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eCommerce Trends

FBA vs FBM: What Fulfillment Method Will Work for You

FBA vs FBM: What Fulfillment Method Will Work for You

There’s no denying that Amazon has become a beast in the online retail world. Its market share of the U.S. eCommerce retail business has reached 47% in 2020. And it is expected to scale up by 50% in 2021.

As a seller, you can’t ignore this platform because that’s the place where 9 out of 10 Americans start their shopping journey. According to Statista, fast and free shipping, a broad selection of goods in one place, Prime Membership that gives a lot of perks, best pricing, and some more are the reasons people go to Amazon rather than any other shopping channel if they feel the need to buy something.

What does it mean for you as a merchant? Amazon might open the doors to the ocean of opportunities for growing your retail business. But this journey might be tricky if you do not have a plan.

Along with facing a lot of competition to win the buyers’ attention, you might stumble on one more thing before you even leave your home. And that’s the choice of the fulfillment method.

What will work better for your business: FBA or FBM? Can you use both? And what are the gains and potential losses of each of them?

If you are haunted by these questions, you’re not alone. Almost every seller raises doubts about the most effective fulfillment option for their business. That is why we are here to clear it up for you and help make a wise decision that would benefit your eCommerce business.

FBA – Is It a Good Option for Your Retail Business?

Let’s decipher what stands behind the FBA abbreviations first. FBA stands for ‘fulfilled by Amazon.’ As you go for this fulfillment option, Amazon will manage your inventory at their fulfillment centers. They will pack and ship orders to your buyers, handle returns and exchanges while you’ll be responsible for:

  • creating listings and their promotion
  • sending the package with goods to Amazon fulfillment centers according to the guidelines
  • paying storage and fulfillment fees
  • controlling restocking.

Benefits of FBA

Did you know that FBA might give your business a 30-50% increase in sales? Why is it happening that as the seller switches to FBA, their conversion immediately skyrockets? Why do customers buy items handled by Amazon more eagerly? There are several reasons for that.

1.Amazon is a trusted enterprise, while you might be an unknown brand without a solid reputation.

Online marketing has significantly grown and many people, especially the Millennials, shop online. But as the demand grows, so does the number of fraudsters who would like to profit from gullible buyers. The same goes for the companies that do not keep their word and fail to deliver proper customer service to their clients.

That is why customers have become pickier and give their money only to the brands they know and trust. Amazon is one of them.

So, if you are a brand without reputation, FBA might be your lifesaver. Buyers are confident in Amazon’s customer support, shipping timeframes, return policy, and will be purchasing goods with greater enthusiasm from them rather than you. But anyway, you’ll be generating revenue and growing your business, even though Amazon will be handling your orders and charging extra fees for that.

2. You have higher chances to win the Buy Box.

If you sell your own products on Amazon, this point might not be that critical for you. But if you resell goods that are also featured by other companies, winning the Buy Box might be your ticket to the successful Amazon future. Let us explain how it works.

You probably know that you should use product matching if you are entering an Amazon market with a product sold by other merchants. This feature is highly beneficial for customers as it eliminates duplicate listings and allows them to check all offers in one place and pick the most beneficial one. But it’s a complete nightmare for the seller because only those items that have the Buy Box have chances to succeed.

If your listing wins the Buy Box, it means that your item will be put in the cart once the customer hits the button (rather than the product of your competitor without the Buy Box). Since more than 80% of Amazon purchases are carried through the Buy Box without further investigation of the offers, you can’t miss a chance to win one.

Amazon promotes FBA listings and they almost always get the Buy Box, so you’ll get a competitive advantage over FBM sellers who will have a hard time winning the Buy Box.

3. Your listings become eligible for FREE Amazon Prime shipping for Prime users.

Did you know that there are 142.5 million Amazon Prime members as of 2020? An average Prime member spends $1,400 annually (compare yearly spendings of non-prime Amazon shoppers – $100-$500). These figures make prime members the most coveted customers for every Amazon seller, and the latter make all possible and impossible to reach them in the ocean of offers.

Since Prime members enjoy the Amazon FREE shipping option, this might be a good point of contact between your listings and Prime buyers. When you list products for FBA, they automatically become eligible for FREE shipping. This might be a determining factor for a Prime buyer who will be making a purchasing decision choosing between you and another seller without free shipping.

4. You can make time for developing selling strategies on other channels.

Amazon is the biggest sales channel for American merchants, but not the only one. According to statistics, 80% of Amazon sellers market their goods on other platforms.

Handling all business processes on all channels might be labor-intensive and time-consuming. So Amazon gives their merchants a chance to take care of their selling strategies on other marketplaces by managing their orders. If you do not have the funds to hire a team, FBA might be a great option since it is a financially beneficial solution.

