In 2020, there are almost 3 million active sellers on Amazon. And according to the 2020 Jungle Scout Seller Status Report, we know that almost all Amazon sellers have different methods of finding success on Amazon.
A key differentiator between Amazon sellers is the fulfilment method they choose: Fulfillment by Amazon (FBA) and/or Fulfillment by Merchant (FBM).
Almost all Amazon sellers (94%) sell with Amazon FBA, and a third (34%) use Amazon FBM. Bang, Amazon sellers sell:
- FBA only: 66%
- FBA and FBM: 29%
- FBM only: 6%
We'll take a look at the main differences between these two fulfilment methods, including the one that requires the most experience and the one that is more profitable, as well as the factors you need to consider when choosing whether to sell on Amazon FBA or FBM.
What is the difference between Amazon FBA and FBM?
- Amazon Fulfillment (FBA) - A method of selling on Amazon in which a seller (or seller's supplier) ships their products directly to Amazon warehouses. Amazon then stores the inventory and ships it directly to the customer (often via their 2-day Prime shipment). They also manage customer service.
- Merchant Compliance (FBM) - A method of selling on Amazon in which a seller lists their products on Amazon, but manages all storage, shipping, and customer support (or through another third party).
Which one should sellers use?
For both small businesses and home sellers of major brands with elaborate supply chains, all types of Amazon sellers can benefit from Amazon's FBA and FBM fulfilment methods. But how do you choose what is right for your business?
First, consider your sales strategy:
- Private Label: Create Your Own Product Label / Branding
- Wholesale: buy products directly from a brand or from distributors with extra stock to sell on Amazon
- Retail arbitrage: buying discounted products through retailers to sell on Amazon
- Online arbitrage: buy discounted products online to sell on Amazon
- Dropshipping: Buying products directly from a manufacturer who fulfils the order and ships directly to the customer
- Custom made: create/create your own products to sell on Amazon
Then there are six main factors to consider before selecting a fulfilment method on Amazon.
- Product size and weight.
- Control of the customer experience.
- Seller Comments
- Inventory turnover rate
- Logistics
- Expenses and fees
This article goes into detail about those factors below.
Here's a quick overview of which method you should use based on those factors.
You should use FBM if ...
- You want more control over your customers.
- Your excellent customer service practices are in place
- The products you sell are too big or heavy.
- You already have local logistics in place.
- You can mitigate the expenses related to fulfilling your own products.
- Your inventory turns slowly and can handle the volume of shipments on your own
You should use FBA if ...
- The products it sells are smaller and lightweight.
- You're okay handing over control to your customers to Amazon
- You want Amazon to handle your customer service thus saving you a lot of time
- Your inventory will be delivered quickest utilizing full potential of FBA shipping
- You do not have established logistics
- Your expenses would be higher if you were to handle your own shipments
Can both FBA and FBM be used?
Yes. In fact, market data indicates that 29% of Amazon sellers sell FBA and FBM.
If you have a large variety of products, you may consider using both to reap the benefits of both.
For example, imagine that you sell two types of products. A product is large and turns slowly. The second product is small and is delivered quickly. To maximize your profit and minimize your expenses, you would use FBM to sell the big / slow-selling product and FBA to sell the small / fast-selling product.
1. Item size/weight
Amazon's fee structure and logistics are beneficial for FBA sellers who have small, lightweight products that change quickly. Conversely, Amazon fees (specifically FBA fees and warehousing fees) do not lead to the sale of heavy and oversized products.
To decide which fulfilment method works best for your product, you can use Amazon's FBA income calculator to forecast fees and expenses.
Example 1. You are selling an FBM garlic press, exactly like the image below. Assuming your price is $ 7.99 and your cost to fulfil the product is $ 6.20, the fee to sell on Amazon is $ 1.20 and the cost of the product is $ 1.50. In this case, by selling FBM, you would lose $ 0.91 for each sale.
$ 7.99 - ($ 6.20 + $ 1.20 + $ 1.50 = $ 8.90) = - $ 0.91
However, if you sold the same garlic press through FBA, the costs would be lower. While the cost of the product and the fee to sell on Amazon remain the same ($ 1.50 and $ 1.20 respectively), the fee to complete the product is $ 3.64 instead of $ 6.20.
$ 7.99 - ($ 3.64 + $ 1.20 + $ 1.50 = $ 6.34) = $ 1.65
In the end, when selling FBA, your profit is $ 1.65 per item (a 20.65% profit margin).
How do I ship Prime products with Amazon FBA vs FBM?
FBA and FBM sellers can ship products through Prime. Prime is a program that Amazon offers its buyers that grant them benefits such as one or two-day shipping. It is well known in the industry that, Prime sellers compete more effectively than non-Prime members.
The products that Amazon offers are automatically available to obtain Prime benefits. However, products delivered by sellers can only sell through Prime if the seller is part of Amazon's Seller Fulfilled Prime program.
As of this writing, there is a waiting list to join the program, so there is no guarantee of entry.
2. Control of the customer experience
FBM sellers stock their own products, ship their own products, and take care of all customer service for your sales on Amazon.
On the other hand, sellers using FBA use Amazon to store and ship their products and handle customer service on their behalf. FBA salespeople rarely, if ever, talk to their customers. As such, FBM marketers have greater control over their customer experience and post sale inquiries.
3. Seller comments
The Amazon Seller Feedback System is a way for customers to communicate to Amazon their satisfaction with third-party sellers and the resulting transactions.
Seller feedback has two components:
- Star Rating: As a product review, buyers can rate the seller's performance on a scale of 1-5.
- Feedback: In addition to the star rating, buyers can leave feedback on why they gave the seller a certain rating.
