For a number of years now people have been using Amazon as a way to make money online while living the laptop lifestyle. E-commerce has exponentially exploded with more and more people now using their computers to buy just about anything and a couple of days later it’s at their doorstep.
In 2020, Amazon was the most visited online retail website with average monthly traffic of 3.76 million visitors.
So it’s no surprise that small and medium-sized businesses are wanting to capture some of that traffic and increase their revenue, but it comes at a cost.
In this post, I’m going to show you just how does Amazon FBA work, if it’s still worth considering and what you as the seller are responsible for when using FBA.
I have built and sold two brands on Amazon in the US, so this comes from my experience as an FBA seller.
Ready? Let’s fly…
Disclaimer: This article includes affiliate links that may provide a small commission to me at no cost to you (it will buy me a cup of coffee though 😉). However, these are the best tools to help you with building an Amazon business. You can read more about my affiliate disclosure in the affiliate policy.
What is Amazon FBA?
First of all, FBA stands for Fulfillment By Amazon.
The most basic way to describe what Fulfillment By Amazon means is:
- You provide the product when you make a sale on the platform, Amazon then ships it for you.
This is great because you get to leverage Amazon’s huge warehouses (known as Amazon fulfillment centers) to store and ship your products. Any order that is placed through the platform will be picked, packed, and shipped by Amazon’s hard-working staff members.
How Using FBA Can Give You the Edge
When you decide to sell on Amazon, you’re getting access to millions of customers with their credit cards in hand, ready to buy, and in some cases, people have their credit cards on file to make the process even quicker.
There are roughly 215 million visitors (only beaten by Facebook and Google) in the United States alone going to Amazon every month, it’s basically free traffic!
- On average, an Amazon Prime member will spend roughly double that of a non-Prime member
- The number of Amazon Prime households is expected to reach 76 million by 2022
- As of January 2020, almost 80% of people choose to shop on Amazon because of its fast shipping
So as an FBA seller, you get access to all those perks and are eligible for 2-day shipping, which we will talk about more in-depth further down the post.
How Does Amazon FBA Work?
The process I’m about to show you is one of the best things about being an Amazon seller, it allows you to be anywhere in the world and sell in any marketplace.
I was able to live in Australia and not only sell in Australia but also sell to the biggest marketplace in the world, the United States.
Here’s how it works:
1. Open a Seller Central Account.
To get started, you’ll need to register as a seller and select the marketplace you want to sell in. My recommendation is to start with the US and once you create your account, add FBA to it.
2. Create Your Product Listings.
This is where you’ll add your product to the Amazon catalog. You’ll insert your title, bullet points, price, and product description.
3. Ship Your Products to Amazon.
Once you’ve got your products ready, create a shipping plan, and Amazon will tell you which of the 110 centers (USA) to send them to.
4. Amazon Stores Your Inventory.
Once Amazon has received your inventory, they will go ahead and store it on a shelf. From here, you will see your inventory numbers rise as it’s processed through the fulfillment center.
Should a product get damaged inside the warehouse, Amazon will cover the loss and pay you the sale price of your product.
5. A Customer Buys Your Product.
Awesome! Now the magic starts to happen. Amazon takes care of the payment and updates your inventory supply.
6. Amazon Ships Your Product.
Amazon will have gotten all of the customer’s details during the checkout process, they will then pick and pack your product before they ship it out to them.
7. Amazon Handles All of Your Customer Service and Returns.
At each stage of the shipping process, Amazon will email the customer to keep them up to date on the tracking process.
If there are any issues, the customer can reply straight back to Amazon. They will also handle any returns.
8. Finally, You Get Paid!
Every fortnight Amazon will place the profit into your nominated bank account. This is after all of their fees and charges are deducted from the sale.
Now, this process may seem pretty simple, but it’s not easy. There are a lot of moving parts to this business.
To learn more about what goes on inside a fulfillment center, check out the video below:
What You Are Responsible For as a Seller
Now that Amazon is taking care of the heavy lifting (see what I did there? 😉), this will leave you to focus on the selling points of your product and market your brand.
Here are a few things you need to know about being an Amazon FBA seller.
1. Develop a Killer Product.
This one is pretty obvious. You need to enter a market with a product you would like to sell. The best thing is that there are over 350 million products to choose from.
It’s important to do the research and check out the competition before committing to a market.
Two of the best pieces of software I would recommend to conduct this research and give you an advantage over your competitors are:
✈︎ Helium 10
2. Keeping Your Stock Levels Up.
To stay in the game, you need to keep your stock levels up. This can be tricky because you’ll need to put more money in to create the next batch of products before you sell out of the current batch.
