The Amazon FBA Program: Is It Worth It?

October 7, 2020
Written by Kevin Wong

When small and medium-sized businesses chose to sell their products on the Amazon platform, their decisions were primarily influenced by its imminent rise as a global brand. The truth is that Amazon continues to be the largest e-commerce platform globally, with over a million customers visiting the platform every year and over 2.5 million sellers trying to make a profit through the brand.

According to Oberlo, 89% of all customers view Amazon as a trustworthy platform to buy different products and prefer it over other e-commerce sites. They have reported smooth and transparent experiences with their purchases, and would likely be buying on the platform again. This long-standing reputation is the main reason why Amazon is at the forefront of the e-commerce industry and why most online merchants have decided to shift their businesses there. If you know how to make Amazon work to your advantage, customers will be lining up for your products.  

Amazon has developed multiple sales programs that work to the benefit of Amazon merchants, called the Amazon FBA Program. If you've heard of this program and want to know if enrolling your business is worth it in 2020, this article can help you make that decision. 

What is the Amazon FBA Program?

The Amazon FBA Program is a third-party fulfillment service program that aims to help an Amazon services seller with his/her shipping needs. The fundamental idea is simple: you sell a product, and Amazon ships it for you. The process may get a little more complicated down the road, but that is the basic formula overall. 

If you're interested in enrolling your business to the Amazon FBA Program, this is how the process works:

  1. You have to register your business for the Amazon FBA Program. Set-up an Amazon Seller Account and add the FBA feature to start.
  2. Prepare your items for shipping. You can either make them yourself, source your products from a manufacturer, or purchase from a local seller.
  3. Ship your products to your nearest Amazon fulfillment center. You can do this yourself or ask your manufacturer to send the products directly to Amazon.
  4. Amazon stores your products for some time, and you can track them yourself through its tracking systems.
  5. When a customer orders an item, Amazon packs your products and prepares them for shipping. No costs will be attributed to you at this point.
  6. Amazon ships the product to the customer's destination. All shipments can be tracked both by you and your customers.
  7. The Amazon team will handle any customer service-related concerns or item returns on your behalf (For more information, check out Amazon’s Seller Central Platform).  

The Amazon FBA Program is reasonably easy to set-up and can be used by any seller on the platform. The concept is enticing since Amazon takes care of everything for you— from storing your products in a warehouse, shipping your products to customers, and handling customer service/reverse logistics concerns. 

The benefits look nice and all, but can you afford to enjoy all of these privileges?

How Much Does Amazon FBA Cost?

While numerous benefits come with registering your brand to the Amazon FBA Program, some costs are not to be taken lightly. After all, Amazon acts as a service intermediary for your business, dealing with your shipping headaches and focusing on other parts of your business operations.

For starters, Amazon FBA fees are divided into three main categories:

  • Fulfillment Fees;
  • Storage Fees, and
  • Item Returns and Disposal Fees (plus other possible penalties)   

Amazon also offers fulfillment services for products sold outside of their platform. If you have a separate website, Facebook page, or even a physical store that would require Amazon's help, they can provide that for you. However, you should know that the prices are way higher if you decide to take this approach.

Fulfillment Fees

Amazon charges a fulfillment fee for every product that it prepares, packs, and ships to a customer. Think of it as a commission fee that you pay for not thinking about those things anymore. The rates range from $2.41 for small-sized products and between $3.19 and $4.71 for large-sized products. It's also important to note that additional penalties will be charged to your account if you have any over-sized products, and they cost between $8.13 (small and large-sized products) and $137.42 (special large-sized products).    

Amazon fulfillment fee rates change from time to time, so it's best to check the FBA program website for more information.

Storage Fees

Amazon also charges storage fees for all products that you ship and store in their warehouses, regardless if they're sold or not. Besides, Amazon operates an e-commerce business, not a storage business.

Fees would typically cost between $0.69 and $0.49 for each cubic foot of storage, which is significantly cheaper compared to other third-party warehouses that charge at least $1. However, during the holiday season, Amazon doubles the price of its storage fees to around $2.40 for each cubic foot. It's best to check storage fees ahead of time to calculate your storage costs and include them in your budget. 

Item Returns and Disposal Fees

When your products stay in Amazon's warehouses for long periods of time without being sold, Amazon will give you three options: you can choose to have your products returned to you or disposed of instead.

This is a situation that sellers don't want to be in, but nonetheless, you should be aware of the fees that come with item returns and disposals. Item returns generally cost between $0.50 (small-sized products) and $4 (large-sized products) for each item. Disposal fees usually cost the same.

For these penalties, businesses should be aware that cross-border removal order fees and disposal fees would cost significantly more than standard rates. Companies can check out Amazon Seller Central for more accurate information. 

Now that you have a better idea of how much you have to spend in the Amazon FBA Program, let's analyze its advantages and disadvantages.

Amazon FBA: The Advantages

There have to be valid reasons why many sellers are starting to register their businesses to the Amazon FBA Program. This feature has been a breakthrough for e-commerce management, where sellers don't get to see, touch, or hold their own products anymore and still make decent profits.

