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What is Fulfillment by Amazon (FBA)?

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What is Fulfillment by Amazon (FBA)? Benefits, Challenges, and Getting Started

Fulfillment by Amazon (FBA) is a popular fulfillment solution for online retailers who don’t want the hassle or risk of handling orders themselves. It’s so popular, in fact, that nearly three-quarters of Amazon sellers in the United States use FBA.

For many Amazon sellers, FBA offers a simple way of handling and shipping orders without maintaining complex in-house logistics operations. Below, you’ll find guidance on how FBA works, the advantages and drawbacks associated with it, and how to get started using FBA if it’s a good fit for your fulfillment needs.

What is Fulfillment by Amazon (FBA)?

Fulfillment by Amazon is a service provided by Amazon through which the company stores inventory for online retailers (sellers), then packs and ships products when retail customers place orders for those products.

How Does Fulfillment by Amazon (FBA) Work?

FBA works in a relatively straightforward way. To use the service, you must first ship products to an Amazon fulfillment center. When a customer places an order, Amazon picks items from its inventory, packages the order, and ships it to the customer’s address.

While FBA manages the logistics of handling and shipping orders, responsibility for other key aspects of the sales process remains with the seller. Sellers decide which products to sell and how to market them. They must also ensure items are prepared and packed correctly before sending to the fulfillment center. Sellers must also keep track of inventory to ensure stock is refilled prior to running out. 

How Does FBA Issue Payments to Sellers?

When setting up an FBA account, a seller provides a credit card number and a bank account. Amazon charges the credit card to cover any fees, and proceeds from any sales are deposited into the designated bank account. Amazon seller payments are automatically tracked and paid out every 14 days.  

Benefits of Using FBA

FBA offers several benefits for online sellers, including expedited shipping, adequate storage space, return processing, customer service management, and Amazon Prime branding. For many sellers, these advantages are time- and money-savers that allow them to spend more time on their core business and less time on fulfillment.

  • Logistics and shipping
    First and foremost, FBA simplifies logistics and shipping for sellers. The service eliminates the need for sellers to maintain a physical warehouse for inventory storage or a staff to pick, pack, and ship orders.
  • Unlimited storage space
    Because sellers who use FBA store their inventories in Amazon fulfillment centers, the space available to sellers is virtually unlimited. This means your ability to offer a large selection of products is not contingent on the size of your own storage space.
  • Shipping speed and cost advantages
    Orders that are fulfilled through FBA are typically shipped faster and at a lower cost than most sellers could achieve on their own. Amazon’s economies of scale allow the company to offer lower shipping prices. And its efficient operations make it possible to pick and ship orders faster than you are likely to be able to do yourself, unless you maintain a sophisticated fulfillment operation of your own.
  • Returns management
    In addition to shipping new orders, FBA handles product returns. If a return is needed, a customer will ship the item directly back to Amazon, avoiding the need for you to manage the physical aspects of the return yourself.
  • Customer service management
    Unlike most other third-party fulfillment services, FBA offers customer service management, too. This means customers who experience a problem with their order will contact Amazon directly.
  • Amazon Prime branding
    Most FBA products are eligible for Prime-related services – such as free two-day shipping to Prime customers – which makes it possible for third-party Amazon sellers to get exposure to 112 million Amazon Prime subscribers. Qualified FBA listings are displayed with the Prime logo, which indicates Amazon handles packing, delivery, customer service, and returns.

Challenges of Using FBA

While it does offer several business advantages, FBA does have some drawbacks that could make it a less-than-ideal for some sellers.

Fees and costs

Amazon charges fees to sellers who use FBA, which may vary significantly depending on factors such as item type, weight, and dimensions. For example, when you ship through FBA, you may incur fees for inventory storage, returns processing, recalled item fees, and fees for items that you ship to Amazon without proper labeling.

Beyond direct costs associated with these fees, sellers may experience varied costs involved in FBA pricing, making prediction of your exact FBA costs difficult. For this reason, FBA may not be a great choice for sellers whose order types are inconsistent, or who cannot accommodate fluctuations in their fulfillment costs.

How much does it cost to sell products on Amazon?

Typical expenses include the selling plan, referral fees, fulfillment fees, and other costs/fees as applicable. See expenses and examples below: 

  • Selling plan
    Individual plan: $0.99 per unit sold
    Professional plan: $39.99/month/unlimited units sold
  • Referral fees
    Paid for each item sold, and can range from 8 - 15 percent
    — Consumer electronics: 8 percent
    — Home/garden: 15 percent
    — Personal computers: 6 percent
  • FBA Fulfillment fees
    Fee per unit for picking/packing orders, customer service, product returns.
    Ranges from $1.97 per unit to $137.32 per unit
  • Other fees
    May include inventory fees, long-term storage fees, or payment for optional programs, such as advertising or premium account services

Product returns

FBA simplifies the product return logistics process, meaning you may experience more returns than usual. However, Amazon imposes a few restrictions. Most items are subject to a 30-day return window, after which FBA will not accept returns. Some items are not eligible for returns at all.