However, smart multichannel sellers also do their best to optimize their work on all the marketplaces, so they leverage third-party apps to manage inventory, listings, shipping, and orders. Software like SellerSkills syncs information from different marketplaces into one panel so you save your time when listing new items, managing your inventory, and handling orders. It also allows you to calculate the shipping rate faster, add products in several clicks, and many more.

5. You can run your business from any location and country.

One of the greatest things about the Internet is that it enables us to get connected with each other regardless of the physical distance. Either being in the same office or separated by different continents, we can effectively communicate using chats, video calls, email, and other communication channels.

Amazon lets your business reap all the benefits of globalization and gives you a platform for selling your goods on the American market, even if your manufacturing facilities are located in another country.

Since customers do not want to wait for 2 weeks when the package gets shipped to them and they want their products the sooner the better, FBA helps international sellers tackle this issue.

Why you might not like FBA

Of course, the FBA option is not an all-business-fit solution. Just like anything in the world, it is not perfect and has some disadvantages. So let’s see what you might not like about FBA.

1. You’ve got to ship products to Amazon following strict guidelines

If you are preparing products to be shipped to Amazon fulfillment centers for the first time, you’ll be pulling out your hair because of numerous requirements. Proper labeling, product packing, then arranging them into boxes by the Amazon distribution list. It sounds like no fun and can eat a lot of your time and energy.

In case you make a mistake, Amazon might reject your products and send them back to you. So, you’ve got to go through this daunting process once again and pay for shipping. In view of the fact that Amazon distributes packages all over the fulfillment centers in different locations, that might cost you a penny.

2. Fees, fees, fees

Amazon will charge for the slightest move from their side. Just take a look:

  • Inventory storage fees – they will charge you for all the items stored in their centers. They calculate the fee based on the average volume of inventory in cubic feet.
  • Fulfillment fees – you’ll pay a fee for each processed order by Amazon. They will pick, pack, ship, and handle every order while you’ll be sponsoring all the operations.
  • Long-term storage fees – if it takes a long time to sell your products, you’ll pay extra fees for items that are stored in Amazon fulfillment centers (assessed monthly for goods stored in the warehouse for more than 365 days).
  • Unplanned services fees – fail to properly label or pack your items, and pay extra fees for the services an Amazon team will carry (to avoid getting the whole box back at your expense).
  • Unplanned services fees – fail to properly label or pack your items, and pay extra fees for the services an Amazon team will carry (to avoid getting the whole box back at your expense).
  • Removal order fees – Amazon can either return or dispose of your goods for a per-item fee.
  • Returns processing fees – if your customer initiates the return, Amazon will handle that and charge you for the free return shipping.

Without a doubt, these costs eat into the buyer’s profits. But if you have no other choice, what else can you do? You just include these fees into your pricing strategies to keep your Amazon business afloat.

3. You have no control over your inventory

Once your products are shipped to Amazon centers, you have no control over what’s going on with the items and in what condition they have been sent. When you ship packages from your location, you can check if the item is not defective and make sure the buyer gets the quality product.

4. Restocking might be confusing and take time

If you are an inexperienced FBA seller, you might have a hard time defining when it’s time to restock your inventory and in what quantity.

You might sell your goods too quickly and run out of inventory before you send new items to the fulfillment center. This will lead to the loss of product ranking.

On the other hand, if you miscalculate and send too many goods that won’t be sold out, you’ll end up paying extra fees for long-term storage.

If you are a new FBA merchant, you might not be aware of all the nuances and fees you’ve got to pay. So it will take time to investigate the market and work out the optimal volume of products you’ll be sending to Amazon.

So, what businesses will benefit from FBA:

  • High-volume merchants.
  • New sellers without a well-established reputation.
  • Foreign companies with an intention to sell on the American, Canadian, European market.
  • Businesses without physical space for storing goods.
  • Sellers of light and compact goods.
  • Companies with limited human resources.

FBM – Is It a Good Fit for Your Business?

FBM, or fulfilled by merchant, is an Amazon business model that allows you to manage and ship all the orders directly from your own warehouse or the third-party facility. Instead of giving Amazon full control over your inventory and orders once they receive your box, it is you who stock and store your inventory, fulfill all orders, arrange returns, and have direct communication with customers.

Benefits of FBM

According to the latest data, there are only 6% of FBM sellers on Amazon. What it means is that this model is either not beneficial for the majority of sellers or they simply do not get all the perks of the FBM fulfillment method. So let us shed light on all the advantages of this option.

1. Fewer Fees

You already know what it takes to sell on Amazon using FBA. But FBM is a more cost-effective option as there are fewer services you’ll be charged for.

Of course, you’ll still be paying for using their platform, but your fees will be much lower and will depend on the plan you use. For example, you can go with an individual plan and pay only $0.99 for every sold item. Or agree on a fixed monthly payment of $39.99 and sell any quantity of goods.