Below are some reasons why the Amazon FBA Program is an outstanding tool for e-commerce businesses:

You are paying for efficient and hassle-free shipping.

As we have previously mentioned in this article, Amazon FBA is so popular because of the convenience that it provides for its sellers.

Apart from this advantage, however, Amazon FBA is also known for being efficient with its shipping process. The Amazon team is aware that customers look at shipping speed as a contributing factor before making a purchase, and so they try to deliver a bulk of their shipping orders on the dot. 

Customers on the Amazon platform also have a history of preferring free shipping options every time they buy a product. Since Amazon covers the shipping costs for its FBA products and doesn't charge customers for shipping fees, your products will be an automatic preference for shoppers. Simply put, the FBA program's free shipping option allows you to build a customer base faster than your competitors. 

You can utilize the Amazon FBA brand to your advantage.

Enrolling your business to the Amazon FBA Program allows you to ride the Amazon brand's coattails, and you can use this to your advantage.

Customers tend to patronize products with the Amazon label over other products, primarily because they perceive Amazon as safer and more credible options. It has come to a point where if a business does not have the Amazon brand on its products, customers will scour through the platform for a competitor who does.

This "quality guarantee" card that you get with the Amazon FBA Program can boost your sales and establish yourself among heavy competition.  

You don't have to worry about customer service and returns management anymore.

More often than not, customer service and returns management are two aspects of a business that you don't want to spend your time on as an Amazon services seller. It's stressful, time-consuming, and hinders your productivity from doing other things.

The Amazon FBA Program can take care of these administrative headaches for you, so your business can shift its focus to improving product quality or developing new items. Every time a customer wishes to inquire about something related to your FBA product, they can call Amazon's customer service hotline, and a qualified customer representative will receive them. No more customer calls or email complaints to worry about on your end.

The same thing can be said with Amazon's returns management policy, which is recognized as one of the best in the world. The Amazon team is entirely aware that customers who have great experiences when returning items are likely to repurchase a product in the future. Shoppers simply have to go to a physical item returns center and hand-in their products with mostly no questions asked. 

It's safe to say that Amazon can cover your business when it comes to reverse logistics concerns.

Amazon FBA: The Disadvantages 

Much like any other service, the Amazon FBA Program also has its own set of disadvantages that you should be aware of. We have already talked about how costly it can be if you don't plan, but there are more cons to this program that could help you take a step back to assess your decision.

Long-term storage fees can eat up your profit margin.  

Remember when we told you that Amazon gives you two options for long-term storage? Well, there's technically a third option: paying for long-term storage fees.

Long-term storage can take up a massive chunk of your profit margin when items sit in the warehouse for over six months. Essentially, Amazon charges every 15th of the month— and strategies to help you avoid the fees are not much of a win either.

After identifying items susceptible to the fees, you may choose to sell it for a slight loss rather than losing a huge proportion of your investment. This aggressive habit may ensure that inventory is sold or help you have the capital for a restock.

Commingling inventories can hurt your brand. 

The concept of commingling inventories stems from Amazon's pledge to ship products in at least two days. To make sure this almost always happens, the source orders for a standard product from any Amazon fulfillment center— even if it doesn't come from you.

Since Amazon labels all FBA products the same way, the inventories of different businesses are combined into a single catalog to keep things simple. While this process can ensure that your products are shipped quickly, you risk compromising your product quality. Imagine spending time and effort trying to create the best products for your customers, only for them to be switched out with a product from a lousy inventory.  

Let's Assess: Is Amazon FBA Worth It?

You now know the advantages and disadvantages of registering for the Amazon FBA Program. You are also aware that many FBA businesses succeed with this approach, so you know it can work if you do it the right way. But still, you begin to wonder: Is it worth it

The answer to that question largely depends on how much your business is connected to the Amazon brand. If 90% of your business is solely done on the Amazon platform, then the FBA program is an excellent long-term investment. You can calculate your business costs and realize that fulfillment and storage fees can be balanced out with Amazon's low shipping rates. Another offsetting factor could be the boost in sales that you have with your FBA products— as long as you know how to manage your inventory, you should be making a profit with the Amazon FBA Program in the long run.

If Amazon is just one of the platforms you operate in, then Amazon FBA will likely not work for your business. Amazon developed the FBA Program to cater primarily to Amazon businesses, so non-Amazon shipping and storage transactions can end up being more expensive than other third-party fulfillment services.    

Conclusion

Deciding to enroll your business in the Amazon FBA Program is a huge step to make for any activity on the platform. It takes a lot of planning, money, and a little bit of risk to make sure this approach works well for you in the long run. 

Questioning the FBA Program formula itself is a valid reason to be unsure whether you should push through or not, but it mostly depends on your ties with Amazon. Some sellers find the price tag justifiable for the convenience that the program brings, while others simply don't see it worth it in the long-term.

If you are looking for a team of Amazon FBA professionals to help you give you advice oh Amazon FBA, we at Seller Interactive can help you out. You may schedule a call with us by sending an email to [email protected] Book an appointment today! 

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