Difficulty of preparing products

Amazon imposes a relatively complex set of rules regarding how sellers must prepare their items before shipping them to an FBA fulfillment center. As noted above, if you don’t prepare your items properly Amazon will charge additional fees in order to accept them.

Inventory tracking

Amazon provides tools to track and monitor shipments as well as remove inventory from Amazon fulfillment centers. However, sellers are responsible for keeping track of what is in their FBA inventory and ensuring it is replenished as needed. If you don’t do this properly, you risk accepting orders that can’t be fulfilled because the items are not actually in stock. Alternately, you could end up with excess inventory and pay to store items for a long period of time at an Amazon fulfillment center.

Sales tax issues

Calculating sales tax is complicated enough when items are sold and shipped directly. When you use a third-party fulfillment service like FBA, sales tax becomes even more complex. The seller could be located in one state, the FBA fulfillment center is in another, and the customer is in yet another, with each state having a different sales tax rate.

U.S. states that host an Amazon fulfillment center require Amazon to collect sales tax on the sellers behalf. However, in states without this requirement it is up to sellers to register with each state in which they will collect sales tax. They must provide this information to Amazon in order to set up sales tax collection on Amazon FBA.

How to Get Started with Fulfillment by Amazon

If you’ve decided FBA is right for your online business, the process for getting started is straightforward.

Set up FBA

First, you must set up an account with Amazon in order to use FBA. To do so, scroll to the bottom of Amazon’s homepage and click the “Sell on Amazon” link located under the “Make Money with Us” column.

What is Fulfillment by Amazon (FBA)?

You can use FBA with either an individual account or a professional account. The main advantage of an individual account is it is free, whereas a professional account costs $39.99 per month. In most cases paying extra for the professional account is worth it. You will be subject to fewer per-item fees when you ship orders, while also having access to additional tools for helping to track orders and upload fulfillment requests.

Do your research

The next step is to determine what you want to sell. This is an important decision that can make or break the profitability of your online store. Ideally, you should sell items in high demand but only offered by only a few other sellers. You can gain some insight into whether items you are considering selling meet these characteristics by searching for them on Amazon and assessing how many other sellers offer the same items.

Along similar lines, you’ll need to set your prices appropriately. Do your research to see how other Amazon sellers price similar products. You can also take advantage of Amazon’s Automate Pricing feature, which helps to simplify the pricing process by matching the lowest competitor pricing automatically.

Create product listings

Well-designed product listings are another essential ingredient for an effective online listing. Make sure your listings include the following relevant product information:

  • Product name
  • Manufacturer
  • Brand name
  • Part number
  • Package quantity
  • Material type
  • Color
  • Shape
  • Dimensions
  • Weight

Be sure to include relevant keywords in product listings. Customers may search for the same item using a variety of terms, so it’s important to ensure all relevant terms appear in your listings.

You should also invest in high-quality, well-lit, high-resolution photos of your products. Provide photos from several angles.

It is challenging to manually create a listing for each product if you have a large number of products. Sellers with an extensive product catalog may choose to automate product listings and sync their catalog to the Amazon Marketplace using listing rules. They may then add specific overrides to finely control the offering on a per-product level. Magento's Amazon Sales Channel provides all these capabilities.

Launch and advertise your products

Once your items are in the FBA center, you are ready to begin selling and advertising them.

Product reviews are a critical tool for helping to launch your business. When you're just starting out, you can create blog posts and social media posts to promote your categories or products. As you begin to sell products on Amazon with FBA, encourage satisfied customers to leave a positive review on your Amazon listing. 

You may also consider using Amazon’s own advertising platform, which is easy to use and offers the advantage of being a particularly effective way to reach people already browsing Amazon’s site.

Make eCommerce Easy with the Right Platform

From understanding FBA rules to setting the right prices to tracking your inventory, running an Amazon online store using FBA comes with challenges. Having the right software on your side helps simplify the process.

With Magento Amazon Sales Channel, you can take advantage of features like intelligent pricing to help automate the pricing process. There are additional features such as systematic inventory management, which keeps your product listings in sync with what is available in your online inventory, and order management, which allows you to track Amazon orders directly from the Magento interface with no need to switch between multiple tools.

Amazon Sales Channel also supports multiple Amazon accounts at once, offering a tiered pricing option that allows you to modify prices automatically based on the quantity of purchases, a particularly useful feature when selling to businesses.

To learn more about how Magento Commerce can help drive the success of your Amazon online store, request a free product demo.

What is Fulfillment by Amazon (FBA)?