When it comes to ecommerce, few companies have as big of a chokehold on the industry as Amazon. It’s the world’s most visited online marketplace with 5.3 billion monthly visitors on average1. And out of all the online retail ecommerce companies, it holds nearly 40 percent of the market share2. Why not take advantage of its resources to leverage your own ecommerce business?
Besides using Amazon as an ecommerce portal, 73 percent of Amazon sellers also use Fulfillment by Amazon (FBA) to handle distribution and logistics3.
Instead of stressing over manual labor, the FBA program allows you to outsource your order fulfillment, inventory storage, packing, and shipping to the retail giant. In exchange, you can spend more time expanding your product selection and reaching more customers.
But these advantages come with a cost. Below, we’ve outlined the pros and cons of Fulfillment by Amazon, so you can assess if it’s the best method to propel your ecommerce business to multimillion-dollar success.
What are the Advantages to Fulfillment by Amazon (FBA)?
When you run a solo business, you might juggle many hats, including administration, finances, marketing, product development, distribution, and so on. Amazon’s FBA program helps you lessen that load by outsourcing product distribution to experienced workers without hiring more staff.
With the basic FBA plan, you ship your products to an Amazon fulfillment center, which stores your inventory until an order pops up. Then, workers take care of picking, packaging, and shipping your product to the customer.
How do these services (and more) benefit your business?
FBA Lets You Save Time on Manual Labor and Space
Once you ship your products to an Amazon distribution center, your role in physical handling is over. FBA allows you to:
- Use Amazon’s warehouses. With FBA, you can take advantage of over 150 million square feet of space across hundreds of warehouses and distribution centers4. If you sell an item with a long shelf-life, like custom t-shirts, FBA lets you mass produce inventory and warehouse it somewhere other than your home office.
- Outsource returns and customer service. Any founder knows that huge parts of your time can get tied up in customer service. But for your FBA business, Amazon’s customer service specialists will communicate with customers throughout the entire buying process. Count on them to handle complaints, process returns, and manage all returned or faulty items.
- Add complementary services. For a higher fee, you can use complementary services like the Amazon Partnered Carrier program. It offers discounted shipping rates when you send your inventory to fulfillment centers. Or, you can sign up for the FBA Small and Light feature, which reduces the cost of fulfilling small orders priced under $10 and weighing less than three pounds. The Repackaging Service allows returned items to be repackaged by Amazon so you can resell them.
Each feature takes a burden off your shoulders and gives you more time to focus on other tasks – like marketing your business.
FBA Lets You Access Amazon Prime Members Everywhere
When using any ecommerce marketplace, your first priority is making more sales. With FBA, you can easily boost your sales because 92 percent of customers would rather buy products from Amazon than any other online retailer due to its product variety and delivery speed. Over 300 million people worldwide have a customer account and therefore have access to your products6.
When you create an FBA ecommerce business, you take advantage of both the program’s services and Amazon’s basic Prime benefits. You can access Prime’s wide customer base and lure potential buyers in with free two-day shipping in 21 countries7. Let FBA handle distribution while you continue targeting Prime customers. Most of them (at least 83 percent) would rather engage with your FBA business than another ecommerce business because it promises free two-day shipping8.
Build Your Brand Beyond Amazon with Multi-Channel Fulfillment
With FBA handling all customer interactions, you risk becoming another faceless Amazon storefront. This makes it incredibly difficult to build a reputable and trustworthy brand.
But with Multi-Channel Fulfillment (MCF), you can build a recognizable brand on your website while still taking advantage of FBA’s offerings. MCF allows you to outsource work for both your Amazon storefront and personal merchant shop so long as you have an FBA seller account.
Using FBA and MCF simultaneously allows you to:
- Outsource logistical labor. Just like FBA, MCF helps you store, pick, package, and ship orders through other sales channels. Sell products through your ecommerce shop in addition to Amazon and let MCF handle the logistics.
- Reach global customers quickly. MCF works for any typical ecommerce website within Canada, Mexico, Japan, Germany, France, Italy, Spain, Australia, the US, and the UK. While it doesn’t promise Prime two-day free shipping, orders are still fulfilled and shipped in under a week.
- Continue building your brand with FBA’s convenience. Using MCF, you can still save time on packing and shipping orders while creating a recognizable brand presence on your website. Work to connect with customers one-on-one as you sell products and handle customer service queries through your own portal.
- Recycle returns easily. Even though you handle returns and customer service, MCF still allows customers to ship returns back to Amazon so you can repackage and resell the item again.
What Will It Cost to Use Fulfillment by Amazon (FBA)?
