Fulfillment by Amazon (FBA) lets sellers in the Amazon marketplace take advantage of Amazon’s giant logistics operation to ship their orders. FBA items are eligible for Amazon Prime shipping and Amazon handles your angry customers (which Amazon considers its customers, not yours). Amazon has dozens of warehouses all over the country, and more around the world, so your products may be in your customers’ hands quickly. However, there are downsides to using FBA that every Amazon seller should be aware of before they get started with FBA.
What is FBA?
With Fulfillment by Amazon (FBA), Amazon takes care of shipping and returns in exchange for fulfillment fees. To use the FBA service, first set up an Amazon seller account. Next, add FBA to your product listings. Then ship your products to Amazon for storage and fulfillment and start selling online in the Amazon Marketplace.
When you use Amazon’s fulfillment, your products in Amazon will have the Prime logo, Prime members are more likely to click the buy box for your products if they can get free two-day shipping. It is not uncommon for an Amazon seller to see orders for their product increase once they start using FBA.
Fulfillment by Amazon lets people selling on Amazon Marketplace benefit from the company’s picking and packing operations. Amazon has a huge network of fulfillment centers across the US. Amazon’s fulfillment will get your products to your customers quickly and efficiently. Plus, you don’t have to worry about order fulfillment or the returns process. Fulfillment by Amazon takes care of that for you. Amazon FBA can save you time.
To sweeten the pot, Amazon is currently offering free shipping, and no storage fees for new Fulfillment by Amazon sellers through the New Selections program. But don’t let this limited time offer give you the impression that the program is cheap. In fact, storage fees for your FBA products and other FBA fees can add up. While Amazon’s customer support for buyers is excellent, sellers have often complained that they can’t get the support they need for their business. Before you decide to use FBA, it’s important to understand the pitfalls of Fulfillment by Amazon.
Is an FBA business worth it?
During past holiday seasons, thousands of FBA products were severely impacted when Amazon enforced last-minute changes to their inventory storage policy just before the holidays. And, during the coronavirus in spring 2020, FBA announced it would only accept shipments of goods it categorized as necessities. All other products were left out in the cold.
If you sell on Amazon and want to outsource your fulfillment, Amazon FBA might be worth the hassles that come with it. However, it’s important to also consider what can go wrong. Here are seven pitfalls to consider before you choose FBA over an independent 3PL services company.
Pitfall 1: Amazon FBA Inventory Chaos
The inventory that’s on the shelves and logged into the system is ready for your orders. This is the inventory your 3PL warehouse can pick and pack to ship to your customers. Amazon FBA sometimes falls short in this crucial metric. Mishandled inventory is one of the Amazon third-party seller problems most commonly reported.
Some sellers have complained of FBA inventory lag time. This can stretch from days to weeks as they wait for their inventory to be logged into the Amazon FBA system. This can cause delays in your customers’ shipments. And that can lead to a drop in your seller ratings or even canceled orders. In addition, inventory that sits on a pallet on a loading dock ties up your capital without bringing in money, something you want to minimize in your eCommerce business.
Your product can also get lost in the Amazon supply chain. When this happens, you must file a claim and Amazon will usually reimburse you for the loss. In the meantime, once again, you aren’t generating sales. To add insult to injury, the amount of your reimbursement may be based on Amazon’s valuation of your merchandise, not what you actually paid for it.
Sellers also report extra inventory showing up after they ship to an FBA warehouse. It can take time and frustrating back and forth with customer service to make sure the correct amounts of your product show up in your inventory in Amazon’s system.
Amazon runs an enormous fulfillment and logistics business. To do that, it has efficient systems in place. When there’s a glitch in those systems, however, it’s often the little guy who gets squeezed.
Pandemic leads to major FBA warehouse disruptions
All these problems seem minor compared to the chaos Amazon created for FBA sellers in its response to the coronavirus pandemic. In March of 2020, people around the globe went into self-quarantine to slow the spread of the virus. Amazon scrambled to keep up with the demand for products like toilet paper to hand sanitizer. Amazon told FBA merchants it would sell the remaining product in its warehouses. However, to deal with the rise in demand for household goods, it won’t accept restocks on other products. Companies that use FBA for their fulfillment had their eCommerce business model shattered by Amazon. FBA sellers had to turn to third-party fulfillment or lose their ability to deliver products to their customers.
