Amazon is the largest marketplace in the United States as an independent platform. 25 cents of every dollar spent by customers online go to Amazon marketplace. In the United States, the Amazon marketplace accounts for about 25% of all e-commerce sales. Data from eMarketer show that in 2021, Amazon accounted for 41.4% of all e-commerce sales in the United States.
Since the marketplace generates at least 60% of Amazon's GMV, it earns 25% of all e-commerce in the United States. Amazon has a 17% retail market share. Even without the marketplace, it would theoretically be the biggest online retailer. By far the largest online retailer in the US as of June 2022, Amazon held 37.8% of the country's e-commerce industry.
On Amazon, there are more than 2.5 million active sellers, and the number is increasing every day at a rate of more than 3,000 new merchants. When it comes to fulfilling orders, each of those Amazon merchants must decide whether to pay Amazon to handle it or handle it themselves.
With the Fulfillment by Amazon (FBA) program, Amazon will ship orders on behalf of sellers. Alternatively, with the Fulfillment by Merchant (FBM) program, sellers are responsible for fulfillment and shipping processes.
Fulfillment by Amazon (FBA) in a nutshell refers to the warehousing and fulfillment service of Amazon that allows the sellers to send their inventory to Amazon warehouse and have their products shipped by Amazon.
FBA for merchants
Amazon FBA helps sellers to scale their businesses in reaching more end customers. In the Amazon FBA program, sellers are paying for the fulfillment services along with other fees to Amazon for listing their products on Amazon. It covers storing inventories, shipping orders, customer support, and maintaining returns for sales on the marketplace.
FBA allows sellers to ship their monthly inventory to any Amazon warehouse at a competitive price. In the New seller incentive program, FBA sellers can avail of the following benefits.
Using the Amazon Partnered Carrier program, FBA sellers will earn $100 in credit toward inventory shipping costs. Using Amazon Global Logistics sellers will earn $200 in credit towards fulfillment costs. Sellers receive $200 promotional clicks For using Sponsored Products. By swiftly producing advertisements that show up in relevant search results and product pages, sellers may aid customers in finding your products.
FBA for end customers
Customers while shopping on Amazon can directly see whether the product is fulfilled by merchants or Amazon. Customers can expect faster and more reliable deliveries of their orders along with faster shipping time frames. Sellers can offer the benefit of prime shipping to customers while meeting their expectations.
When should sellers choose FBA?
Amazon FBA might be right for the merchants if the seller:
- Have a larger inventory and negligible storage space
- Turn over inventory very fast
- Are not able to fulfill orders in-house faster
- Wish for premium speedy delivery at 30% lower cost than shipping using own logistics or hiring 3PL
- Don’t have in-house logistics in place
- Have very limited infrastructure for return processing
- Have limited resources for providing excellent customer support
- Require a cheaper fulfillment option for order delivery
- Wants to use FBA specialized services like FBA Subscribe & Save, FBA Small and Light, Multi-channel fulfillment, FBA Export, etc.
Commission and fees
Sellers who prefer Amazon FBA has to pay commission and fees, as Amazon is handling their products in the warehouse and ships their products to the end customers. Referral fees for FBA range between 8 to 15% based on the categories of products.
Shipping charges for FBA sellers cost up to 32% less per item when compared to the slowest shipping options provided by the major carriers in the U.S. FBA two-day shipping also cost 72% less per item than the two-day shipping costs of those U.S. carriers. Amazon has the pay-as-you-go service, where it charges for the storage space of the inventory and the orders it fulfills.
Shipping costs of orders in FBA are included in the fees that sellers are paying to Amazon and they can also avail of Amazon Prime Free 2-day shipping and free shipping on specific eligible orders for free. However, there are other types of fees charged by Amazon for selling on their platform from the sellers and a few optional fees which are discussed below.
1. Inventory storage fees
Amazon charges inventory storage fees from the sellers as their items are stored in an Amazon warehouse and fulfillment centers. From January to September, sellers pay a cost of $0.75 per cubic foot for standard item inventory storage. In contrast, it increases up to $2.40 per cubic foot during the peak season.
2. Long-term storage fees
Amazon charges a long-term storage fee monthly for items stored in a fulfillment center for more than a year. The amount is $0.25 per unit for a long-term inventory period of 181 to 365 days. However, if the item remains in the fulfillment center beyond 365 days, then the seller has to pay $0.50 per item. Nevertheless, sellers that maintain sound inventory year-round can avoid long-term storage fees.
