Small group workshops to help you learn, optimize, and grow.
.svg){kind=logo}
E-commerce giant Amazon has transformed the way consumers search and shop for goods. Despite the reopening of physical stores post-pandemic, online shopping is still a significant part of the retail industry. Companies and individual sellers can reach millions of customers worldwide thanks to Amazon, and there’s a lot of profit to be made from selling there. However, your business strategy determines the level of success you can reach on the eCommerce platform.
An important decision you need to make if you want to start selling on Amazon is the fulfillment strategy you’ll use. In eCommerce, fulfillment means the process by which orders are completed and delivered to the customer. In Amazon, merchants can choose from two primary methods: Fulfillment by Amazon (FBA) and Fulfillment by Merchant (FBM).
Each has its merits and drawbacks, and choosing the right one can spell the difference between profit and loss. In this article, we’ll break down the advantages and disadvantages of each option and help both established and aspiring sellers determine the best route to take regarding their fulfillment strategy.
It’s easy to understand the difference between FBA and FBM. FBA simply means that Amazon is the one that fulfills orders through its fulfillment centers. Sellers send their products to Amazon, and when an order for your products comes in, the company’s fulfillment specialists prepare the items for shipment to the customer.
On the other hand, FBM, also known as Merchant Fulfilled Network (MFN), means that the seller is responsible for preparing and shipping orders to the customers. This was the more conventional way of doing business before eCommerce grew, and managing order fulfillment became more complex because of sales volume.
Amazon FBA is a service that allows merchants to outsource order fulfillment to Amazon. Because fulfillment entails a lot of tasks, this service enables smaller businesses with a limited workforce and warehouse resources to pass on these tasks to Amazon.
FBA is a popular option among Amazon sellers, with approximately 64% using the service for their fulfillment needs in 2022. Let’s look at how FBA works and if it’s the right choice for you.
Amazon sellers can set up FBA through their Amazon Seller Central accounts. Create your product listings in your account and specify it as FBA inventory by ensuring that the “Fulfilled by” option is set to “Amazon” instead of “Merchant.” You can also change existing product listings through the Manage Inventory page on your account.
Once your product listings are specified as FBA inventory, you must prepare those products for shipping to an Amazon fulfillment center. Amazon provides packing guidelines and shipping and routing requirements to ensure your items arrive in the best condition at the center. If you cannot prepare the products yourself, Amazon also offers FBA Prep service for specific products.
The next step is to create a shipping plan. You can still do this through the Manage Inventory page on your Amazon seller account. Once you’ve specified the items you want to ship to a fulfillment center and their packing type, you need to set the quantity for shipment, label them accordingly, and fill out all necessary information about the packages for shipment to Amazon.
The Amazon Seller Central Help page contains all the details necessary to send FBA inventory to Amazon’s fulfillment centers correctly. New sellers can read through the comprehensive step-by-step guide created by Amazon to ensure that shipments are not delayed, rejected, or lost.
Once your products are at the fulfillment centers, Amazon is responsible for inventory management, processing orders from your account, and shipping them to the customer’s delivery address.
The most apparent advantage of FBA is less work for you when fulfilling orders. This is the most significant benefit of FBA for smaller Amazon sellers who need to devote more time and effort to management, marketing, and sales, or even producing or manufacturing the products.
But other than convenience, Amazon FBA provides more benefits for merchants.
On the other hand, there are some disadvantages to using FBA. While the service provides convenience for inventory and order fulfillment, the fees and surcharges can be a drawback. For instance, Amazon measures your inventory management with the “Inventory Performance Index,” which includes excess inventory and sell-through rates, among others. You need a minimum grade of 500 on this index; otherwise, Amazon will raise your rates and restrict the number of products you can ship to their warehouses.
Calculating FBA fees is also an additional step. Big and bulky items have a higher storage fee than lighter packages. If you have many heavy items, you should check whether storing these products is more cost-effective through in-house warehousing, FBA, or another third-party fulfillment service.
You may not be responsible for shipping orders to customers if you use FBA, but you are still responsible for shipping your products to Amazon for warehousing and distribution. And with millions of other products stored in the same places, your inventory must be properly labeled. If your product is stored in the same bin as those of other sellers, the item that Amazon delivers to your customer may differ from what you shipped to the fulfillment center. If that particular product is of inferior quality, broken, or counterfeit, then you’re the one who suffers, and your account may be suspended.
This is also why Amazon is strict about proper labeling. If you read their guidelines on shipping products to Amazon for FBA inventory, you’ll notice they have stringent requirements. In addition, even if you prepare all your products for a single shipment, Amazon’s system needs you to pack products according to their specifications, which may result in multiple shipments instead of just one. This means additional costs and fees, which can affect your profit.
Finally, because Amazon takes care of your fulfillment, it also means that you no longer have any control over shipments after an order is placed. This includes storage and handling fees, delivery schedules, and other decisions affecting your expenses and operations. You also miss out on opportunities for branding and personalizing orders.
