So you’re an Amazon seller or are planning to become one. Regardless of the business model you choose, you need to figure out one major challenge: fulfillment. After all, you’re selling physical products that need to be stored, packed and shipped to your customer. This concern may have brought you to this blog post: comparing FBA vs FBM as your route to fulfillment.
What exactly are FBA and FBM?
FBA is short for Fulfilment By Amazon and FBM is Fulfilment by Merchant. When selling on Amazon these are your choices when it comes to fulfillment. The terms are pretty self-explanatory.
Merchant, in this case, refers to you, the seller. As such, FBM means that you handle all the logistics involved in delivering your customers’ order to their doorstep. In other words, you handle order fulfillment yourself.
Pretty straightforward, right? You’re the one selling the product, so you’re the one who’ll be storing, packing and shipping it. FBA is the exact opposite. In short, you pack up your products and have them sent in bulk to Amazon (or have your supplier or a third-party processing facility do it).
That’s about it, Amazon takes it from there. They handle delivering your product and even providing customer support as it relates to fulfillment. Specific product-related questions will be taken care of by you. In essence, your role is simply taking care of the bulk product shipment to Amazon warehouses and keeping an eye on customer support.
The FBA model has gotten very popular among sellers over the past few years. Numerous courses were even released offering a full “blueprint” on how to sell successfully on Amazon using FBA.
The reason why the FBA model gained so much popularity is simple: lower barrier to entry. The FBA model made the “work from home or anywhere in the world” dream possible for a lot of people as you don’t have to be stuck in a specific place to run your business. Once your products hit the Amazon warehouses, you’re practically free to run your business from wherever you please.
This kind of flexibility (along with a multitude of other aspects) attracts a lot of sellers to start doing (or switch to) FBA. It goes without saying that there are pros and cons to each fulfillment approach, and you can even do both at the same time (our recommended approach in some cases).
In this post, we’ll review the pros and cons of each approach thoroughly and recommend a route for you based on your own unique situation. We won’t just lay out the pros and cons and then leave you hanging, wondering what would work best for your business.
So let’s jump right in.
Amazon FBM: The Positives
Quicker to set up
With FBM, you only need Amazon as a marketing channel while you handle everything else. This allows you to get up and running as soon as your listing is online. With FBA, you have to go through the whole process of packing and shipping all your items to Amazon warehouses.
Amazon is pretty strict about FBA shipments so it could take a bit of time to prep your products and comply with all the Amazon requirements until your listing is up and running.
Full control over inventory and fulfillment
While this may be considered a double-edged sword, some sellers see it as a clear benefit. Having control over your whole fulfillment process means issues with product quality can be quickly identified and rectified without Amazon’s involvement.
You also have the flexibility to personalize your packages rather than just settling for Amazon’s standard packaging. FBM allows you to maintain tight control over your whole operation and run it completely as you please (as long as it meets Amazon’s requirements).
Minimal Amazon fees
Since you handle all the logistics, FBM saves you Amazon’s storage and shipping fees that you would have otherwise had to pay if you were doing FBA. Amazon’s fees could be especially painful with low margin, bulky products.
That being said, you still incur other Amazon fees like the referral and closing fees. It’s just obviously less than what you would typically pay Amazon with FBA.
Little or no additional overhead if infrastructure exists
Some sellers may actually venture into Amazon as a way of expanding their business rather than starting it. These brands may already employ alternative online and offline sales channels such as their own website, a brick and mortar store, another online marketplace…etc.
In this case, the business most likely already has an operational infrastructure that allows it to store, pack and ship products to its customers efficiently. FBM might be the way to go if that’s the case as the business would need to do little to no changes to its day to day operations while saving Amazon’s additional costs if it were to go with FBA.
Amazon FBM: The Negatives
It’s all on you
While this may not sound scary if you’re selling a couple of products per day, things could quickly spiral out of control if you start selling dozens or hundreds of items daily.
At first, you might store the products in your own bedroom or the garage but then where would you store them? In the beginning, you might handle fulfillment yourself, but what about when it starts taking up your whole day, who will handle other aspects of the business?
You’d have to start hiring. Wrong item sent to the customer? You need to handle the return and replacement as efficiently as possible. There are a lot of moving parts and a lot of things that could go wrong, especially with higher daily order volumes.