3. Fulfillment fees
Amazon Fulfillment fees are calculated based on per unit for picking, packing, shipping, and handling returns of the orders, and customer support. In FBA, The individual selling plan costs $0.99 per unit sold while the professional plan costs $39.99 per month no matter the number of items a seller can sell.
4. Unplanned service fees
Amazon Unplanned service fees are charged when the inventory arrives at the warehouse or fulfillment center without proper labeling or not following the instructions from Amazon. For the Amazon barcode missing in the packaging, Amazon charges $0.20 per standard unit. It can go up to $0.40 per unit in case of critical stages.
For oversized and overweight shipping boxes, Amazon has standard unplanned service charges of $0.25 per unit that can rise to $0.75 per unit depending on criticality. Sellers can avoid these charges by either hiring 3PL or following the instructions of Amazon thoroughly while sending their products to the Amazon fulfillment center.
5. Removal Order fees
Sellers are charged removal order fees per item from Amazon when they opt for Amazon returns for their inventory in a fulfillment center. Depending on the weight of the item, removal order fees of Amazon lie from $0.52 to $1.51 per standard item whereas the rate changes to $1.50 to $7.25 per oversize item.
6. Return Processing Fees
Amazon charges return processing fees on orders from the seller whenever Amazon offers customers free return shipping. Amazon return processing fees amount to $2.12 to $2.32 per standard item whereas it increases to $2.40 to $3.41 per large standard item and $4.19 to $75.08 per oversized item.
Salient features of FBA
Sellers using Fulfillment services by Amazon experience plenty of benefits that help them scale their business as they don’t have to worry about inventory, shipping, customer support, and return management, as these processes are handled by Amazon. Below are the core features of Amazon FBA discussed in detail that merchants can avail.
1. Buy Box Competitiveness
The buy box feature is the white box that is present on the right of the product page on the Amazon marketplace. This feature is available to the product listings of the FBA sellers. It prompts the customers to add their favorite products to the shopping cart easily. This feature accounts for approximately 82% of the sales of the products on any listing. Thus, FBA products along with standard Prime shipping will have a greater competitive advantage.
2. Effortless Shipping
Amazon does all the shipping-related work for its FBA sellers. Starting from keeping track of product listings to ensuring proper stock, Amazon manages end-to-end fulfillment operations which is a great opportunity for the sellers as they are getting multichannel fulfillment services from Amazon.
3. Customer Service Management
Merchants selling their products on Amazon marketplaces using fulfillment services fulfilled by Amazon (FBA) do not have to pay any headache for customer service. Amazon offers 24*7 customer support for their FBA sellers and a proper platform that takes care of the customers buying sellers’ products.
4. Faster Delivery
Customers nowadays expect faster delivery, and retailers across the world are striving to meet this customer expectation. Sometimes achieving same-day delivery or two-day delivery can be tricky, but with Amazon FBA it can be done quickly. FBA sellers that manage to get Prime badges from Amazon are eligible for Prime free shipping which leads to faster delivery of products to the end customers.
5. Return Management
Order return management can be tedious and tricky if the retailer doesn’t have enough resources to handle customer query and manages order return. Amazon handles return management of the customers’ orders as a part of their fulfillment process for the FBA sellers. As FBA sellers are paying fees for the fulfillment process, hence they are getting the return management service from Amazon.
6. Prime Shipping Eligibility
Amazon offers standard Prime shipping eligibility to their FBA sellers. Prime shipping offers the seller’s listing a coveted blue Prime badge and faster delivery options. Now, Amazon’s Prime shipping offers same-day delivery to its Prime members for free. Additionally, for sellers that have the Buy Box feature on their listings, the availability of Prime shipping will make it more appealing to the customers.
Fulfillment by Merchant (FBM) by Amazon is a process where a seller lists their products on the Amazon marketplace but manages shipping, storage, and customer support independently or through any 3PL.
FBM for merchants
While Amazon is more hands-off in FBM or MFN, sellers usually have greater control over the whole fulfillment process and are also able to recoup the additional fees charged by Amazon for each product sold in FBA compared to FBM. Sellers using Amazon FBM can go to a greater extent in satisfying customer expectations while providing best-in-class shopping experience and customer service.
FBM for end customers
Customers can get to know about the product which is fulfilled by merchants on Amazon, hence they can expect better customer service provided by that merchant. Customer expectations like product packaging, speed of delivery, customization, etc. are handled by sellers that increase customer loyalty and brand value.
When should sellers choose FBM?
