There is no doubt that Amazon provides a stellar system for merchants to reach out to their customers and fulfill orders in an efficient manner. That is the reason why over 300 million people globally buy on the Amazon marketplace each year and over 2.5M third-party sellers (FBA and FBM) are active on the platform.
However, selling on Amazon comes with its own set of challenges and drawbacks. What makes matters more complicated is the fulfillment process carried out by Amazon and the exorbitant fees that take away control from the original merchant and make fulfillment a costly affair.
This is why the majority of Amazon sellers prefer to adopt a different strategy as they grow in revenue and customers. They may turn to the Fulfilled-by-Merchant strategy or may do a combination of FBA and FBM. Some may completely part ways with Amazon and manage sales channels, orders, inventory, and fulfillment independently. This helps them retain control and lower operational costs at scale.
Here is a guide on the most common challenges merchants on the Amazon platform face and what they need to bring their fulfillment process in-house.
Compromised Cash Flow
Amazon has a strict structure around payouts. Usually, the payouts are made every two weeks.
On the other hand, vendors need to pay to acquire/produce inventory that they later sell on Amazon and other channels. Many manufacturers in China, for example, expect a 25% payment upfront. The manufacturing process, coupled with shipping, customs clearance, and Amazon payout cycles could mean a merchant gets paid after 3-4 months post the advanced payment for obtaining the goods. This way, the Amazon sellers are subject to long periods of time before they achieve any return on their investment in inventory.
Cash flow is certainly a massive challenge faced by merchants that sell on Amazon. One solution to this problem is setting up one’s own sales channels such as an e-commerce store. This way a merchant can retain control over sales and also be the direct recipient of payouts anytime a sale is made. This also helps in eliminating Amazon as an intermediary in the payments process. More details of how Amazon charges for its services can be found later in the article.
High Degree of Competition
Amazon allows a large number of sellers to sell the same product. At the same time, the barrier to entry for sellers on the Amazon platform is extremely low.
Unless the merchants are selling an exclusive product, they are always competing with a large number of other players. The excessive competition also makes it typically hard to be discovered by enough customers to convert more sales. The said competition isn’t just local. Out of the 900,000 Amazon sellers registered in the United States, almost 38% of them are based out of China where manufacturing goods is a lot cheaper giving them an opportunity to penetrate the market with lower prices. In fact, in 2020, 2/3rd of all Amazon FBA sellers interviewed in a survey expressed concern and fear over the increased competition leading to a steep decline in prices.
Having one’s exclusive sales channels and marketing mediums provides merchants a chance to create a unique positioning for their products and go one step further in building the brand that they wish to.
Amazon has strict guidelines on how products must be sent to the Amazon Fulfillment Centers. The company has over the years suggested certain box sizes and deviations from them could either slow down the process or worse, may render the entire consignment improper. In the latter case, the items are sent back to the merchant and all costs associated with the activities completed previously are borne by the merchants. The charges for both the delivery and the return from the Amazon warehouse are paid for by the Amazon fba seller. This also poses a major opportunity cost since the inventory stuck in transit/inspection could have been sold on other channels. There are various other reasons why Amazon could reject shipments such as unaffiliated shipping partners, failing to meet Amazon pallet requirements, cancellation due to delay, etc.
Both FBA and FBM merchants are bound by policies that dictate their packaging process. The packaging process typically consists of two pillars, the labeling and the actual packaging of individual products and the consignments sent out to the Amazon Fulfillment Centres. Amazon expects each merchant to follow international labeling standards for their manufacturing labels, Amazon labels (such as FNSKU), and brand owner labeling (to prevent counterfeiting of high-value items). Amazon sellers also have a choice to let Amazon produce labels for their individual product units. However, the FBA Label Service may turn out to be costly for low-margin products as Amazon charges about £0.15 or $0.20 for each unit it generates and places a label on.
Once the merchant has taken care of the labeling and the barcodes, the next step is to adhere to all the packaging requirements for selling on the Amazon platform. Amazon has rigid guidelines around loose products, sets, boxed units, polybagged units, and case-packed products where each box with the same product must have the same number of units and the same SKUs. This ends up adding to the operational complexity and the costs associated with the fulfillment process.
Merchants do also have the alternate FBA Prep Service, where Amazon prepares the consignments to be sent to the Fulfillment Centers and properly packages the products. However, the cost of this service can range anywhere from $0.95 to $3 and isn’t available for each category of product. Similarly, merchants can also choose to buy the recommended packaging material from providers of Amazon Preferred Packaging, but, this again isn’t cheap and may not be suitable for lower margin products.
Strict Inventory Expectations
Merchants on Amazon are expected to maintain prescribed levels of inventory at all points. Too little inventory with high turnover means frequent stockouts. High levels of inventory that doesn’t liquidate for longer periods of time means high storage charges and penalties imposed by Amazon. Both situations tend to impact a seller’s performance on the Amazon marketplace. Businesses in today’s age need an algorithmic forecasting and recommendation system to attain optimal inventory levels based on historical inventory and sales data. This helps companies save on inventory holding costs and drive higher customer satisfaction and retention.
Amazon doesn’t just have restrictions around inventory levels but it uses a metric called Inventory Performance Index (IPI) to assess a seller’s handling of inventory. The metric is based on the 12-month performance of four components, excess inventory, sell-through rate, stranded inventory, and in-stock inventory.