Please note that a seller rating is different from a product rating/review. The seller rating only covers the elements of the actual transaction, such as shipping, whether or not the product matches its description on Amazon, and the seller's communication.
Because Amazon handles most of the steps involved in fulfilling FBA products, FBA sellers have less to worry about when it comes to seller feedback. In fact, if Amazon handles an FBA seller's transaction and the seller receives negative feedback, the seller can request that the feedback be removed.
Because FBM sellers have more control over their transactions, they are more susceptible to receiving negative feedback from the seller on Amazon. As such, FBM sellers need to focus more on the condition of the products they ship, the speed at which they ship, and how they handle all communications with sellers.
4. Turnover rates
The turnover rate of a salesperson is the speed with which they sell and replenish inventory. The turnover rate of an FBA seller is important because Amazon keeps track of how long inventory stays in these distribution centres.
The longer a product stays in a distribution centre, the more warehousing fees the product will accrue. Then, if a product is in an Amazon distribution centre for 365 days or more, Amazon begins charging the seller long-term storage fees.
Therefore, sellers with products that have slower turnover rates should consider fulfilling their own products to avoid costly Amazon storage fees.
5. Logistics
Choosing, packing and shipping your own products can be time-consuming. Therefore, it is recommended that a seller who is just getting started with Amazon and does not yet have their own fulfilment logistics start with Amazon FBA. That way, they can focus on the other important elements of building a business using Amazon.
For sellers who are adding Amazon as a new sales channel and already have logistics, they may still want to review whether or not Amazon FBA can save them money on compliance, especially if they sell and ship high-turnover products.
6. Fees
Amazon FBA sellers must pay FBA fees to ship products through Amazon's fulfilment network. The FBA fees cover the costs of picking up, packing, and shipping the products to the consumer. In a way, these are "shipping and handling charges" charged by Amazon.
While Amazon FBM sellers don't have to pay FBA fees, they still need to consider the expenses involved in handling and shipping their own products. This includes the costs of warehousing, labour, product packaging costs, and the actual cost to ship the product.
If these costs are higher than the fees would be to allow Amazon to handle compliance, the seller should consider using Amazon FBA.
What are the key differences between FBA and FBM vendors?
Beyond the methods they use to fulfil their products, we discovered some key differences between sellers using FBA and those using FBM.
Which is more profitable: Amazon FBA vs FBM?
FBM sellers have more sales and higher profit margins than FBA sellers
- 27% of FBM sellers earn more than $ 25,000 per month in revenue vs. 24% of FBA sellers
- 22% of FBM sellers have profit margins of 25% or more vs. 20% of FBA sellers
Which Sellers Start Selling Faster: Amazon FBA vs FBM?
FBM sellers launched their Amazon businesses faster than FBA sellers.
- 51% of FBM sellers took less than six weeks to get started on Amazon vs 34% of FBA sellers
- 31% of FBM sellers made a profit in less than three months vs. 21% of FBA sellers
Which method takes less time to administer: Amazon FBA vs FBM?
FBA vendors spend less time on their business than FBM vendors.
- 23% of FBM sellers spend more than 40 hours per week in the Amazon business vs. 18% of FBA sellers.
- 42% of FBM sellers attribute their success on Amazon to having more time to engage with the business than 37% of FBA sellers who said the same.
Other Findings: Amazon FBA vs FBM Selling
FBA sellers are heavily focused on private label sales, while FBM sellers engage in other sales models at much higher rates.
- 73% of FBA sellers use the private label business model vs 58% of FBM sellers.
- 41% of FBM sellers use the wholesale business model vs 26% of FBA sellers.
- 15% of FBM sellers use dropshipping business model vs 7% of FBA sellers.
FBM sellers tend to start with less startup capital
- 40% of FBM sellers started with less than $ 1,000 vs. 27% of FBA sellers.
- 38% of FBA sellers started with more than $ 5,000 vs. 28% of FBM sellers.
FBM sellers have much more product listings on Amazon than FBA sellers (with more category diversity).
- Almost half of FBA sellers (49%) have fewer than 10 products, while half of FBA sellers (50%) have more than 50 products.
- FBM sellers are generally those with a huge catalog and can’t ship everything to FBA warehouse.
FBA vendors are less concerned about the effects of increasing competition than FBM vendors
- 49% of FBM sellers are concerned about the increased competition that lowers prices compared to 46% of FBA sellers.
- 31% of FBM sellers are concerned that Amazon sells products that compete directly with theirs, compared to 27% of FBA sellers.
The Benefits of the Amazon FBA On-Site Program
Participating in the on-site FBA program can have significant benefits for your business. The program brings the best of Amazon FBA and Seller Fulfilled Prime to one place - your warehouse. The benefits of joining the on-site program can greatly benefit your business.
Another great benefit of being in the on-site program is the money you save on typical Amazon fees. You no longer need to pay or worry about FBA warehousing fees or inbound shipping fees. Amazon still charges for shipping at a custom rate that is provided to you when you join the program.
Not having to worry about long-term storage fees or FBA storage fees is a huge benefit, especially since New Amazon FBA fees went into effect in February 2019. Shipping fees can be a bit higher depending on where your warehouse is located in relation to the place where the product is shipped. This is due to a centralized warehouse location versus a dispersed network like FBA.
The full list of fees you can avoid with Amazon Onsite is below:
- FBA Inbound Shipping Rates
- FBA workflow preparation/tagging fees
- Order handling fees
- Pick & Pack rates
- Weight handling fees
- Return fees
- Short-term inventory storage fees
- Long-term inventory storage fees
As you can see, the amount you can save by being on the on-site FBA program can really add up.
With these many benefits by your side, we're pretty sure FBA is a profitable deal for anyone, and especially when you are dropshipping with FBAdiscounts, you can get all the above-mentioned benefits without paying any prime fee.