It’s no big deal if you do run out of stock (we’ve all been there, and it’s a great problem to have), but it will take some work to get back into the game, so keep an eye on it.
This can become especially problematic during the holiday season, so it is essential to plan your inventory management much earlier in the year.
3. Marketing and Advertising.
With 350 million products out there, you’re going to have to invest in a little bit of paid advertising to be found.
This is the only way you can be seen on the first page of Amazon from day one. There are really only two factors that shoppers look for, the price must be right, and then they look at the reviews.
To be competitive, you will need to market your product at a price that will make sure you are able to entice customers to buy your product with no reviews.
Once the reviews start coming in, then you can slowly increase the price to where you want it to be.
4. Product Photos and Listings.
As I mentioned above, you’ll need to create a really good listing with plenty of benefits and killer photos that show your product in a different light.
Differentiation is key here. You need to have some professionally taken photos with a couple of lifestyle shots with the product being used (if applicable).
Take up all of the allowed slots for photos, but beware of Amazon’s strict guidelines for photos. For example, hero shots (the first image shown to customers) must be on a pure white background.
Advantages of Using Amazon FBA
When you sign up as an FBA seller, you automatically get to partner with Amazon, one of the richest companies by revenue in the world.
Let’s take a look at some of the benefits you would get:
1. Automatically Get Access to Prime Customers.
This is probably the best benefit of being an FBA seller. FREE and FAST shipping is a major attraction for customers. It’s what Amazon is known for.
In most cases, Amazon can get your product out to your customers quicker and cheaper than you would be able to, thanks to their partnerships. This leaves more profit in your pocket. Nice.
You also automatically get the ‘Prime’ badge on your listing, showing members that you offer Amazon’s shipping guarantee.
2. Get Amazon’s Reputation From Day One.
The trust people have in Amazon is incredibly strong. When someone orders some ski gloves before their trip, they know they will get them in 48hrs.
If they don’t, it’s easy to access the customer service hotline and get it fixed.
If you have the ‘Prime’ badge, then you automatically earn the customer’s trust, and give you an advantage over the non-FBA sellers.
3. Customer Service and Return Management.
If there’s any kind of issue, let’s face it, it could ruin your day by getting an upsetting email or phone call that would otherwise take you away from doing something else on your business.
Amazon has placed a mantra of “the customer is always right”. Now whether this is right or wrong, customers have come to expect this, and it allows them to purchase items virtually risk-free.
So it’s a good thing that Amazon will handle all of the returns and customer service calls for you 24/7.
No more answering emails of where to return the product, no more calls in the middle of the night about how to put your product together, and no more customers sending your product back to your own house, it’s a great selling point.
4. Run Your Business From Anywhere.
This is a huge perk for an international business owner. I never even got to touch the final product.
I got the product made in Asia, then shipped all the way to Amazon in the United States, and it was bought by real customers.
It allowed me to tap into the biggest marketplace from the other side of the world. Just awesome.
You can also use Amazon fulfillment beyond the Amazon marketplace. This allows someone to make a purchase on your own website, and then you create the order with Amazon, who will send it out for you.
Disadvantages of Using Amazon FBA
Of course, it’s not all roses and rainbows. There are some disadvantages to using FBA, but it’s up to you whether the negatives outweigh the positives in order to make it work for your e-commerce business.
1. FBA Should be Called Fees By Amazon.
Amazon is running a business, and just like you, its goal is to make money. So it’s really no surprise that letting them handle your products comes with a whole heap of fees.
The fees to be aware of are:
This is the storage cost to keep your products in their warehouses. If you have any inventory left at the end of the month, you’ll be charged a monthly storage fee.
In addition to the monthly fee comes the long-term storage fees. On the 15th of every month, Amazon does a complete clean-up of any inventory that has been sitting in a fulfillment center for more than 180 days.
So it’s in your best interest to have a product that you know is smaller (and takes up less storage space) and also is moved or replenished quickly to minimize fees.
Pro Tip: This will all help save on shipping costs if your product is smaller. However, if you opt for
Individual Item Fees/Monthly Subscription Fees
There are two types of online sellers. Individual and professional. The main difference is that on an individual plan, you pay fees every time you make a sale ($0.99), and on a professional seller account, you pay a flat $39.99 fee every month, no matter how many sales you make.
So if you’re selling more than 40 products a month, it makes sense to move to a professional plan.
