How Does Amazon FBA Work (and Tips to Lower FBA Fees)

July 20, 2021
Written by Kevin Wong
how does Amazon fba work

Amazon FBA (Fulfillment by Amazon) is used by 66% of the top 10,000 sellers. If Amazon's high-earning sellers trust the world's most advanced fulfillment network, why shouldn't you? As an Amazon FBA seller, you can entirely focus on marketing your products. Simultaneously, Amazon will handle the other half of your business—the fulfillment of orders. However, one reason new sellers hesitate to join FBA is the slew of fees Amazon charges. This article will discuss how Amazon FBA works, the breakdown of associated fees, and tips on saving costs.

How Does Amazon FBA Work 

Amazon FBA's concept is simple. You sell products, and Amazon ships them. Besides order fulfillment, it is their responsibility to answer customer queries and manage returns. Here's how Amazon FBA works:

1. Your supplier ships the products to an Amazon Fulfillment Center.

2. Amazon will store your products.

3. The customer makes an order.

4. Amazon will pick, pack, and ship the order.

5. Amazon will handle any queries from the customer.

6. Amazon will manage returns assuming the customer isn't satisfied with the order.

In the first step, your supplier will ship the products to an Amazon Fulfillment Center via a freight forwarding firm or pallet shipping. Amazon will then store your products until it gets ordered.

Is Amazon FBA Worth It?

Amazon FBA's Fulfillment Centers operate in a highly sophisticated environment. Every fulfillment process is handled there, from start to finish, making it more than just a storage facility. Other than the 250,000 associates working in Fulfillment Centers worldwide, more than 100,000 robotic drive units, palletizers, and robo-stows operate around the area. Humans and robots work hand in hand to make the complicated process of order fulfillment seamless.

Aside from the process mentioned above, Amazon FBA sellers can enjoy the following:

FBA is Your Ticket to Prime

In case you're not aware, you need to undergo a rigorous process to be Prime-eligible, which includes joining a waiting list and completing a trial. Why is it a big deal to have the shiny blue badge? You can sell to ready-to-buy customers who love free two-day shipping. FBA products can qualify for Cyber Days and Prime Days as well.

Seamless Logistics and Delivery

As a Prime seller, you will surely appreciate Amazon's advanced Fulfillment Centers capable of managing a high volume of orders. Amazon is the pioneer of free same-day shipping.

Higher Product Ranking

Amazon's A10 algorithm prioritizes FBA product listings over non-FBA products. Apart from this, your product listings have a higher possibility of winning the Buy Box.

Build a Scalable Business

Amazon offers specialized services to help scale your business. There are different Amazon products you can join, like FBA Small and Light, FBA Subscribe & Save, and Multi-Channel Fulfillment. 

What to Sell On Amazon FBA

Your enrollment in FBA will be all for naught if your product is not promising. How can you build a brand (or an empire!) with a product that no one wants? Whether you like it or not, conducting product research is a must. You should accomplish this before creating a professional Amazon seller account—even while you're just thinking of selling online. 

One of the easiest ways to choose what to sell on Amazon FBA is through Amazon itself. Look for the best-selling products by going to the Amazon Top Seller section, near the bottom of the Homepage. Once you click the link, it will show a selection of viable product ideas. 

Here are qualities of a feasible product idea that you may consider to create a shortlist of profitable products:

  • High demand - Maybe this product is often at the Best Selling or Top Seller section of Amazon. Find a product that sells at least 300 units per month or roughly 10 units per day.
  • Not competitive - Low competition means you have a higher chance of selling. Check out products with an average of 50–100 reviews.
  • Has room for improvement - Select products with only a 3–3.5 star rating but high demand. 
  • Not patented or trademarked - Avoid lawsuits and choose a product without an existing patent or trademark.
  • Easy to sell - Of course, no product is "easy" to sell. With this condition, we're talking about a product that won't give you problems in sourcing, importing, and manufacturing.

Besides the criteria above, always set the price range between $15–$50 while searching for the perfect product, as this is the “sweet” spot for many Amazon customers. 

After you've figured out what to sell on Amazon FBA, your next task is educating yourself about its fees.

Understanding Amazon FBA Fees 

The Amazon FBA fees you will see on Amazon's website are enough for you to run for the hills and never take a look at FBA ever again. Don't be scared. It might be overwhelming at first as a new Amazon FBA seller, but you will soon grow accustomed to the fees as your business progresses. 

