Amazon FBA Explained: How It Works and Why You Should Use It

Find the Benefits of Amazon FBA for Your E-Commerce Business

What is Amazon FBA?

• Amazon FBA stands for Fulfillment by Amazon.
• Amazon handles storage, packaging, and shipping of your products.
• Offers customer service and manages returns for you.

If you’re wondering what is Amazon FBA, it’s a service that allows you to outsource most of your e-commerce logistics to Amazon. They take care of storing your products, packing them when they sell, shipping to customers, and even handling returns. This means you can focus more on growing your business and less on the daily grind.

Amazon FBA makes it easier for e-commerce entrepreneurs to compete with big players by allowing access to Amazon’s massive network of Prime customers. Your products can reach more people faster, thanks to Amazon’s efficient logistics. Plus, leveraging FBA can increase your sales and customer satisfaction.

I’m Will Mitchell, and I’ve spent over 20 years importing from China and selling online. I’ve helped thousands of entrepreneurs like you understand what is Amazon FBA and how to succeed using it. Let’s dive into the details and see how FBA can push your business to the next level.

What is Amazon FBA?

Fulfillment by Amazon (FBA) is a service that lets you outsource your order fulfillment to Amazon. This means Amazon handles the storage, packaging, shipping, customer service, and even returns for your products.

How Amazon FBA Works

Here’s a simplified breakdown of how FBA works:

1. Send Products to Amazon: You start by sending your products to Amazon’s fulfillment centers. These are vast warehouses where your inventory will be stored.

2. Amazon Warehouses: Once your products arrive at the warehouse, Amazon logs them into their system. They are then stored until an order is placed.

3. Order Processing: When a customer buys one of your products, Amazon’s system automatically processes the order.

4. Shipping: Amazon picks, packs, and ships the product directly to the customer. Thanks to Amazon Prime, customers can receive their orders in as little as one day.

5. Customer Service: Amazon also handles all customer service inquiries. This includes answering questions, processing returns, and handling refunds.

Benefits of Amazon FBA

Using FBA comes with several significant advantages:

• Lower Costs: By leveraging Amazon’s scale, you can often reduce your shipping and storage costs. Amazon has negotiated great rates with carriers, and these savings are passed on to you.

• Increase Sales: Products fulfilled by Amazon are eligible for Prime shipping, which can significantly increase your sales. Prime members are more likely to purchase items with the Prime badge.

• Save Time: FBA takes care of the labor-intensive parts of your business. You don’t have to worry about packing orders, shipping them, or dealing with customer service.

• Optimize Operations: With FBA, you can focus on growing your business rather than getting bogged down with logistics. Amazon’s sophisticated system ensures orders are processed quickly and efficiently.

• Expand Reach: FBA allows you to access Amazon’s global fulfillment network. This means you can easily sell to customers around the world without the headaches of international shipping.

Pro Tip: Use Amazon’s Seller Central dashboard to track your inventory and manage stock levels. This tool helps you keep an eye on your products and ensures you don’t run out of stock.

By leveraging FBA, you can streamline your operations and focus on what you do best: growing your business. Now, let’s look at how you can get started with Amazon FBA.

How to Get Started with Amazon FBA

Step-by-Step Guide

Step 1: Create an Amazon Seller Account

First, you need to sign up for an Amazon seller account. Go to Amazon’s seller registration page and choose between “Sell as a Professional” or “Sell as an Individual.” For beginners, selling as an individual might be a good start. Amazon charges $0.99 per sale for individual accounts and $39.99 per month for professional accounts.

Step 2: Enroll in FBA

Once your seller account is set up, you need to enroll in Fulfillment by Amazon (FBA). Steer to Seller Central, go to the settings, and select “Fulfillment by Amazon.” Follow the prompts to complete the enrollment process.

Step 3: Add Products

Next, add your products to your Amazon seller account. You can do this by clicking on “Add a Product” in Seller Central. Enter the product details, including title, description, and price. Make sure your listings are accurate and appealing to attract buyers.

Step 4: Decide Fulfillment Strategy

Decide whether you will use case-packed or individual products for shipping. Case-packed means sending multiple units of the same SKU in one box, while individual products mean different SKUs in one box. This decision impacts how you prepare and label your products.

Step 5: Prepare and Label Products

Prepare your products according to Amazon’s guidelines. This may include poly bagging, bubble wrapping, or adding labels. You can use Amazon’s labeling service for a per-item fee, or you can do it yourself. Ensure that each product has a scannable barcode.