A seller might choose Amazon FBM over FBA if the seller:
- Sells a lower volume of items
- Have heavy or large products to ship
- Have plenty of space for product storage
- Keep a smaller inventory
- Deal with very minimal fulfillment requirements
- Easily handle product return
- Provide seamless customer service
- Already figured out the logistics for order fulfillment
- Have temperature-sensitive objects to sell
Commission and fees
Amazon charges shipping rates to sellers who prefer to fulfill their orders themselves. Nevertheless, sellers also have to pay referral fees calculated based on the product price, shipping costs, and sale price of the item. Currently, Amazon charges a 15% referral fee, however, depending on the product category, this cost might range from 6% to 45%.
Sellers using Amazon FBM’s individual plan use shipping rates for the products set by Amazon. Individual sellers need to set the price of their items in a way that even if shipping credit is less than the shipping costs, they can earn a profit as sellers need to ship their orders at Amazon’s shipping rates.
For every unit of items sold, an individual FBM seller have to pay $0.99 plus additional selling fees to Amazon. Sellers who sell less than 40 units are sure what to sell and are unwilling to advertise their product on Amazon can opt for the individual selling plan.
On this professional plan, sellers can sell more than 40 units in a month and want to qualify for the top placement on the product details pages. They can also customize their shipping templates for specific regions internationally or domestically including the handling and transit times. Professional sellers have to pay $39.99 per month irrespective of the number of units sold by the seller.
Professional sellers are eligible for customizing their shipping rates based on orders, per item, per weight, etc. They can match their logistic capabilities for specific items by creating a multitude of shipping templates by assigning them to the specific set of products. They can also sell their products in a few restricted categories and can use advanced selling tools like APIs.
Salient features of FBM
Managing inventory efficiently is a great deal for an e-commerce merchant to fulfill customer demand and expectations. There are a few important features of the Amazon FBM model, that sellers need to know for choosing their marketplace model wisely which are discussed below.
1. Greater Process Control
If a seller uses Amazon FBM, then it can have greater control over the fulfillment process. Having greater control over the whole process helps online merchants to go above and beyond for their customers and create a superior brand image in the marketplace.
They can not only control their inventory but also can opt for customized packaging options and can take their brand image to the next level compared to Amazon FBA which has standard rules for product packaging.
3. Superior Margins
While selling the products as FBA, Amazon charges fulfillment fees and referral fees from the sellers while handling an FBA order. In addition, Amazon will also charge inventory storage fees depending on the duration and volume of inventory the seller is keeping in their warehouse. Recently Amazon has increased their fulfillment fees by 5% which is huge for many retailers.
With FBM, merchants are not liable to pay hefty FBA fees that would otherwise eat up their profit margins. In this case, sellers are not paying the above charges as they are managing inventory themselves and are not using Amazon’s fulfillment service.
3. Ability to Compete with the FBA Buy Box
Merchants that are qualified for the Seller Fulfilled Prime (SFP) can compete for the Buy Box feature with the FBA sellers. With SFP, FBM sellers can offer Prime shipping on specific products. It can also appeal to the sellers who want to have greater control of their business and operations while being competitive for the Buy Box FBA offer with the Prime shipping opportunity.
4. Easier Inventory Tracking
Merchants can streamline their business easily by having full control over their warehousing and inventory tracking. On the contrary, sellers using FBA vs FBM get much lesser visibility into their inventory status once it reaches to Amazon Fulfillment center until a customer receives the order. Maintaining total control of the inventory with Amazon FBM means the seller is decreasing the risk of potentially running items out of stock or wrong timing of important replenishment.
5. Direct Customer Relationship
When an e-commerce retailer manages its customer service on its own, it can establish customer relationships for the long term. Personalized customer service is something that retailers can provide to their customers that Amazon cannot provide as they have a standard customer service process.
Sellers often aim to learn from each customer interaction and buying pattern to improve their product categories, features, and their ability to satisfy customer demand. It is possible only with Amazon FBM.
Is Amazon FBA worth it in 2022?
The goal of listing products on Amazon is to grow sales and improve the bottom line. Now the question is why modern retailers are opting for Amazon FBM than FBA for sellers for scaling their businesses.
Retailers have the option of setting up their accounts as FBA or FBM when they first sign up as Amazon sellers. Because Amazon businesses are not one-size-fits-all, the sellers must know the challenges of Amazon FBA. Fulfillment strategies must therefore match sellers' business requirements.
Nowadays sellers are choosing FBM for its benefits to provide excellent customer experience and create a strong brand reputation in the market. Below is the list of challenges that Amazon FBA sellers faces which predicts Amazon FBM is the winner for the global merchants.