Here's a summary of Amazon FBA fees you’ll eventually get acquainted with:

Seller Central Account Fees

Amazon offers two types of plans, namely, Individual Seller and Professional Seller. 

  • Individual Seller Plan - No monthly fees, but you have to pay $0.99 + additional selling fees per item sold. You won't have access to Amazon's advertising tools.
  • Professional Seller Plan - Requires a monthly subscription fee of $39.99 a month, but comes with Amazon's marketing tools and more.

We suggest starting with an Individual Seller plan if you haven't chosen a feasible product idea yet. You can transition to a Professional Seller plan once everything has been laid out.

Inventory Storage Fees

Your inventory storage fees depend on how long your items stay at the Fulfillment Center:

  • Monthly Inventory Storage Fee - The space your inventory will occupy at Amazon Fulfillment Centers is based on the daily average volume measured in cubic feet. It starts from $0.48–$2.40 per cubic foot.
  • Long-Term Inventory Storage Fee - For inventories that stay longer than 365 days. It is added to your monthly inventory fee and costs $0.15 per unit or $6.90 per cubic foot, whichever is greater.

Fulfillment Fees

The FBA "perks" of picking, packing, and shipping an item comes with a price. It also includes customer service and returns. Fulfillment fees start from $2.41–$132.32 per unit. 

Return Processing Fee

One downside of being Prime-eligible is that the customer can return an order whenever they want without your consent. The return processing fee is equivalent to the fulfillment fee.

Referral Fee

As an exchange for letting you use their online marketplace to sell your products, Amazon charges a referral fee or commission of 15% per item. It is also based on the product category.

Labeling Fee

If your supplier doesn’t label your items with a barcode, Amazon will do it for you at $0.20 per unit.

There you have it! It is quite a long list, but you must be fully aware of the different Amazon FBA fees.

It is a useful tool that gives you a projection of how much you can earn, depending on your chosen product idea. The FBA Revenue Calculator also shows the Amazon FBA fees you will be paying on a per-unit basis. 

What are the types of Amazon FBA fees it covers? Let us break it down:

  • Selling on Amazon Fees - Consist of a variable closing fee and referral fee. The latter is only applicable to media products.
  • Total Fulfillment Cost - This part only concerns itself with the Fulfillment by Amazon fees, calculated based on the item's weight and dimensions.
  • Storage Cost - Pertains to the monthly storage cost per unit.

The FBA Revenue Calculator only calculates upfront costs. There are other fees that you should take note of, as mentioned above.

8 Tips to Lower Amazon FBA fees

Don’t let these Amazon FBA fees bring you down. Here are ways to reduce your expenses:

  1. Limit the weight and dimensions of an item. Remember that FBA storage fees are based on these two. 
  2. Try bundling items if applicable. You need to pay for fulfillment fees if you sell it separately. Bundled items also make good promotions on Amazon.
  3. Schedule an inventory cleanup. Aged inventories are an eyesore to Amazon, and they will charge you for not selling your products right away. 
  4. Promote a clearance sale for your aged inventories. 
  5. Put your unwanted items up for sale in the Amazon Outlet. This little-known section sells clearance and overstocked items. 
  6. If scaling your business to European countries is not enough, Amazon has an FBA Export program where customers worldwide can buy it. Amazon doesn't charge you for the excess shipping costs.
  7. Prevent Amazon from shipping your product to other fulfillment centers. Amazon “tests the waters" of a particular market, usually another country. The shipping fee is then charged to you. To stop this from happening, create and submit a concrete shipping plan specifying your preferred shipping location to Amazon.
  8. Create Amazon PPC ad campaigns. In Amazon, you don't only have the privilege to sell on its platform, but you can advertise your products with Amazon’s tools, like Sponsored Products, Sponsored Brands, and Display Ads.

In Closing

The success of your Amazon FBA business doesn't only depend on how much money you invest in it. You must be extra cautious in searching for a viable product with high demand and low competition. Moreover, you must always think of ways to save yourself from drowning in Amazon FBA fees; try out the tips above to reduce your costs. It is integral for you to know how Amazon FBA works, so your budding business can easily adapt to the ever-changing environment of Amazon FBA.

Are you still scratching your head wondering “How does Amazon FBA work?”, then talk with Seller Interactive today! We have a team of expert Amazon consultants willing to help and guide you through the ins and outs of Amazon FBA. For inquiries, email [email protected]. We’d love to hear from you! 

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