What Is Amazon FBA and Is It Right For You?
June 21, 2021
Distribution is the name of the game in ecommerce. The faster and more efficiently you can fulfill orders, the faster your business can scale. Amazon is the largest ecommerce company in the world, but it’s not just Amazon products that make up Amazon’s reach. In Q1 of 2021 almost 55% of units sold on Amazon came from third party sellers.
Amazon is renowned for incredibly efficient ways of marketing and distributing products across the globe. The behemoth has enabled small businesses and third party distributors to use its platform at a cost, creating a huge market opportunity for an entirely new ecosystem of sellers. For companies looking to sell on Amazon, there are generally two approaches to distribution: Merchant Fulfillment and Fulfillment by Amazon (FBA).
These two systems of distribution cater to different types of companies. Each offers its own benefits and associated costs. To understand which fulfillment method is best for your company, it is important to understand the details and requirements of both options. Here is a breakdown of how Amazon FBA works, and how you could incorporate it into your distribution strategy:
What is Merchant Fulfillment?
With the Merchant Fulfillment plan, you distribute directly to your consumer. That means they take care of all of the packing and shipping for their products, including shipping costs. This is generally the best place to start for businesses that are just beginning to work with Amazon because fees are charged on a per-item basis. Those who go the Merchant Fulfillment route don’t get charged a fee unless they sell something.
Amazon charges a $0.99 fee to the business for every item sold by way of Merchant Fulfillment.
Merchant Fulfillment is usually a good fit for companies that sell under 40 products per month, or who already have their own distribution facility that they can leverage for Amazon orders. For small scale companies, 40 products is generally the break even point with the FBA program, which costs $39.99 per month.
What is Amazon FBA?
Fulfillment by Amazon (FBA) is a service from Amazon that manages distribution on a third party seller’s behalf. FBA costs $39.99 per month. Brands can leverage Amazon’s large network of distribution centers for fast shipment to their customers without needing to manage all the logistics on their own. The service helps to expedite shipping as well as provide storage, removals, and returns processing. Another major benefit of Amazon FBA is that you have access to Amazon’s customer service and returns service.
FBA is available to companies at the $39.99 per month rate, but it also comes with fees. Inventory fees, long-term storage fees, and unplanned services fees are a few to be aware of. And although you are paying a monthly rate for Amazon to handle the shipping, there is still a fulfillment fee on every unit that you sell. You can find a better estimation of how much you’ll pay using FBA using Amazon’s revenue calculator.
Generally speaking, FBA is intended to help sellers earn higher profit margins because the fees are less expensive at scale. If your business is shipping units day and night, your money might be better spent offboarding those responsibilities to Amazon.
How does Amazon FBA work?
If we’ve learned anything about Amazon, it’s that whatever they do they do it well. When you need to create an Amazon FBA account, the process to get started is pretty streamlined and accessible.
Let’s explore how “the sausage is made.”
Set Up FBA
Unlike the Merchant Fulfillment fee of $.99 per product sold, using an Amazon FBA signs you up for a $39.99 / month fee. While that fee might seem like a steep climb from Merchant Fulfillment, it encompasses all of the base needs for your business while also making it extra streamlined for your customers — especially when you’ve got a high inventory that you have to bust out every month.
Create Product Listings
Obviously, every Amazon sale starts with a product listing. However, there is an art (and science) to what performs best for sellers when it comes to how products are represented on the site. Hot tip: Listings that aren’t too text heavy and look more buttoned-up have been shown to attract more customers and increase sales for businesses.
Once you’ve created all of your product listings, the FBA process truly begins because businesses are able to showcase the breadth of their inventory (which Amazon will need to account for).
Prepare the Products
You’ve set up your FBA and listed your products. Congrats! Now comes the fun part: preparing your products to be shipped to Amazon. As a part of the FBA process, the onus is on businesses to ensure that all shipments are packaged safely and securely to get to Amazon’s fulfillment centers. While seemingly arduous, fret not. Amazon has an in-depth resource for sellers to reference when it comes to getting that inventory on its way.
Ship The Products to Amazon
It’s shipment time! The final step is to ship your inventory to Amazon’s distribution center where they will finish out the remainder of the process. Once they’ve received your inventory, the products become seamlessly available to customers for a streamlined experience..
Get Paid for Sales
Amazon releases funds into your account once a customer’s purchase has been shipped to them. Because Amazon generally ships out items very quickly, they can distribute funds as soon as the next day. Amazon pays out biweekly, but they hold a certain amount of money at all times as a risk hedge — typically the average of one week of sales.
Which is right for your business?
Choosing between Merchant Fulfillment or Fulfilled by Amazon can be tricky for some companies. They each have their respective pros and cons. The right fit, of course, is the one that saves you the most money (and keeps your cashflow moving).
Merchant Fulfillment is a good option for companies just starting out or just getting used to selling on Amazon. Also, if volume is low (under 40 units per month), Merchant Fulfillment is probably a good choice.
Amazon FBA can be a great choice for larger companies, or those with more frequent volume of sales. FBA intends to provide better margins and favorable payout schedules, so you can continue to count on steady income without getting bogged down or stifled by product packaging. Amazon FBA is also a good perk for your customers — it allows brands to offer shoppers a super streamlined checkout process, including free two-day shipping eligibility, Amazon’s customer service, and returns at a scale that would be incredibly difficult to match all on one’s own.
How Settle Helps Ecommerce Companies Scale
Choosing a distribution strategy for Amazon is just one of the many decisions that companies must make to regulate their cash flow. Whether selling on Amazon or selling direct to consumer, ecommerce companies have distinct challenges when it comes to working capital. From R&D to production to distribution, the product life cycle can be long, uncertain, and filled with many vendors, payments, and bills.
Settle helps companies align thier COGS with their revenue by paying your vendors up front and letting you take care of the bill later. This allows you to focus on your business without worrying about the constant push-and-pull of cash flow. Much like packaging your products and sending them to customers, the smoother the process the better the return.
We make it easy to pay all your bills in one place, and give you the ability to make payments on time without sacrificing cash efficiency. Settle’s easy-to-use software platform and innovative lending products are tailored to the needs of e-commerce and CPG businesses, so we’re there to partner with you as you grow.
Settle streamlines your finances so you can scale faster. We offer both payers and vendors best-in-class financial tools, with easy set up and integrations that let you make payments within minutes.