The eternal dilemma of Amazon sellers: Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM)?
Of course, that’s mostly a false dichotomy. Most sellers end up using a mix of FBA and FBM — it’s fairly rare that one seller has their entire product line shipping all through Amazon, or all merchant-fulfilled. That’s because neither fulfillment method is one-size-fits-all: there are certain types of products that will benefit more from FBA, and other types that will benefit more from FBM. The choice also depends on the resources available to you as a business, in addition to many other factors (competition, margins, etc.)
To go over the basics, Fulfillment by Amazon, or FBA, means that you ship all of your products to Amazon’s warehouse, and they take care of all the rest — handling, shipping, returns, and everything in between. The catch, of course, is that there are numerous fees associated with FBA. Using FBA also makes that product eligible for Prime free two-day shipping, which is a big selling point for many customers.
On the other hand, Fulfillment by Merchant, or FBM, means you have to ship everything yourself. This gives you more control over your operations, but if you make too many mistakes, it will negatively affect your Seller Health, possibly resulting in a suspension if things get too bad. By default, FBM products are not eligible for free two-day shipping, but with Seller-Fulfilled Prime, you can get the Prime badge back — as long as you can meet Amazon’s (frustratingly high) standards.
Without further ado, let’s get into the pros and cons of both fulfillment methods.
Using FBA automatically makes your products Prime-eligible, meaning they’re eligible for free two-day shipping, one-day shipping, and even same-day shipping in certain locations.
This is a pretty big deal, for obvious reasons. Prime benefits are a huge part of why many customers shop on Amazon. Here’s what’s so great about Prime customers:
- There are more of them.
Consumer Intelligence Research Partners estimates that at the end of March, 80 million people had subscribed to Amazon Prime. That marks a 38% increase from last year, and close to a 100% increase from two years ago. In addition, CIRP estimates that around 60% of Amazon users are Prime subscribers, meaning they outnumber non-Prime users.
- They buy more.
According to Statista, Prime members spend an average of $1,300/year on Amazon, whereas non-Prime members spend just $700/year.
- They pay more.
Additionally, Prime customers are often willing to pay a bit more just to get the free 2-day shipping, allowing you to increase your margins a bit Note, however, that this increase in margin is often just enough to offset the additional FBA fees
So, Prime is a pretty big deal. Prime customers may not even consider buying a product if it isn’t Prime-eligible. Thanks to all of these factors, sellers report that switching to FBA can double, triple, or more-than-triple your sales. Of course, there are many other factors you should consider before switching to FBA, but this is the number one reason why most sellers switch at least some of their products over.
Higher Shipping Satisfaction Rate
Amazon runs an extremely tight shift with their shipping, especially for Prime subscribers, so you can rest assured that your FBA products will (almost) always make it to their buyers’ doors on time. This will ensure that you have satisfied customers and excellent seller health, at least where shipping is concerned.
Buy Box Bonus
Amazon takes a ton of factors into consideration when deciding who gets the buy box, and shipping is one of them. Besides just flat-out giving sellers with FBA a boost, the buy box algorithm is also influenced by order defect rate (ODR), late shipment rate, and other seller performance metrics, most of which automatically get a boost when you enroll in FBA.
Amazon Handles Returns
This one can either be a pro or a con, depending on how well-equipped you are to deal with returns yourself. If you’re a smaller seller, this saves you the hassle of having to process returns yourself. This doesn’t come for free, however — the return fees that Amazon charges you can be a burden, not to mention the refunds that they issue (see FBA Cons section below for more).
Increased sales, and all the other benefits that come with FBA, don’t come for free. The basic fees for any products include:
- Monthly storage fees
- Pick-and-pack fees
- Order fulfillment fees
- Weight handling fees (heavier products cost more to ship with FBA)
In addition, there are extra costs beyond those basic fees:
- Long-term storage fees (slow-moving products cost much more to keep in FBA warehouses)
- Inbound shipping costs (to ship your goods to the Amazon warehouse)
- Return fees (you need to pay a fee if you want your items returned to you, or if you don’t want them, you STILL need to pay a fee for disposal of your items)
Some products are burdened by fees more than others, which is one of the reasons why it’s important to make fulfillment decisions on a per-product basis. We’ll discuss this more later.
Thankfully, Amazon has made it easier to determine how much FBA fees will affect you with their FBA Profitability Calculator. Click here to access the calculator.
Reduced Inventory Control
Having your inventory stored remotely makes it more difficult to quickly respond to shifts in sales velocity. You may find yourself with stale inventory (and getting charged extra fees for it), or, just as easily, you could go out of stock before you have time to react.
Additionally, losing direct control over inspections and handling defective products can be a deal-breaker for some sellers. Dealing with defective inventory can be a complicated and painful process under FBA, as you’ll have to send them quality control documentation if they suspect a problem and replace the units yourself if the problem grows too severe.
FBA Suspensions, sometimes triggered by a single support agent despite good statistics, can be devastating if you rely on FBA for a certain product and/or don’t have the capacity to fulfill it yourself.
