Amazon eCommerce

How Does Amazon FBA Work? Here’s What You Need to Know

Are you thinking about selling on Amazon FBA? Then read on for all you need to know about this eCommerce platform and how to make the most of it.
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When you decide to sell on Amazon, how you fulfill orders is an important as the products you sell. You can either fulfill yourself or use Amazon’s FBA. Amazon FBA allows sellers to leverage Amazon’s vast network of fulfillment centers to store, pack, and ship products to customers with a predictable pricing model. In its simplest terms, you sell it and let Amazon ship it.

However, there are some critical costs and essential tips that Amazon FBA users have to consider before pitching their tent with Amazon FBA. In this guide, we’ll outline and advise on how you can grow your income using an Amazon FBA account.

What is Amazon FBA?

Fulfillment by Amazon (or Amazon FBA, as it’s usually called) is a service that allows vendors to leverage Amazon’s robust distribution and customer base. The entire business model relies heavily on Amazon’s fulfillment centers (or warehouses), which takes care of order fulfillment, customer service, and more.

Amazon FBA has become a popular part of Amazon’s entire e-commerce business. Over 2 million users now rely on the product. The service is especially famous for its inclusivity – anyone can use it, regardless of whether they’re wholesalers, product suppliers, etc.

Amazon FBA Homepage
Amazon FBA Homepage

How Amazon FBA Works

Amazon FBA requires that sellers use their usual Amazon seller accounts, then follow some instructions to add products to their FBA section. The service allows users to expand their business and reach with a few clicks, and it’s quite effective.

The service has a pretty straightforward model:

You send your products to Amazon

Amazon has over 100 fulfillment centers in the United States alone. Some of these cover vast distances, up to a million square feet. Before sending any item to the warehouse, you have to give Amazon detailed information about your products so they can advise on the warehouse to store your products.

Amazon takes care of sorting and storage

Once the product gets to Amazon, they’ll sort it appropriately and add it to their inventory. They store the product in the warehouse for as long as you want. Keep in mind that you will pay storage fees based on how long the product stays in the fulfillment center. If the product suffers any form of damage, the company will reimburse you.

Purchases and inventory management

Once a customer places an order for your product, Amazon takes care of payment and inventory management. This involves the process of moving the product from storage by a picker to packing it and shipping it out.

Amazon handles everything else

Note that Amazon will also follow up to ensure that the customer had a great experience. If there are any questions or returns, the company handles them – not you. The only time you get involved is by making monthly payments and sending your well-labeled products to the warehouse for storage.

Get paid

Every two weeks, Amazon calculates your gross sales, deducts your fees, and sends the net income to your bank account. You don’t even have to lift a finger to be successful.

Amazon Seller Dashboard
Amazon Seller Dashboard

What You’re Responsible for With Amazon FBA

Amazon is one of the most visited websites in the world, with thousands of third-party vendors selling millions of products. According to research from the Philadelphia Inquirer, for every dollar spent in the U.S online, 50 cents goes to Amazon. For a site that big, there’s bound to be insane competition. How do you ensure your products are not left on Amazon’s shelves for months? There are several ways to do that, and it includes:

Product selection

Amazon FBA allows you to sell anything you would like to sell. However, if you want to avoid paying storage fees without making sales, you might want to choose products that move off the rack quickly.

To do this, you need to conduct your research on what’s in demand on Amazon and what’s not. One way of doing this is by using Spying tools like Jungle Scout to identify best-sellers and developing innovative ways to offer better products. Your goal should be modeling your products after your competitor’s not undercutting them by selling the same thing for less.

Marketing

Amazon won’t market your products for you. While people who sell products for high-ranked brands might not need much in terms of marketing, those who sell their products will have to.  To get more visibility on Amazon, you might want to look into online ads and optimizing your listings for discovery on Amazon. We’ll explain deeper later on.

Amazon FBA costs

Calculating costs and fees for Amazon FBA is crucial if you want to stay profitable.