1. Higher FBA fees
Amazon FBA sellers need to pay fulfillment fees between $2 to $6.8 in the U.S. depending on the weight, size, and categories of the products. Apart from that, merchants also have to pay referral fees which range anywhere from 6 to 45% depending on the product category and its retail price.
Sometimes these charges pile up, and Amazon FBA sellers recorded up to paying almost 53% of their revenue to Amazon which becomes challenging for the FBA sellers in terms of earning profit.
Whereas FBM sellers have to pay referral fees to Amazon as they are using the platform to list their products. 37% of FBM retailers start with less than $1000 than 27% of FBA merchants.
Compared to FBA sellers, FBM sellers have a higher presence in every Amazon category as they have more product listings in various categories. Hence, the FBM program of Amazon is more profitable in this case for sellers that can handle fulfillment by themselves.
2. Lower Speed of sale in FBA
When compared to FBA sellers, FBM sellers can get started faster than FBA. Research says that more than 51% of Amazon FBM sellers take approximately 5 weeks for selling their products on Amazon compared to FBA sellers.
However, 20% of the FBM retailers witnessed sales conversations and profits within the first 3 months, whereas FBA retailers tend to be only 20% in this case.
3. Strict Inventory Management in FBA
Amazon FBA sellers are required to keep certain levels of stock available at all times. Amazon will charge long-term storage fees for inventory that doesn’t liquidate for longer periods which affects sellers’ profitability. They do not have any control over their inventory, moreover, vendors must meet several intricate requirements before delivering their goods to Amazon’s warehouse.
Whereas sellers using FBM have complete control over their stock. Checking for product availability and meeting client expectations are the vendors' responsibilities. When it comes to reviewing their inventory and replenishment plans, FBM merchants have more latitude than FBA sellers.
4. Higher Risk level for Retail Arbitrage in FBB
One of the great perks of Amazon FBM sellers is that the risk level is less for retail arbitrage. It is effortless to list FBM items on the marketplace, then the products get returned easily if it does not get sold.
When comparing the same scenario Amazon FBA vs FBM, if any item of FBA seller is not selling, then they have to pay the shipping charges for moving the product to Amazon warehouse. It can be a problematic situation for FBA merchants who wants to experiment with new products as it incurs a loss of profit and higher risk levels.
FBM sellers have the immense benefit of experimenting with the specific item to see if the risk will pay off with ample profits as it comes with lower risks for retail arbitrage.
5. Lesser Profitability in FBA
It is seen that most FBM sellers, tend to get more conversations than FBA retailers which makes FBM a clear winner. Amazon FBA sellers pay multiple fees like inventory storage fees, long-term storage fees, return processing fees, etc. along with referral fees and fulfillment fees to Amazon which is the reason for lower profitability.
Since FBM sellers are not opting for the fulfillment service of Amazon, they are responsible for paying much less than FBA sellers which indicates greater profitability. Reports say that 33.5% of FBM sellers tend to earn more than $25,000 per month in terms of revenue compared to 26.8% of FBA sellers. On the contrary, 37% of the FBA sellers experience better sales margins than 20% of the FBM sellers.
E-commerce merchants designate them as Amazon FBM sellers for a variety of reasons, but scalability and profitability are the main drivers. Online marketplaces are anticipated to outperform traditional sales by $7 trillion by 2024. Customers and brands alike need ease and a dependable online marketplace for their goods. Global retail brands are working to enhance their customers' overall shopping experience. And in this instance, Amazon FBM is outpacing Amazon FBA in terms of popularity.
For FBM merchants who carry out their fulfillment by themselves, Hopstack provides a comprehensive digital fulfillment platform to consolidate omnichannel orders, automate, execute, and optimize the entire fulfillment lifecycle with maximum efficiency and accuracy.
A digital warehouse platform like Hopstack enables FBM sellers 100% inventory visibility and efficient handling of warehouse operations. The visibility and handling of data from all marketplaces must be ensured through a centralized, transparent platform for sellers that will help them to maintain sound inventory while meeting customer demand.
The multi-channel inventory synchronization feature of Hopstack's digital fulfillment platform allows inventory to be synchronized across all marketplaces and sales channels at every stakeholder level.
Hopstack’s order management system enables great workflow flexibility and visibility while assisting FBM sellers in centralizing their offline and online orders seamlessly. To learn how Hopstack's digital fulfillment platform can help to streamline the transition to in-house fulfillment and boost warehousing operations, schedule a demo today!