Of course, using FBM in no way means that you’re safe from suspensions — this is just to show that FBA isn’t completely bulletproof when it comes to suspensions, either.
Amazon Handles Refunds
This one gets listed as a con, because almost every FBA seller hates refunds. Amazon rarely tells you why they issue a refund; usually, they’ll just issue one immediately, before the customer returns the product. However, if the customer doesn’t return the product in 45 days, they will reimburse you.
If the product does come back, there are three possibilities:
- They determine that it’s unsellable, and that the damage was their fault. In this case, they reimburse you fully for the refund, and keep it.
- They determine that it’s unsellable, and that the damage was the customer’s fault. In this case, they ship it back to you (for a small fee) and you can inspect it.
- They determine that it’s still sellable, and they put it back in your inventory.
The most frustrating aspect of this is the lack of transparency: Amazon will rarely tell you why a refund was issued, leaving you with little to no information about how to change your practices and avoid more refunds in the future. Sometimes, they will issue the refund at the time of return, at which point you can see the reasons for the refund and the condition of the return, but this isn’t always the case.
More Inventory Control
Since, with FBM, you’re working out of your own warehouse, you have the ability to control your own stock at a much finer grain. First of all, having your own warehouse makes accounting for sudden changes in sales velocity easier — you avoid the problem of needing to anticipate demand much further out that comes with shipping to FBA warehouses. Additionally, you can inspect and deal with defects as you wish, without having to go through Amazon Support.
Avoid the Add-On Program
Low-priced items ($6–$8) under FBA will often be automatically enrolled in Amazon’s add-on program, which saves Amazon shipping and handling costs by requiring customers to purchase at least $25 worth of merchandise before they can add the smaller item to their cart.
However, some customers are deterred by this, so you may find that these lower-priced items will have greater sales velocity if you ship them yourself. FBM lets you control this and ship the items yourself.
This is another point that straddles the categories of “Pros” and “Cons.” The “pro” of Seller-Fulfilled Prime (SFP) is that, well, it’s available. Sellers who don’t want to commit to FBA on certain items can still access that Prime badge, as long as they can guarantee to Amazon that they can provide two-day shipping.
The “con” of Seller-Fulfilled Prime is that the downsides almost always outweigh the benefits. FBA two-day shipping has the advantage of being subsidized by $99 yearly payments from every subscriber. SFP has no such subsidization. As such, you eat all the costs of express shipping yourself. Additionally, Amazon will almost always require you to use a guaranteed service such as USPS Express Priority, UPS 2-day, or FedEx 2-day, unless you limit your offer to a small region around you. The fees for these services are often much too high to justify using Seller-Fulfilled Prime over FBA, but you might find that it works for you if your products have high MSRPs and decent margins.
Loss of Prime Customers
This is basically a mirror of the first "Pro" in the FBA sections, but it still deserves mention here. Because so many Amazon customers are enrolled in Prime, and so many of them come to Amazon specifically to take advantage of free 2-day shipping, shipping products with FBM (unless you're using Seller-Fulfilled Prime) means losing out on those dedicated Prime customers. This loss is always something you have to consider when keeping a product on FBM, but it can still be worth it, depending on how the FBA fees will affect your specific products.
Held to Strict Standards
Amazon holds its sellers to incredibly high standards when they are fulfilling their own orders. You will be penalized heavily for late or incorrect shipments — and those mistakes are bound to happen at some point, unless you run an incredibly streamlined shipping service.
Mistakes can start to add up, and they will negatively affect your seller health. This can reduce your position in search rankings, reduce your buy box priority, and, if it gets too bad, get you suspended from Amazon.
If there are FBA sellers competing on the same SKU, you will likely have to price your offering much lower in order to compete. This is one of the reasons that you have to consider your competition when deciding on a fulfillment method for your products — not using FBA on certain products with lots of FBA competition may lead to a price war.
Factors to Consider
As we’ve stressed before, FBA or FBM are not one-size-fits-all programs. Some products will benefit greatly from being on FBA; for others, the burden of extra fees makes it more logical to ship them with FBM.
First, there are three product-specific characteristics you should look at: size, margin, and sales velocity.
If one product is large, low margin, and slow-moving, FBA may not be right for that item. Large items will accrue more weight handling fees, low-margin items will lose a greater percentage of their profitability due to fees (although you can usually increase the price to compensate), and slow-moving items will cost you more the longer they sit in Amazon’s warehouse. Low sales velocity for an FBA item can be especially painful, as Amazon really doesn’t want to be your long-term storage warehouse. They’ll charge long-term storage fees every February and August for any items that have been in the warehouse for longer than 180 days, and an additional fee will apply for items in storage for longer than 365 days.
Besides the characteristics of the product, you also need to consider your competition. If you’re competing for the buy box with other sellers, then switching to FBA will give you a significant boost in buy box priority. Furthermore, if you’re not using FBA on a certain ASIN, but other sellers are, it’s almost impossible to wrench the buy box away from them without switching to FBA yourself.
Finally, make sure you use the (above-mentioned) FBA Revenue Calculator if you’re thinking about switching a product to FBA. Click here to access the FBA Calculator.