FYI – this topic is for those using Seller Central (3P), not Vendor Central (1P), to sell through Amazon
To survive in the Amazon ecosystem, sellers must use any advantage they have at their disposal. Perhaps you are a fast-moving, solitary seller whose edge rests in his ability to adapt quickly, change territory and ship nimbly.
Or, maybe you are a larger organization whose success relies heavily on group effort— sharing responsibilities across multiple disciplines to grow and maintain brand identity and autonomy.
Perhaps you are somewhere in between— managing a lean, multi-channel operation.
On Amazon, products of all shapes and sizes compete for a top spot in the food chain.
Despite each sellers’ unique traits, strengths and weaknesses, one of the many challenges facing all merchants in the choice of how to best handle fulfillment.
In the world of Amazon fulfillment, it’s ship or be shipped— FBA or FBM.
FBA, or fulfillment by Amazon, is the option to pay Amazon to handle all areas of fulfillment, including storage, shipping, returns and fulfillment-related customer service.
FBA also qualifies many products for Amazon Prime, except in cases where the product is deemed unprofitable. In these cases, Amazon will instead qualify the product as an add-on item.
FBM or fulfillment by merchant (also sometimes referred to as merchant fulfilled network or MFN) is a process by which all fulfillment and customer service is handled by the merchant themselves.
Each method has its advantages and disadvantages, which we will cover later. But instead of giving you a list of pros and cons like every other blog post out there, we want to help illustrate the key differences by showing which method is best for each type of seller.
In other words, which merchant should use which method? Should you use both, or neither, or maybe let someone else handle fulfillment for you? Running out of stock (OOS) on Amazon is like running out of mosquito spray in the jungle. You don’t want to do it. After all your hard work, you could lose lots of your coveted sales momentum almost overnight. If you still aren’t certain which direction to go after reading this, that is totally fine and perhaps even expected too given the number of options and importance of this choice. We recommend talking to someone who does understand this well as it’s not something to be taken lightly.
The Jaguar (FBA-aligned seller)
This big cat is swift, adaptable and relies on stealth and speed to catch its prey, often blending in with his surroundings; a strategy which helps make the jaguar one of the top predators of the jungle.
Like the Jaguar, the typical and model FBA product is lightweight and moves quickly, keeping storage and shipping fees low. (However, know that many heavy and slow-moving products can make sense through FBA too.)
Many sellers who choose FBA prioritize sales, marketing, or customer service over fulfillment due to a more lean organizational structure. Some of those types of companies can be as small as one-person operations working out of their garage. But not all businesses suited for FBA are small. Many of these companies are multi-billion dollar organizations with an international presence. Not exactly mom-and-pop operations.
Regardless of size, FBA is for the seller who wants to make a serious go at Amazon as a significant channel. All things being equal, Toucan has found that sellers who more heavily stock on FBA will typically find more success on Amazon.
A major advantage of FBA sellers lies in utilizing the Amazon reputation, manpower and Prime status to increase conversions.
Compact but Powerful
One of the most notable characteristics of the Jaguar is its compact body, and powerful jaws. This helps the Jaguar maintain a low profile while closing in on its prey.
Merchants whose products are small and lightweight can benefit from lower storage and shipping fees charged by Amazon. Because FBA fees vary by product volume, sellers with more compact items may realize greater margins (yet like above not always).
Many of the more popular products on Amazon fit this bill, like cell phones, as they are both lightweight and higher priced.
The Jaguar is a top-level carnivore, poised with thousands of years of evolution on its side for one purpose, to win the fight in the Amazon.
Similarly, FBA sellers typically win the buy box more often than their non-FBA competitors due to a number of differentiating factors:
- Prime eligibility
- Ability to offer all shipping options available
- Utilization of baked-in Amazon brand trust & reputation
Most products under FBA are awarded the “Prime” designation which is great because prime products typically convert at a higher rate than non-prime items.
Because they “bear” the extra cost associated with FBA, these sellers enjoy the benefits of Amazon’s superior distribution and shipping networks and are able to offer a streamlined shipping and customer service experience for their customers without the need for additional in-house manpower.
Conversions are further bolstered by the stellar fulfillment and customer service reputation held by Amazon.
Like using the cover of the jungle to sneak up on prey, Amazon protects the FBA seller from skeptical buyers by ensuring a superior standard of service and execution.
The Capybara (FBM-aligned seller)
The Capybara is the world’s largest rodent. It’s a social animal who thrives in groups and in dual environments (wet and dry) and is often picky about what it eats, choosing one specific plant over another.
Many sellers suited for FBM have plenty of manpower to handle many facets of the business, including fulfillment and customer service.
But— not all FBM-aligned sellers are large organizations with a robust staff. Many smaller, multi-channel orgs may lack the sophistication to run multiple fulfillment options simultaneously and will opt for a simpler single fulfillment solution over which they can maintain the most control.
For example, the small seller whose business is split between a primary ecommerce channel and a secondary online marketplace may find it simpler from a logistical perspective to keep their fulfillment under one roof (i.e. their own).
If your items are large and heavy, FBM typically becomes a logistical no-brainer, and is most likely the cost-effective solution as well. Make sure you run the numbers to see what your FBA fulfillment fees may be based on the product weight and dimensions.
FBM aligned merchants care about brand cohesion and prefer not to commingle with other products in their packaging.
The Capybara is only as strong as its weakest rodent. With strength in numbers on its side, the Capybara has an easier time defending its group and territory over those who go it alone.
Fulfillment is a task for many. You need people to organize, pack and ship your products. Until we see box-packing robots become ubiquitous, we need hands and brains to do the work.