This model might be especially beneficial for products with low margins since each fee will be dramatically cutting into your profit.

2. Easier and faster to get your business started

Preparing, packing, sending products to Amazon fulfillment centers might take several weeks. Then Amazon will be processing the received boxes, which will last for about a week or more. So, in general, your inventory will be ready in about a month in the best-case scenario.

With FBM, you can start selling your goods the moment they enter your warehouse or are available in third-party stock.

3. You have more control over your inventory

Since it might be a big disadvantage for some businesses, having control over order fulfillment and stock management can come in handy for some merchants.

If you sell electronics or fragile stuff that might get out of order for some reason, you’ve got a chance to check if the device is in the right condition and only then send it to your buyer. If the defective tool is sent, the customer will leave a negative review which might ruin your reputation and prevent other prospects from buying from you.

It’s clear that Amazon won’t be testing every item before sending it to the customer’s destination, while you can if you use FBM.

It also gives you a chance to create customized or branded packaging to promote brand awareness and loyalty.

4. Allows marketing handmade and custom-made products.

If you offer custom-made or exclusive goods like bags, named talismans, personalized textbooks, etc., you physically can’t send your items to Amazon warehouses. So the only way is to handle all orders on your own or hire a manager who will be dealing with all sales-related processes, while you’ll be creating handmade stuff for your beloved customers.

Why you might not like FBM

Before you make the final decision, you should weigh down all the drawbacks of FBM along with its advantages. So, here we go.

1. No chance to get connected with Amazon Prime members

If you do not have a Prime badge, which means no free shipping or fast two-day delivery, you risk being ignored by the most active and sought-after Amazon audience – Prime members.

Since Prime membership costs $119 a year, these buyers want to make sure their investment pays off. So, if you do not sell gold for the price of salt, no one will want to pay extra money for shipping and would order from your competitor who has a Prime tag.

However, even if you are an FBM seller, you still can become a Prime merchant. But it’s possible if you are an established business and have exceptionally good customer reviews and ship your products fast.

2.You’ve got to compete to win the Buy Box

This is the nightmare of all FBM sellers – the fight for the Buy Box. Usually, the seller who holds the Buy Box becomes the winner of the competition for the customer’s attention as their product is available for purchase by default because it sounds like the most profitable offer on the market. If you do not have the Buy Box, the buyer will have to scroll through all the offers to find yours.

People are more prone to fast purchases now and do not see any point in discovering other offers because Amazon has already done that for them.

So, the seller who has the lowest price, uses FBA, or sells unique products is more likely to win the Buy Box. As you are constantly reducing prices, that might cut your profit margins and turn your successful retail business into a loss-making one in a blink of an eye.

3.You’ve got to compete to win the Buy Box

If you do not have a big turn-over, it won’t be that challenging to handle all the Amazon-related processes. Preparing products and packages for them, printing labels, arranging shipping, communicating with customers, keeping track of inventory logs, etc. might be not that confusing.

But as you scale up and earn a reputation as a good seller, more and more customers will be heading your way. Are you ready to stock, pack, ship all the products, along with handling all the requests? Do you have enough space to store the goods? If you are not ready for such growth, FBA might be a better way for you.

4.Not suitable for international retailing

FBM might be a good solution for sellers who are physically located in the USA or any other targeted country. But if you run your business in China, Europe, or any other part of the globe, you’ll have a hard time selling on American Amazon.

Buyers got used to fast shipping and waiting for two weeks until they get their package doesn’t sound attractive to them. So, the physical distance might become a big disadvantage for FBM sellers and cut their sales significantly.

So, what businesses will benefit from FBM:

  • Companies selling bulky, heavy-weight, expensive products.
  • New sellers without a well-established reputation.
  • Foreign companies with an intention to sell on the American, Canadian, European market.
  • Businesses without physical space for storing goods.
  • Sellers of light and compact goods.
  • Companies with limited human resources.

Can you use both FBA and FBM?

If you still do not know what option will work better for your business or you sell products that are different by their nature, combining FBA and FBM might be a smart solution. Actually, about 29% of Amazon merchants stick to this strategy and are successfully growing their presence in this marketplace.

For instance, you sell snow brushes and air humidifiers. To balance your sales and make the most profit from different product types, you can use FBA for a smaller and cheap product with a fast turnover – snow brush, while manage orders of heavy, pricy, and slow-selling humidifiers on your own.

So, what will work better for you: FBA or FBM?

In this article, we covered both pros and cons of FBA and FBM fulfillment methods and gave you explanations of what model will be beneficial for different business types.

If you still have hesitations and haven’t figured out the solution for your business yet, here is our final tip. Use Amazon’s sales margin calculator to have a clear picture of what revenue you might generate from the sale of every product based on its nature, price, and fulfillment method.

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