There are quite a few disadvantages associated with a low IPI score. First, Amazon sellers with lower IPI scores may have their products show up lower in the search results. This leads to them losing their product positions to their competitors in an already highly competitive environment. A lower IPI score can also lead to sellers losing on the Amazon Buy Box leading to other vendors for the same being prioritized in the product page on the platform.
They may also lose their Amazon Prime status making their listings less appealing to the consumers in the age of rapid and expedited deliveries. This way, an Amazon seller is totally dependent on Amazon for how well their products are discoverable to the consumers and if they get the Amazon Prime tag. Currently, due to the COVID-19 pandemic that has caused severe disturbances to inventory and supply chain operations, the recommended IPI score is between 300-700. However, as of the 2021 Holiday Season, Amazon has also started using the IPI to prescribe certain limits on the restock quantity and the storage space allocated to a fba seller with some sellers only being allowed up to 25 cubic feet worth of inventory.
Vendors with IPI scores of less than 500 are subject to losing out on allocated storage space and are supposed to operate under the limits imposed on them. There is no way a merchant can appeal these restrictions and has to wait till the next quarter when the inventory performance is reassessed and new IPI scores are computed.
High Amazon Fees
Amazon charges medium to high Amazon fba fees for its services at every step of the process. These charges range from one-time to regular. As these charges pile up, some Amazon FBA sellers have even recorded up to 53% of their entire revenue going to Amazon in the form of various fees and charges. Even for the FBM or Fulfillment-by-merchant model, sellers have had their Amazon-related costs as high as 27% only for the product listing and any search ads they may have run.
First-off, Amazon charges 39.99 for setting up an Amazon seller account for ‘Professional Sellers’. This is a recurring monthly payment irrespective of the number of products and volume of sales. Additionally, merchants must also pay the referral fee or commonly called the commission. This ranges anywhere from 6-45% depending on the retail price and the product category. The referral fee is bound by the ‘Minimum Referral Fee’ which sets the lower threshold for the commission in each category. The Minimum Referral Fee is typically 0-2% depending on the category.
The biggest contributor to the costs is by far the fulfillment fees under the Amazon FBA program. Amazon clubs the picking, packing, and shipping costs as one and it is to be paid for by the merchants. These costs can range anywhere from $2 to $6.8 in the US depending on the size, weight, and category of the products. Additionally, a lot of sellers do fall prey to the storage fees if their inventory is not liquidating quickly enough. Amazon normally charges $.75 per cubic foot for most parts of the year but during the October-December period, the charge is around $2.4 per cubic foot of storage space used. In order to keep up with the demand and the competition during this period, sellers end up paying exorbitant amounts towards storage that hampers their profitability.
To top it all, it is becoming increasingly difficult for merchants to rank higher on search results without the use of paid advertising. 3 out of 10 top results on Amazon are normally the products being promoted for the keyword/category. In fact, Amazon earned over $9.7B from their advertising segment only in 2021. This leads to sellers bearing more costs in addition to their regular promotion and marketing spends.
As manufacturing and trading companies grow in revenue and volume of units sold, there is an innate need for them to set up their own fulfillment operations. This involves setting up their own order fulfillment warehouses and tying up with a shipping service such as FedEx, UPS, etc. Taking ownership and control of the entire fulfillment cycle proves to be beneficial to a growing company in many ways such as:
Consistency in Storage Fee
Having one’s own warehouse prevents sellers from any fluctuations in storage fees due to seasonality or their previous inventory performance, which Amazon assesses using the IPI.
No Seasonal Restrictions
As discussed above, Amazon may at any point in time, impose limitations on the storage space allocated and the restock quantities allowed to a merchant. This is the reason why the number of FBM sellers grew by over 20% in 2021. FBM allows sellers to have full control over their warehouse space utilization.
Control over Fees and Costs
Businesses have a lot more control over their cost structures when they have independent fulfillment operations and are not subject to Amazon’s exorbitant pricing.
Should a company wish to move its inventory out of Amazon’s warehouses, it is subject to high fees and taxes. This is a major issue faced by sellers and is all the more severe in the age of the pandemic where 93% of all SME Amazon sellers have experienced supply chain disruptions. However, this can be prevented with the company's own independent warehouses.
The pandemic has been a challenging period for all retailers alike, e-commerce or not. One important lesson learnt is that Amazon doesn’t always have the sellers’ best interests in mind. That’s why so many companies, from multi-billion dollar Nike to SMEs are parting ways with Amazon and taking charge of their fulfillment process. A lot of scaling businesses are beginning to realize that the benefits of taking ownership of their operations far outweigh the vast network Amazon provides.
The move from an arrangement like the Amazon FBA to insourced fulfillment is complex and challenging for large and small businesses alike. Firstly, they must find and compare different shipping services that can provide the transportation infrastructure suitable for their products and the target market. Similarly, they also need to have a robust Warehouse Management System (WMS) that can assist and automate the activity of providing data-driven actionable insights for better inventory control, multi-channel order management and batching, picking and packing processes, and overall fulfillment efficiency.
Schedule a demo today to understand how Hopstack’s AI-driven WMS can help you supercharge your warehousing operations and can make the switch to in-house fulfillment seamless!