Because Amazon processes the request and takes care of all the admin for you, if a customer requests a refund, they will charge you a fee for it. Up to $5.00 or 20% of the refunded fee, whichever is less.
Amazon FBA Fees
We now know that Amazon will pick, pack and ship your products out to your customers for you. So rather than charge you 3 different fees every time, they’ve come up with the FBA fee.
These fulfillment fees are determined by the size and weight of your inventory.
The smaller and lighter your product is, the fewer fees you’ll pay.
And if those fees above weren’t enough, you are charged a referral fee on every sale. For most sellers, this will be a flat 15% or less.
Because this is basically a “commission” to Amazon for the opportunity to use their customer base for you to get a sale, referral fees are only paid after the sale has been made.
For more information, here is the complete overview of all fees and the Amazon FBA calculator.
2. Amazon’s Return Policy.
This can be a disadvantage because of Amazon’s very relaxed “no questions asked” return policy. You will find there are always people who, unfortunately, will take advantage of third-party sellers and request a refund even if nothing is wrong with the product.
Be sure to factor this into your margins.
3. Accounting and Taxes.
Sales tax may not be a problem if your inventory is only in one state and you only sell within that state.
But Amazon doesn’t operate this way. With fulfillment centers all over the country and the fact that your inventory can be bought from any state, it can make it hard to keep track of which state sales tax applies.
Not to mention that Amazon can also move your inventory to any fulfillment center at any time, and you would have no idea unless you were keeping an eye on it all the time.
Luckily TaxJar was created for Amazon sellers to stay on top of their tax requirements. Check them out.
4. You Lose Some Control.
Once your inventory has been sent to Amazon and placed into the warehouse, you no longer have access to it. If you want to change something within your packaging, branding or even get in touch with your purchasers, you can’t.
It’s unfortunate, but the fact is, the customers belong to Amazon, not you.
Alternatives to FBA
Selling on Amazon FBA is not the only way to give the same level of service and experience to potential customers.
Known as 3PL (Third Party Logistics) companies, the way it works is that instead of sending it to an Amazon fulfillment center, you send it to a third-party warehouse.
When a customer buys a product, the 3PL will do the picking, packing, and shipping for you.
If you don’t want to keep all of your inventory in an Amazon warehouse, you can use the ‘drip-feed technique’, where you send a small amount to Amazon and keep the rest in the 3PL warehouse until you’re ready to push the next lot through.
If it makes good business sense to go with a 3PL, here are some I recommend:
✈︎ RedStag Fulfillment
So is Amazon FBA Still Worth it?
As a business owner, only you can answer this. Does it fit in with your business model to use the Amazon FBA program?
There are millions of e-commerce sellers using FBA (myself included), so clearly, it works. Especially with the fact that I did this all from another country.
If you’re selling just on Amazon, then my answer is yes, it is still worth it. The higher cost of actually selling on the platform is outweighed (in my opinion) by their awesome customer service, shipping and handling, and refund management.
But this is not for everyone.
The FBA program is very much a pay-to-play type scenario. Amazon FBA costs money to get started, and you won’t go far without it.
But before you go committing, you need to know your numbers. How many units do you intend on selling every month? What are your net profit margins, and is it enough?
If Amazon is just one of your sales channels, then perhaps using a 3PL may make more sense.
If you have non-Amazon sales and use FBA to fulfill the order, then the shipping and storage fees are significantly higher.
So do the math. There are plenty of FBA calculators to get an idea of what you’ll be paying in advance.
As a rough guide, use the 25% rule. Take your selling price and divide it by 4.
- 25% goes to your CoGS (landed cost Stateside).
- 25% goes to Amazon for fees.
- 25% goes to advertising (needed to be competitive).
- 25% profit margin (what you get to keep).
There’s no question that Amazon definitely makes it easy to start an online business. FBA is a great initiative to reduce the headaches most e-commerce sellers face and, in most cases, reduce the cost of running a business.
The biggest benefit of using FBA is the Amazon Prime eligible badge, which from my experience, definitely increased click-through rates and conversions.
Not to mention handing over the customer service to someone else, all from being located in a different time zone.
FBA, with its fast and free shipping, is definitely a way to gain your customer’s trust, partner with a retail giant, and still be competitive enough to be the number one spot on page one.
Tell me in the comments below if you’re using FBA! How are you finding it?
It’s time to be the pilot of your life and not just the passenger.
Chris Bournelis is a blogger and part-time web developer. He has been working in online business since 2015. Join him here at ChrisBournelis.com for the best SaaS reviews and tips to get the most out of your online business.