Convenience doesn’t come cheap. Using Fulfillment by Amazon will cost you a hefty monthly bill and may hit you hard in other business respects. Consider the following disadvantages of FBA before using it.
Anticipate Inflexible Shipping, Storage and Return Fees
When you fulfill and ship orders yourself, you can negotiate with manufacturers or pack your items in a way that lessens your shipping costs. But Amazon’s basic fulfillment fees are set in stone and only vary depending on the weight and type of product you sell.
For example, Amazon will charge you $3.28 per six-ounce smartphone case you sell. But large oversize items like flatscreen TVs will cost you a $90 base price, plus 83 cents per pound above 90 pounds9. All of these costs are per unit, so the more orders you sell, the more you pay Amazon to fulfill them.
Additional fees include:
- Extra service charges (for features like Repackaging or Labeling). The more services you use, the higher your bill will be.
- Monthly storage fees. The ecommerce titan also tacks on a long-term storage fee after six months. These costs vary spending on how much warehouse space your products take up. But if you don’t sell as much inventory as you hoped, you may lose even more money.
- Per-unit costs on returns. While Amazon handles returns, you pay for each item returned or sent to Amazon to repackage or relabel onsite.
You must evaluate your budget before working with FBA. These expenses will hit especially hard in your business’s first few months, so ensure you have enough cash set aside to live off of while you get your Amazon FBA business off the ground.
Expect to Lose Some Revenue From Easy Returns
While Amazon’s FBA program can help you reach a wider audience, expect many of these customers to return your products.
The average return rate in the US has already jumped six percent in the last year, with customers returning an average of 16.6 percent of all sales10. For Amazon, the average return rate depends on your product category, with apparel and jewelry suffering from a staggering 40 percent return rate11.
The retail giant emphasizes the simplicity of 30-day returns for faulty or unsatisfactory products, and there’s nothing you can do to change that. Creating an FBA business means acceding control to Amazon for specific processes – meaning you can’t set a fee for customers to return items or mark certain sales as final.
You’ll need to consider these return rates when choosing your product category. Or, try to combat them with high-quality products that will satisfy customers.
Prepare for More Responsibility If You Have Multiple Sales Channels
The whole point of using Fulfillment by Amazon or Multi-Channel Fulfillment is to eliminate logistics tasks. However, with both programs, you must ship your inventory to Amazon’s fulfillment centers yourself. So while running multiple sales channels, prepare to spend extra time shipping and updating inventory for all your shops.
You must ship the products from the manufacturer to your home to the fulfillment center. Or, find a way to send finished products directly to Amazon from the manufacturer. Since the US hosts more Amazon fulfillment centers (110) than any other country, you’ll likely have to ship it there, no matter where you’re located. These costs easily add up, so factor in those shipping costs plus the storage and fulfillment fees when assessing your budget.
In addition to more responsibilities and costs for shipping, you also have to handle customer service and returns through MCF. Even if Amazon makes a mistake in distribution, you still represent your business since the customer purchased the product through your website. You’ll need to take accountability for any errors and prepare to soothe ruffled feathers.
Sell Your FBA Business on Acquire
If you’re a bootstrapped founder with limited funds, it might be hard to cough up those extra dollars to truly grow your business. Even if you do, you may realize the investment will require much more capital than you have on hand. Before today, that usually meant you’d need to raise venture capital or do a fire sale of your business assets and exit. However, today we’ve created a viable third option for ecommerce businesses at any stage: acquisition.
Whether your FBA business earns $10,000 in revenue or $100,000 in revenue, you can list it on Acquire at any point. We’ll help you find verified, trusted buyers to take care of your business and achieve the vision you entrust them with. Based on our August 2022 multiples report, expect to value your ecommerce business at 1x to 2x revenue or 3x to 5x profit.
There’s no better time to start and sell a profitable FBA business. Some major companies, like Thrasio, are willing to spend billions of dollars to Acquire FBA businesses and grow them12. See how you could successfully exit yours by visiting our seller page today.
Sources:
1 Most visited online marketplaces worldwide 2022 | Statista
2 Largest online retailers in the U.S. 2022 | Statista
3 3 Things to Consider Before Owning an Amazon FBA Business (entrepreneur.com)
9 Amazon
10 Retailers’ average return rate jumps to 16.6% as online sales grow (cnbc.com)
11 How to Lower Your Amazon Return Rate – tool4seller
12 Thrasio Grabs Another $500 Million To Fuel Shopping Spree Of Amazon Sellers (forbes.com)
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before entering into any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.