Fulfillment by Merchant means the seller is responsible for completing each order. This involves all the steps necessary to fulfill each other, such as packaging, labeling, and sending them out for delivery. It also includes handling returns and exchanges. New and aspiring sellers might benefit more from FBM when the number of orders remains manageable. As your sales volume increases, you may need to review your expenses and operations and decide on an appropriate fulfillment option to help your business succeed on Amazon.
If you already have an Amazon Seller account, there’s not much else you need to do after listing your products. You’ll need to select “Merchant” as your fulfillment option for every product listing you will fulfill yourself. After that, the next steps are ensuring that your shipping templates on the Seller Central dashboard match your logistical capacity and managing your storage or warehouse efficiently.
The main advantages of using FBM are the following:
Of course, FBM also comes with its share of disadvantages. Because FBM sellers complete the orders themselves, it takes them much effort and resources. This may be fine for sellers who accept and handle only a handful of orders simultaneously, but scalability will be challenging. Success in Amazon and other eCommerce platforms means you need to grow and expand your business. Fulfilling orders via FBM can take up a considerable chunk of your time and effort, which you could have spent on other crucial management tasks like marketing and product research.
FBM sellers also need to consider the workload of customer service, a critical component of successful eCommerce businesses. FBA sellers have the advantage of having Amazon handle customer support, but FBM sellers manage their services independently. As mentioned earlier, this can be an advantage in that you interact with your customers directly to establish a strong relationship, but this can also be a challenge because customer service demands significant time and resources to ensure the satisfaction of customers.
Another drawback to FBM is that shipping is either limited to nearby areas, severely restricting your customer base, or you spend more to ship to faraway regions. You may also be unable to take advantage of bulk rates for shipping. FBA sellers have no problem with this since Amazon’s warehouses can be found everywhere.
Lastly, FBM sellers lose out on Amazon Prime eligibility. This can decrease the attractiveness of your products considering many customers prefer Prime-eligible products. Even if you offer items at a lower price, if your competitor uses FBA and the order is eligible for Prime Free Two-Day Shipping, many customers may choose the Prime product for free shipping. Amazon does offer a program for FBM called Seller Fulfilled Prime, but the requirements are stringent, which can be prohibitive for smaller businesses.
We’ve explained the pros and cons of Amazon FBA and FBM, but how can you choose the best option? There are some factors to consider when deciding on your fulfillment model.
In general, Amazon’s storage fees are higher for bigger and heavier items. So, if your inventory consists mainly of huge, bulky goods, you should first calculate the cost of fulfilling these big-item orders via FBA versus FBM. Sometimes, in-house fulfillment might be more cost-effective because of FBA fees. You can use the Amazon Revenue Calculator to check the profitability of your products.
Amazon has a list of products that are restricted for sale through FBA. If you sell products that fall under these categories, FBM or another third-party fulfillment provider will be better. Additionally, even if your products are not restricted, if they require special handling—such as refrigeration—FBM would be a better option.
If you have fast-moving products or products that are bestsellers, you should consider FBA. Amazon regularly monitors FBA inventory and charges sellers for products that remain in their warehouse for a considerable time. Merchants who sell niche items or other slow-moving products might do better with FBM.
FBA is also more suitable for sellers who receive orders regularly and do not have the logistical power to fulfill all orders on time.
If branding is one of your business goals, FBA will dilute your branding opportunities. Because you cede control of fulfillment to Amazon, you won’t be able to give a personal touch to your deliveries. Go for FBM if you prefer having complete control over fulfillment, including packaging and custom orders.
In summary, FBM may be better for you if you:
On the other hand, you should consider FBA if you:
The good news is that you’re not required to choose only one fulfillment option. As you’ll notice in your Seller account, you can select which products can be specified as FBA inventory. This means you can take advantage of the benefits of each model by going for a hybrid fulfillment model. In 2022, about 22% of Amazon sellers surveyed by Statista used both FBA and FBM to fulfill orders.
You can use FBA for your high-demand products and lightweight goods and FBM or SFP for others. You can even list the same product for both FBA and FBM (create two separate listings) so that you can continue to offer it via FBM even if your FBA inventory has already sold out.
In deciding which model to choose, do your due diligence and calculate the costs of using one model over another. This will help you make an informed decision and guide your cost analysis.
Fulfillment is an integral part of running an Amazon business. Fortunately, Amazon offers several options for fulfillment, enabling sellers to create a strategy based on their business model, operations, and future plans. Don’t be afraid to explore different options and use third-party services and tools like Threecolts to help you grow your eCommerce business.
Browse through and read our other blog posts that are data-driven insights with our very own proprietary data and learn more on Mother's Day trends and best practices, Easter sales, price elasticity of demand, Amazon FBA fee changes, Amazon product title optimization, winter seasonal products, Amazon end of year sales, Valentine’s Day trends and best Amazon fulfillment centers by location and throughput.