Harder to obtain prime eligibility
Contrary to what some sellers think, prime eligibility for products isn’t an exclusive benefit for FBA. Through SFP, or Amazon’s Seller-Fulfilled Prime program, sellers are allowed to display the Amazon Prime logo while fulfilling the orders themselves.
I know what you’re thinking, this is amazing, it’s like the best of both worlds. Unfortunately, it’s not all rainbows and unicorns. Amazon holds you to some tiring standards in order to grant you this privilege.
Not only do you have to commit to 2-day free shipping, but your seller metrics generally have to be squeaky clean. This is a lot of work and a lot of pressure considering the FBA scenario where your items are automatically eligible for Prime.
Additional Operational Costs
Sure, you’ve saved Amazon’s storage and shipping fees, but you still have to store and ship on your own, right? Depending on a lot of things, these costs could be less or more than what you would have paid with Amazon FBA overall.
Saving the Amazon costs doesn’t mean these costs are going away completely. You must carefully calculate what it would cost you to do what Amazon would have otherwise done on your behalf. If these costs work out to be higher than FBA, then going for FBA might be a no-brainer for you.
Potential struggle to get the buy box
When you search for any item on Amazon, there could be dozens of sellers selling it. As buyers, we usually don’t notice these other sellers as we click “Add to Cart” on the “main listing” and that’s it. This is the “add to cart” button highlighted inside the red rectangle in the image below:
That is called the “buy box”. We refer to a seller as owning the “buy box” when a sale from this red rectangle is made and sent to that seller. Amazon determines who owns the buy box using a variety of factors such as the seller reputation, item price…etc. Amazon basically gives the buy box to the best deal it sees for that item.
Other sellers would then be stuck together in the “Other Sellers” section (yellow box). As you can imagine, these sellers get significantly fewer sales than the buy box owner. The majority of sales go the buy box.
Where’s the problem then? Well, Amazon often favors FBA items over FBM items when it comes to buy box ownership. Sometimes the FBA seller would have a higher price than the competing FBM seller and still own the buy box.
This isn’t usually an issue if your item is unique or has very little competition, but that’s rarely the case.
Now for FBA. Some pros in the FBM model turn into cons in FBA and vice versa. I will mention these items briefly below so as not to waste space unless they need clarification.
Amazon FBA Pros
Better shipping prices
To ship a 4-pound package yourself using USPS from San Francisco to Austin, it would cost you roughly $18. You’d need to have crazy margins or a pretty expensive product to be able to eat this cost and still maintain profitability.
Amazon is a gigantic logistics octopus with arms all over the nation. They breathe, eat and sleep product fulfillment so they can usually ship products at significantly discounted rates. This rule doesn’t apply in all cases but it’s generally valid.
With FBA, you simply send your shipments in bulk to the designated Amazon warehouses and they handle the rest. No worrying about how far a state is from your warehouse and how much you’d have to charge your customer to fulfill their order.
Amazon handles storage, inventory, packaging, shipping, and returns
As mentioned earlier, Amazon pretty much handles everything for you except some customer service aspects. From the moment the customer orders till they receive their items, you just sit back and watch Amazon do the legwork. The customer wants to return the item? No problemo, it’s flawless with Amazon. You don’t need to step in unless there’s a hiccup and Amazon asks you to.
As of June 2018, it’s estimated that almost 60% of Amazon shoppers are Prime members. It’s hard to imagine that those 60% would pass up the opportunity to get free two-day shipping on an item for an equally priced (or even slightly lower priced) item from another seller.
FBA sellers have a very clear advantage in that regard because their items are automatically Prime-benefits eligible. If a competitor of yours is FBA and you’re not, assuming all else is the same, they’re most likely going to get the vast majority of sales.
Amazon Prime isn’t just about the Prime members though. The Prime badge instantly makes the listing look more trustworthy. Before I knew anything about the Amazon “behind the scenes” fulfillment solutions, I actually used to think that those “Fulfilled by Amazon” badges meant that Amazon is the one creating and selling this product.