Fees that Amazon Charges All Sellers

As an Amazon FBA user, you’re also a seller on Amazon. Given that, here are some fees you need to familiarize yourself with:

Referral fees

The referral fee is a commission that you pay to Amazon for every item you sell on its platform. The company typically charges a flat percentage, although it’ usually less than 15 percent. This fee is not expected to be paid upfront. Amazon could also deduct referral fees from your account after you make a successful sale.

You can find the current list of referral fees here.

Amazon Seller Pricing Plans
Amazon Seller Pricing Plans

Individual and subscription fees

Amazon has two types of seller accounts—individual and professional. The account type determines how much you pay and when you pay them.

The Individual Plan is suited for small scale sellers that plan to sell 40 items a month. Amazon charges $0.99 on every sale made plus additional selling fees. Amazon also charges selling fees, which range between $0.45 and $1.35. The company also deducts those when you make a sale.

The Professional Plan is targeted at sellers who want to take advantage of everything Amazon has to offer, including Amazon FBA, bulk listing creation, API integration, and on-site advertising tools. Amazon charges Professional sellers $39.99 monthly in addition to extra selling fees. Amazon deducts the funds from your account balance. Once the balance is empty, the company makes the deductions from your credit card.

Refund administration fees

If a shopper requests a refund for your product and you’ve already been paid, Amazon will charge a fee to process that refund. The fee is usually a flat $5.00, or 20 percent of the refunded charge – whichever is less. Similar to the subscription fees, these are also charged to your Amazon account balance or your credit card.

Fees for Amazon FBA Sellers

FBA fees

FBA sellers don’t handle product packaging, handling, and shipping. Instead, employees at Amazon fulfillment do that on your behalf. Amazon will charge you a fee for this, and it will depend on the product’s size and weight.

You can find a breakdown of Amazon’s current FBA fees here.

FBA Storage fees

Amazon charges businesses for storing their products in its fulfillment centers. The storage fees come in two categories – monthly fees and long-term fees.

Monthly storage fees

Monthly storage fees apply when you still have inventory at a fulfillment center at the end of the month. The company charges these funds to your account, or credit card
Amazon splits the fees into standard and oversize products.

Amazon FBA charges $0.75 per cubic foot between January and September for the standard size, while the fees rise to $2.40 per cubic foot between October and December. The charge for oversize products is $0.48 and $1.20 for the same periods, respectively.

Long-term storage fees

Amazon conducts a cleanup of inventory on the 15th of every month. The process involves company employees recording any products that have been at the fulfillment centers for over 180 days.

For these products, Amazon charges a long-term storage fee of $6.90 per cubic foot of storage. If the time frame expands to over 365 days, Amazon charges a flat fee of $0.15.

Note that these fees might surge in busy seasons, as Amazon might want to persuade you to remove products that aren’t moving.

Miscellaneous Fees

  • Closing fees – Media products – DVDs, books, etc. – come with a flat $1,80 fee per sale.
  • High-volume listing fees – If you have over 100,000 products listed, Amazon might ask you to pay a monthly flat fee of $0.005 per product. Note that these fees are deducted at the same time as FBA storage fees.
  • Rental book service fees -Sellers who rent books on Amazon will get a $5.00 charge for each rental. Like the referral fees, Amazon deducts these fees at the time of a sale.
  • Stock removal fee – To remove inventory from Amazon and dispose of any unsold products, you will have to pay $0.50 and $0.60 per unit, respectively.
  • Labeling fee -Every item shipped to an Amazon fulfillment center comes with a strict barcode label specification. If the labeling isn’t done correctly, the company might hit you with a labeling fee of $0.20 per unit.
  • Prep and unplanned prep service fees – Amazon also has guidelines for product prep and packaging. While the company can do both for you – for a fee, of course – you could also choose to do it yourself. Note, however, that an improperly packaged product or one that incurs an unplanned prep will attract charges. These charges depend on the type of product, and the fees range between $1.00 and $2.20 per unit.