Step 6: Create a Shipping Plan

Go back to Seller Central, click on “Inventory,” then “Manage FBA Inventory,” and select “Send/Replenish Inventory.” Follow the prompts to create a shipping plan. You’ll need to provide details like the “Ship From” address, which could be your home or a third-party prep service.

Step 7: Ship to Amazon

Choose your shipping method: small parcel delivery (SPD) or less than truckload (LTL) delivery. SPD is suitable for smaller shipments, while LTL is for larger ones. Use Amazon’s partnered carriers to get discounted shipping rates. Print the shipping labels and attach them to your packages.

Step 8: Track Inventory and Manage Stock

Once your products are shipped, you can track their progress in Seller Central. Use the “FBA Inventory” tool to monitor stock levels, set replenishment alerts, and avoid long-term storage fees. Keep about two months of inventory on hand to ensure you don’t run out of stock.

Pro Tip: Regularly check the FBA Dashboard for a summary of your sales, shipments, and inventory. This helps you plan better and stay on top of your business operations.

By following these steps, you can streamline your operations and focus on growing your business. Next, let’s discuss the costs associated with Amazon FBA.

Costs Associated with Amazon FBA

Fulfillment Fees

Amazon charges several fees for their Fulfillment by Amazon (FBA) service. These fees cover the costs of picking, packing, shipping, and handling products. They also include customer service and processing returns.

Fulfillment fees are calculated per unit and vary based on the product’s size and weight. For example, a standard-size item like a T-shirt incurs a fulfillment fee of $5.32, while a larger item like a baby cot could cost $12.67. These fees can add up, especially if you sell bulky or heavy items.

Storage Fees

Amazon also charges monthly storage fees for keeping your products in their fulfillment centers. These fees are based on the volume of your inventory in cubic feet. For instance, storing standard-size items costs $0.87 per cubic foot from January to September and $2.40 per cubic foot from October to December, reflecting the higher demand during the holiday season.

Long-term storage fees apply if your inventory sits in Amazon’s warehouse for more than 365 days. Starting February 15, 2024, the surcharge for inventory stored between 271 to 365 days will increase. Items held for over 365 days will incur even higher fees.

Returns Processing

One of the benefits of FBA is that Amazon handles returns for you. However, this service comes with its own costs. Returns processing fees are charged per item and depend on the product category. Amazon’s easy return process can sometimes lead to higher return rates, which could affect your profitability.

FBA Revenue Calculator

To get a clear picture of your costs and potential profits, use the FBA Revenue Calculator. This tool allows you to compare the costs of FBA with your own fulfillment methods. By entering details like product dimensions, weight, and price, you can see how fees impact your bottom line.

Aged Inventory

Managing inventory efficiently is crucial to avoid additional costs. Amazon charges an aged inventory surcharge for items stored for more than 181 days. This surcharge is applied monthly and is higher during busy seasons to encourage sellers to move their stock quickly.

Pro Tip: Regularly monitor your Inventory Performance Dashboard to keep track of your Inventory Performance Index (IPI) score. A low score can lead to overage costs and limit your ability to send more inventory.

By understanding these costs, you can better plan your pricing strategy and manage your inventory to maximize profits. Next, let’s explore the pros and cons of using Amazon FBA.

Pros and Cons of Amazon FBA

Pros

Logistics Support and Scalability

With Amazon FBA, you don’t have to worry about packing, shipping, or customer service. Amazon takes care of it all. This means you can scale your business without the headache of logistics.

Prime Benefits

Products enrolled in FBA automatically get the Prime badge. This makes them eligible for Prime free shipping, which can significantly boost sales. Plus, Prime members tend to trust and prefer these listings.

Win the Buy Box

The Buy Box is the box on the right side of the product page with the “Add to Cart” button. Over 80% of Amazon sales happen through the Buy Box. FBA sellers have a better chance of winning it, which can drive more sales.

Shipping Discounts

Amazon’s massive shipping network means you get discounted shipping rates. Even with FBA fees, the shipping savings can make it more cost-effective than handling shipping yourself.

24/7 Customer Support

Amazon provides 24/7 customer service for FBA sellers. This means your customers can get help anytime, and you don’t have to handle it yourself.

