Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM)? Choose the perfect shipping model to build your Amazon business in 2021!
Choosing your Amazon shipping model is one of the first decisions you have to make that can determine the success, profitability, and foundation of your business.
Selling on Amazon provides two different shipping methods: Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM). While both of these models provide similar benefits, each has distinct logistics and procedures that play a major role in how many products you can have in your inventory and the number of sales you should expect. In some cases, you may want to do a hybrid approach where you use both FBA AND FBM if it matches the needs of your business.
This blog is going to provide an in-depth breakdown of both the FBA and FBM models and the pros and cons of each model depending on your Amazon business. After reading, you should be able to determine which shipping model would be best suited for your business needs and the next steps you should take to build your Amazon business!
The first shipping model you can use is the Fulfillment by Amazon method or simply “FBA”. Amazon’s Fulfillment by Amazon is a shipping model that allows sellers to purchase products (whether it be wholesale, private label, or arbitrage) and then send them directly to Amazon’s Fulfillment Centers located across the globe. These centers will accept the products and store them at their warehouses for the sellers. If a customer buys a product from a third-party seller, Amazon will locate the inventory, package it, and then send it directly to the buyer.
Amazon FBA is not only the easiest model for Amazon sellers, but it is also the most common. Out of the top 10,000 sellers on Amazon, roughly 2/3rds or 66% of them use the FBA model. The popularity of FBA isn’t surprising at all considering the amount of work and management Amazon has invested into building their Fulfillment Center network. The FBA model enables sellers to quickly ship their products to Amazon without having to directly handle any merchandise.
By using this model, third-party sellers can order products, sit back, and collect earnings from Amazon, all without having to worry about the logistics or management of purchases. In addition to having to do less work, sellers can take the time and resources they saved using the FBA model to invest in growing their businesses instead.
Pros of FBA Business
The benefits of using FBA seem endless for third-party sellers.
First, FBA sellers get the best benefit of saving time and energy. Fulfilling orders is often the most grueling part of selling on Amazon. Having to pay for shipping costs, shipping items to buyers, or even picking a shipping company can be a long and strenuous process, especially if you’re selling a lot of products at the same time. An advantage of the FBA model is that you don’t worry about fulfilling any order since the FBA covers all of those responsibilities.
The second is saving storing or inventory management costs. Holding a physical inventory in a room or warehouse takes up space and money to rent out storage. Some sellers might even need employees or a management system to handle all of the physical stock products. Using FBA means that you don’t need to store anything because all of your products are being sent to Fulfillment Centers instead.
The third benefit is productivity. With Amazon FBA, shipping and fulfillment productivity and efficiency are optimized to the highest degree. Amazon hires hundreds of employees at each Fulfillment Center and has implemented procedures and protocols to optimize shipping times. You can rest easy knowing Amazon is shipping your items on time and is a lot more productive than if you were shipping products yourself. Not only is it more productive, but if you’re selling a ton of products, it’ll also be cheaper using FBA than individually shipping one item at a time!
Fourth, is access to Amazon’s Prime shipping. Prime shipping provides customers and buyers with access to same-day, 1-day, or 2-day shipping. As a seller, these added benefits don’t mean much, but a buyer might enjoy these added benefits and may buy more products because of the quick shipping times. Since your products are at the fulfillment centers, your products will most likely be eligible for Prime shipping.
Last but not least, the fifth pro of using FBA is managing returns from buyers. If a buyer has a problem with a product, Amazon FBA will handle all returns for you and even ship the buyer a different unit.
Cons of FBA Business
With any advantages, there will have to be some disadvantages to using Amazon FBA too. Here are some of the problems that you may run into using FBA:
One disadvantage is that using the FBA model isn’t free, and Amazon will charge you fees to use their services. We cover this a bit in our blog about 7 Steps to Activate Your Amazon Seller Central Account, but in short, sellers can decide between an individual plan or a professional plan. For individual plans, sellers have to pay $0.99 per unit sold, or they can opt for the professional plan of $39.99 per month. For some sellers and some products, these fees can take up your profit margins, leaving you with little to no profits off of selling on Amazon.
Another disadvantage of the FBA model is that the products are out of your control. Because sellers do not have to handle any merchandise, they can’t identify any problems or issues with the quality of the products unless a buyer returns a defective product. This could lead to potentially bad reviews about your business or your stock could be entirely defective without your knowledge.
