choosing
When deciding on FBA vs FBM, both have their own pros and cons. So how do you know which one is right for your business?
Yes … you should use FBM.
- · You want to better control your customers
- · The item you are selling is too big or heavy
- · You already have logistics
- · You can reduce the cost of buying your own products
- · Your rotation is slow
You should use Fulfillment by Amazon in the following situations:
- · The products are small and light.
- · You can transfer control of your customers to Amazon
- · You want Amazon to take care of your customer service
- · Rapid turnover of your inventory
- · You have no logistics
- · If you sell your own product, your cost will be higher
You can also use FBA and FBM at the same time. In fact, Jungle Scout data shows that 29% of Amazon sellers sell Fulfillment by Amazon and FBM at the same time.
If you have multiple products, you may want to consider using the two to benefit from both. Suppose you sell two products. One product is too large and turns slowly. The second product is small and can be quickly returned. To maximize profits and minimize costs, you can use FBM to sell high / low selling products and FBA to sell low / high selling products.