More Storage Space

FBA gives you access to Amazon’s extensive warehouse network. This means you don’t have to worry about storing your inventory, no matter how much you have.

Multi-Channel Fulfillment

With FBA, you can also sell your products on other platforms like eBay and BigCommerce. Amazon will still handle the fulfillment, making it easier to manage your sales across multiple channels.

Cons

Costly Fees

FBA is convenient but comes with various fees. These include fulfillment fees, storage fees, and long-term storage fees. For low-cost items, the fees can eat into your profits.

Inventory Management

You must meet Amazon’s strict requirements for inventory. This includes proper labeling and packaging. You’ll also need to regularly track and manage your stock levels to avoid extra fees.

Limited Branding

Amazon handles the packing and shipping, so your branding opportunities are limited. Your products will arrive in Amazon-branded boxes, which can dilute your brand’s presence.

Commingling

Amazon may pool your products with those from other sellers if they have the same manufacturer ID. This can lead to quality control issues, as your items may be mixed with lower-quality products.

More Returns

Amazon’s easy return policy can lead to higher return rates. While convenient for customers, it can be a hassle for sellers. Returns are processed by Amazon, but the costs and logistics can still affect your bottom line.

By weighing these pros and cons, you can decide if Amazon FBA is the right choice for your business. Next, we’ll answer some frequently asked questions about Amazon FBA.

Frequently Asked Questions about Amazon FBA

Can you actually make money from Amazon FBA?

Yes, you can make money from Amazon FBA. Many sellers have found success with this program. For example, Ben Wood & Logan Rogers of Angora and Kim Meckwood of Click & Carry have built profitable businesses using FBA.

In fact, 22% of Amazon sellers reported turning a profit within their first three months, and 58% within their first year. While it’s not a get-rich-quick scheme, with the right product and strategy, you can generate significant revenue.

How much is it to start Amazon FBA?

The cost to start Amazon FBA varies. Here are some key expenses to consider:

• Fulfillment Fees: These cover picking, packing, shipping, and customer service. Fees depend on the size and weight of your products.
• Storage Fees: Monthly storage fees are charged based on the volume your products take up in Amazon’s warehouses. Long-term storage fees apply if your products stay in the warehouse for more than 365 days.
• Other Costs: You might also need to invest in product sourcing, shipping to Amazon, and marketing.

Using the Amazon FBA Revenue Calculator can help you estimate these costs and compare them to your potential revenue.

How does Amazon FBA pay you?

Amazon pays FBA sellers every two weeks. Here’s how it works:

1. Sales Revenue: When you make a sale, Amazon collects the payment from the customer.
2. Fee Deductions: Amazon deducts referral fees and FBA fees from the sales revenue.
3. Payout: The remaining balance is deposited into your bank account every two weeks.

You can track your payments and manage your finances through the Amazon Seller Central dashboard.

By understanding these frequently asked questions, you can better prepare for your Amazon FBA journey. Next, we’ll discuss how to get started with Amazon FBA.

Conclusion

Selling on Amazon FBA offers a unique opportunity to leverage the power of Amazon’s logistics, customer service, and massive customer base. By using FBA, you can focus on growing your business while Amazon handles storage, shipping, and even returns.

Summary

Amazon FBA simplifies the process of selling online. You send your products to Amazon’s warehouses, and they take care of the rest. This includes storage, packaging, shipping, and customer service. The benefits are clear: lower operational costs, access to Amazon Prime customers, and the ability to scale your business more efficiently.

Benefits

The benefits of using Amazon FBA are numerous:

• Lower Costs: By using Amazon’s fulfillment centers, you save on storage and shipping costs.
• Increased Sales: FBA products are eligible for Amazon Prime, which can lead to higher sales.
• Time Savings: Amazon handles the logistics, giving you more time to focus on marketing and product development.
• Customer Trust: Products fulfilled by Amazon carry the trusted Amazon name, which can boost customer confidence and sales.

StartupBros E-commerce Training

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Expert Guidance

Starting an Amazon FBA business can be daunting, but you don’t have to do it alone. With our expert guidance, you’ll learn proven strategies and get insider tips to maximize your profits and avoid common pitfalls.

Selling on Amazon FBA can transform your business by giving you access to Amazon’s vast resources and customer base. With the right approach and guidance, you can build a successful and profitable e-commerce business.

Ready to get started? Check out our e-commerce training programs to learn more and take the first step towards your Amazon FBA success.