The third problem with Amazon FBA is that managing your inventory can be a bit more challenging. Since you do not have any direct interactions with stock, it’ll be harder to forecast the perfect number of inventory to buy for your business. Some seasons your products will fly off the shelves and other times they’ll collect dust. It can be tricky to find the perfect order volume, especially since the products aren’t physically there for you to check and count.
The fourth con of using the FBA model is that Amazon has very strict guidelines to ship to their Fulfillment Centers. They have instructions for all suppliers and sellers when shipping products to one of the warehouses such as packaging, labeling, and identification codes. While this doesn’t seem like a big deal, not following these instructions can lead to a logistical nightmare trying to hunt down your shipments.
The other commonly used model for shipping products for your Amazon business is through the FBM or “Fulfillment by Merchant” model. The FBM model also refers to self-shipping, in which sellers will have complete control over their inventory and fulfilling shipments. This may include ordering and storing inventory, utilizing a warehouse, packaging and shipping individual items to sellers, and handling returns for defective products.
Pros of Self Shipping
Although this method is less common than its FBA counterpart and may require more work for individual sellers, it also provides a lot of benefits that are lost with the FBA model.
For starters, self shipping enables sellers to have complete control over the buying and shipping process. Unlike FBA, sellers can perform quality assurance on their inventory, leading to fewer returns or the likelihood of shipping out defective products, This is also safer in terms of protecting your Amazon business because you can prevent bad products from reaching the customers thus protecting your brand and personal reputation. FBM sellers also can check inventory levels and order better quantities of their stock since they can forecast sales with complete awareness.
Secondly, FBM means sellers don’t have to pay the upfront costs that would hurt profitability like FBA. With FBM, sellers are not subjected to FBA fees, thus they might see higher profit margins for the items they do sell.
Third, is the customer service benefits that come along with FBM. We touched on this topic a bit already, but with more power comes more responsibility. Since FBM sellers handle all of the returns, they can directly communicate with the customer. This means the transparency between sellers and buyers becomes a lot stronger, allowing for more trust and communication between two parties.
Cons of Self Shipping
Of course, with any benefits of using FBM, there are also associated disadvantages as well.
For FBM, self shipping will often be more expensive since sellers will need to ship items individually. It also becomes a logistical challenge to find the right delivery service and pay for their fees as well. This also means taking on shipping challenges such as delayed shipments, missing packages, or even stolen merchandise,
Secondly, we come back to more agency and responsibility of FBM. Because you handle merchandise directly, it also means higher quantities of work and challenges of managing large amounts of inventory. For some FBM sellers, they have to invest in large warehouses that have rental costs as well as hiring staff or employees to help manage the load of work. Although you do not have to pay the FBA fees, there are a ton of other costs that may be involved in FBM.
Third, with self shipping, you also lose access to Prime shipping. Amazon is currently working to solve this issue with their new Prime program, but for now, FBM sellers do not have many options when it comes to the same-day, 1-day, or 2-day shipping. Missing this bonus may be a dealbreaker for buyers who want their purchases quickly, so FBM may be losing out on potential sales and profits.
Choosing the right Amazon Shipping Business Model
Now that you have a better understanding of the two shipping models for your Amazon business, it leads us to the ultimate questions:
What shipping model should I use for my Amazon business?
The best answer we can provide you is, it depends. To determine the best model for your business, you will need to understand the size, sales estimations, and overall needs of your business.
If you’re leaning towards the FBA model, here are some key criteria:
- Expecting high quantities of sales
- Limited storage space or access to warehouses
- Less stress or involvement
- Selling items with high return rates
If you’re leaning towards the FBM model, here are some criteria to look for:
- Expecting limited or low amounts of sales
- Selling big, heavy, or large items
- Have access to storage or warehouses to keep inventory
- Selling items with low return rates
- Access to employees or management software
Deciding on the shipping model is dependent on what your business needs. If you want less involvement or need more help managing your inventory then FBA may be the best solution. If you want to be more involved in the shipping process and want more control over your inventory then FBM might be a better fit.
Some sellers opt to use a hybrid model of both FBA and FBM. Don’t forget that you can always switch over to a different model if it’s not working for you.
The bottom line is: no one really knows your business except for you.
I picked my Amazon business model, what now?
If you have picked your Amazon business model and know which shipping method you prefer, it’s time to start building your business. Head over to Amazon’s Seller Central and create your account today!
The best time to start your business was yesterday. The second best time to start your business is today.
If you need help jumpstarting your Amazon FBA or Amazon FBM business, head to our blogs and read our 7 Steps to Activate Your Amazon Seller Account in 2021 blog. We’ll see you there!