If you’re an established organization with enough manpower to carry out the rigors of fulfillment, you might be better suited for FBM. However, let’s stress again that all things being equal, Amazon prefers to default to FBA/Prime listings over FBM.
The capybara thrives in both wet and dry environments, sometimes staying underwater for up to forty minutes without a breath!
Just like the Capybara, the FBM aligned merchant can hold its own while fulfilling through Amazon and elsewhere.
In-house fulfillment allows the merchant to maintain online and offline orders with just one inventory.
Most important, the FBM seller controls the shipping and delivery experience across multiple channels to ensure brand cohesion.
This plays well when potential customers perform multichannel research on your products and company and discover similar experiences shared among customers spanning multiple outlets.
Not only does FBM save you from the ever-changing storage, packing and shipping fees incurred by FBA sellers, you also enjoy the freedom of choosing what packaging you use to ship (mitigating damage) and how you communicate with your customers throughout the process.
Some FBM merchants include enhancements like handwritten letters or gifts in their packaging depending on each specific order’s needs. When you control how your product is shipped, without commingling of other products, you better control the experience delivered to your customer. Perhaps you could think of building your customer base as opposed to Amazon’s base.
Albeit an abstract benefit, the value of a cohesive brand story from decision to delivery, cannot be overstated.
Pros and Cons of FBA and FBM
Here’s a quick breakdown of some of the pros and cons of using FBA or FBM
FBA Pros and Cons
- Baked in brand Amazon trust converts more customers
- Amazon handles customer care, shipping and returns
- More likely to win buy box due to prime status
- Vast shipping and distribution networks
- Lower shipping rates
- Sophisticated warehouse storage and reporting
- Simplified returns
- Products commingle
- Limited access to quality control
- Evolving storage and shipping fees
- Loss of customer experience control
- Unpredictable packaging poses damage risk
- Fees and policy subject to unexpected changes
- Slow-moving products can incur long-term storage fees (LTSF)
FBM Pros and Cons
- Freedom and control
- The possibility of greater margins
- Brand independence and cohesion
- Reduced product damage and returns
- Seller Fulfilled Prime program eligibility
- Save money on larger items with slow turn rate
- Simplified online and offline inventory management
- Cohesive service reputation across multiple channels
- Minimize out of stock situations with controlled inventory
- More space and manpower required for efficient fulfillment
- Amazon penalties associated with poor customer experiences
- Continuous quality control and oversight responsibilities
- Competitive pricing strategies mean smaller margins
- Limited market exposure unless prime eligible
- Potentially higher overhead costs
Before you decide, consider the following
- Amazon’s commission fee (referral fee) is the same in FBA and FBM as determined by product category.
- It may take days for an item to show as “in stock” to the consumer under FBA. With FBM, you have the ability to set inventory status within minutes of receiving new stock. Note that during the busy Q4 holiday buying season, this can many time longer than normal with up to 3 weeks to fully receive stock.
- For many sellers, the actual shipping cost in FBA will be less than the shipping cost in FBM; which may make FBA attractive for net margins too, yet you’ll need to take into the account your cost to ship products into FBA.
- Under FBA, Amazon charges additional fees (called refund administration fees) to recover returned units back to seller. With FBM, you receive the items directly.
- Amazon imposes a surcharge for long-term storage under FBA. Slow-moving or out-of-season items will cost you more to store.
- Amazon fluctuates storage fees during the year (e.g., Q4 storage fees are higher) although typically this is a very small percentage of your overall FBA cost structure.
- Seller pays only for actual storage needed with FBA vs with FBM Seller will likely have same overhead every month for self-stored warehouse no matter how full or empty it is. FBM seller with a 3PL may also only pay actual storage needed, depending upon contract.
- For the multi-channel enterprise seller, an inventory management system with multiple warehouse functionality may be needed for FBA (i.e., some inventory held at FBA, some inventory held by seller).
- Many smart FBA sellers will use FBM listings as backup listings (i.e. same price) as when/if they run out of stock at Amazon their FBM listing will have a chance at winning the buy box (especially if other sellers aren’t competing for the buy box)
FBA Revenue Calculator
Amazon provides a handy tool to help you find out whether or not FBA is the right choice for you.
Drill down on the numbers with the FBA revenue calculator to help you decide, or we’d be glad to walk you through it too.
A note about Seller Fulfilled Prime
Seller Fulfilled Prime is a perk offered to qualifying FBM merchants.
Merchants who want to take advantage of access to the Prime badge on Amazon while shipping out their own products must be able to consistently meet an extremely stringent and specific set of criteria relating to delivery rates, cancellation rates and more.
The main benefit to using SFP is access to the Prime customer base and ability to effectively compete against other FBA sellers for the coveted buy box.
For some FBM sellers, this is the best of both worlds. Sort of like if a Capybara developed spots and learned to enjoy the taste of meat.
It’s A Wild World
In the Amazon, there are many species of sellers trying their best to survive. At times it can be overwhelming and fraught with surprises. But, as daunting as the competition might seem, the online retailer can be a place of customer abundance and prosperity if navigated well.
When considering selling your product online, it’s best to carefully consider how the different fulfillment options offered by Amazon might affect your customer experience or your bottom line. There may not be a perfect fit for your business, but there will usually be a closest fit.
For some merchants, it’s worth the additional fees to allow Amazon to handle all of the hard stuff for you.
For others, maintaining control is a top priority.
Sometimes, utilizing a clever hybrid approach is best.
Which fulfillment option works best for your business? Contact us if you need help crafting the perfect fulfillment plan for your business.