I had no idea they were doing this on behalf of other sellers. I always liked to shop from listings with this badge over others, even though I wasn’t a prime member a the time. Pretty sure I’m not alone.
So not only is being automatically eligible for Prime good for getting purchases from Prime members, but it’s also great for boosting your listing’s overall trustworthiness and credibility.
Many people crave the “laptop lifestyle” where you can just pick up your laptop, travel the world and manage your business remotely. With FBA, this is very possible but with FBM, it’s a lot tougher. Sure, you can do this with FBM if you have a whole team that you can depend on running your day-to-day with little to no involvement from your side.
But, if you need to be “in the middle of the action”, the laptop lifestyle would be impossible as you’ll be chained to your day-to-day operations.
Better buy box opportunity
As mentioned earlier, Amazon is a little biased when it comes to FBA sellers and the buy box. I’m assuming it’s because, with FBA, Amazon controls a big part of the customer experience, so they’d generally be more confident that the customer will be happy with an FBA purchase then an FBM purchase if all else is the same.
This is why an FBA seller will almost always win the buy box, again, if all else is the same (or close).
FBA also offers a very interesting option where they can handle fulfillment for you even if you’re selling “offsite”. This can have huge benefits as you can add more sales channels (such as your own website) which would allow you to better control the customer experience on the front-end, as well as expose your customers to more of your branding, upsell your own products, collect their emails and sign them up to your newsletter….etc.
You can do all that while still using Amazon’s powerful infrastructure to handle fulfillment on the backend. Read more about Amazon’s multi-channel fulfillment.
Higher conversion rate
The increased chances of landing the buy box as well as the credibility gained from the Amazon Prime logo, free 2-day shipping, and other Prime benefits can heavily contribute to boosting your conversion rates considerably compared to FBM.
Amazon FBA Cons
Before you send your products to Amazon’s warehouses, you have to “prep” them. The process isn’t overly complicated or anything, but Amazon could be pretty strict and picky when it comes to prepping requirements. Messing something up could cause delays or incur unexpected costs.
Read more about Amazon’s prep and packaging requirements.
Storage and per order fees
Amazon charges you for storing your items and that’s not a one-time fee. The longer they stay in their warehouses, the more storage fees you incur. This could especially problematic for bulky items. Amazon also charges you fulfilment fees for every order.
Dealing with taxes when selling on Amazon isn’t as simple as you’d think. Amazon does not automatically collect sales tax on your behalf. You’d have to manually enable tax collection under tax settings in Amazon seller central. Learn more about your tax obligations as an Amazon seller.
No immediate access to inventory
Since you don’t have direct access to your inventory, any inventory updates, such as restocking, will be delayed. If customers complain multiple times about quality, you may need to pull the stock and review the batch for quality problems, and then resend the shipment to Amazon. This requires back and forth and can cause delays.
Which is right for you?
The obvious answer is it depends. But if you would ask me to recommend one of the solutions blindly, with no context or information given, I’d most likely recommend going for FBA. I’ve broken down the section below to “FBA is ideal if” and “FBA is not ideal if”.
Review the bullet points under each section and see how many apply to your business and how many are a priority. Simply go with the solution that ticks the most boxes. Also, review the “Why not both” section right under.
FBA is ideal if
- Your product is small, expensive and has high margins.
- Your turnover is fast.
- You can’t efficiently handle fulfilment yourself.
- Location independence is a priority.
- You’re happy to trade margins for convenience.
- You have multiple competitors in your niche and need to stand out.
FBA is not ideal if
- You’re dropshipping.
- Your product is bulky and cheap.
- Your turnover is slow.
- You have enough manpower and efficient fulfilment processes in place.
- Freedom/location independence is not a priority.
Why not both?
Very good question. In some cases, combing both FBA and FBM could deliver literally the best of both worlds. The Amazon seller forums has an excellent discussion about this (multiple discussions, actually). I highly recommend you take a look at it (and google the others for more insight).
If I was to sum up my opinion in one sentence I’d say: Use FBA unless you have a strong reason not to. The advantages that help maximize sales while having Amazon do all the legwork and lets you focus on other aspects of your business (even if you pay for it) makes it a no brainer for me in the majority of cases. That’s it!
Have you tried one or both of FBA and FBM? What was your experience like?