Who is Amazon FBA For?

Individuals and companies that sell and don’t have many resources for storage, inventory management, and customer service will appreciate Amazon FBA. However, some businesses tend to enjoy the service even more than others.

Some of these include:

  • Brick-and-mortar stores: Brick-and-mortar stores have a lot to gain from Amazon FBA. Apart from leveraging on the company’s reach to get their products across greater distances, they can also use Amazon’s digital advertising service to bolster their business and drive customers.
  • E-commerce companies: A seasoned e-commerce company can easily get more buyers through Amazon.
  • Business people: You might need some time to refine your product offering and optimize profits. However, if you commit to Amazon FBA for the long haul, you’ll appreciate it.
  • Making money with Amazon FBA: What you need to know

Selling on Amazon is one of the top ways of making it big in the e-commerce space. Amazon sellers make over $4,000 in monthly sales. The marketplace is quite lucrative but crowded. With an average conversion rate of 15%, you need maximum visibility on Amazon if you want a piece of the pie.

FBA helps you grow
FBA helps you grow

Here are some smart ways to increase your visibility on Amazon to boost earnings:

Pick products wisely

It’s essential to select what you want to sell. Remember that only products that have high demand will move with Amazon FBA. You can manually conduct the research on Amazon by checking the best=selling items in your category.

Another section to examine is the “Customers also bought” section to find the similar products shoppers are buying along with others. You can also use the Jungle Scout chrome extension to view the monthly sales volumes in your niche market or by using the Unicorn Smasher to gather sales revenue per product.

Manage your inventory well

You must keep your inventory at minimal levels. This way, you can avoid paying hefty sums if they don’t move. When you’re out of stock for a long period, it results in low rankings for your products and store. You can also use lead times and forecasting to plan inventory orders. This allows you to plan your inventory reorder quantities using your sales trends.

Invest in marketing

You will have to market your products well and be deliberate about it. Marketing remains the top way to maximize sales and profits. So, spend considerably on it.

Amazon FBA FAQs

Is Amazon FBA worth it?

Yes, it is. You can earn thousands of dollars in profits monthly selling on Amazon FBA, but you need to choose products wisely. Amazon FBA is an automated system that ensures you continue to earn income even while you sleep. Since you will only pay fees and the company will handle all the tedious parts for you, there’s no limit to how much you can make.

Can I get rich with Amazon FBA?

Yes, you can get rich, but it depends on the product you’re selling and how well your sales are. Amazon has a Seller’s Profitability Calculator on its platform, which you can use to determine your net income after Amazon must have deducted their fees. The best part is that you can work your way forward into riches with pure maths. Find the product, sell at your price, market it, and let Amazon ship them out for you.

Are there products I can’t sell on Amazon FBA?

Amazon FBA doesn’t allow you to sell products like alcohol, gift cards, and prescription drugs.

Amazon FBA Pros and Cons

Pros

  • Swift shipping and delivery
  • Visible to Prime customers
  • Buy box priority

Cons

  • Increase in returns
  • Inventory tracking

Conclusion

Sellers using Amazon FBA enjoy multiple benefits. The service itself is quite nifty, since you won’t need to handle any of the usual responsibilities of running a product-selling business.

While Amazon will charge you for handling these services, the pros outweigh the cons. There are thousands of sellers maximizing their profits through the Amazon FBA. It’s a secure, fast and efficient way to scale your e-commerce business. Register today!

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning.He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience.He has a strong passion for regulation and macroeconomic trends as it allows him to peek under the global bonnet to see how the world works.

2 Comments

  1. Rachel Grate Reply

    Hey Jimmy Aki,

    Your Post is a too good and very informative dude, there is lots of very useful information. I have read lots of blog-related with this but Those tips I can’t able to find out in other blogs.

    Rachel Grate .

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