Pitfall 2: Amazon vs. Your Brand
If you’re like most entrepreneurs, you want control over every aspect of your business and your product lineup. That way, you can make sure everything runs properly. With Amazon FBA, you have no choice but to give up some of that control.
The most obvious instance where Amazon places its stamp on your business is on the box. Amazon ships all FBA items in boxes with the Amazon logo. You don’t have the option to include a personal note from you to your customer. You can’t ship in a box with your brand logo or even an unmarked box. While Amazon FBA does offer multi-channel fulfillment, orders from your website and other platforms will still be sent using Amazon boxes as well. This can create confusion and could detract from the relationships you want to build with your repeat customers.
Pitfall 3: Missing that Personal Touch
Your 3PL warehouse can do a lot more than store inventory, pick and pack, and ship orders. At Red Stag, for example, we can add inserts and personalized marketing materials to your customers’ orders, or help you source uniquely branded boxes and even tissue paper with your company’s logo. We can also kit your inventory to increase your selling potential (and disassemble kits, if you need the product). We work to ensure you’re shipping an optimized number of products per order.
You won’t find services like these, which require personal attention and expanded capabilities, at Fulfillment by Amazon.
Pitfall 4: Customer Service Fails for Amazon FBA Sellers
The test of any vendor is not when things go smoothly but how well they handle the glitches that inevitably occur. According to Amazon seller forums, numerous Reddit forums, and countless other sites, Amazon FBA does not do well on this test.
Sellers report spending hours on the phone and exchanging multiple emails with customer service. Problems can sometimes take weeks to resolve. On the flip side, Amazon FBA will handle customer service when your customers have an issue. No one likes talking to an irate customer, so outsourcing your customer service may be a blessing. The question you should ask yourself is whether you trust Amazon to do a good job giving your customers the personal attention and respect that you want to reflect on your business.
Pitfall 5: Free Shipping and Amazon Fulfillment
The products of sellers who use Amazon FBA are automatically eligible for free Amazon Prime shipping. While this can be a plus in attracting more Prime customers, you still have to pay for the shipping costs.
You won’t be able to decide which products get free shipping. Whatever your margin on an item, you’ll have to absorb the shipping costs for Amazon Prime orders.
Before you sign up for Amazon FBA, you’ll need to calculate not only the fees for the service but also the extra bite that free shipping can take out of your bottom line.
Pitfall 6: Sales Tax Nexus and FBA
Sales tax nexus means a physical presence in a state such that you must pay sales taxes in that state. For example, Bob runs a business selling kitchen appliances. Bob is based in Pensacola, so he has sales tax nexus in Florida. When he ships an order to a customer in Florida, he must add sales tax and remit that tax to the state.
One of the ways Bob’s business may get sales tax nexus outside of Florida is if his products are stored in a warehouse in another state. If Bob chooses Red Stag Fulfillment as his order fulfillment company, his inventory in our Knoxville fulfillment warehouse may trigger an obligation for him to register to collect and remit Tennessee sales tax. Red Stag has warehouses in just two states and our clients have full transparency about where their inventory is stored. Thus, the additional sales tax paperwork is manageable for Bob.
If Bob signs up for Amazon FBA instead, however, he could open a sales tax nexus can of worms. Amazon has fulfillment warehouses in at least half the states in the US. It’s hard to keep tabs on exactly where these fulfillment centers are located. Amazon doesn’t like to reveal this information.
Amazon FBA won’t tell Bob where his inventory is stored. The company may move his blenders and toasters from one warehouse to another. He can only learn where Amazon FBA stored his products by looking at the locations from which they were shipped. This can create sales tax collection headaches for Bob.
The bill comes due for FBA sales taxes
Amazon’s practice of moving inventory to different warehouses without informing the seller has led to serious tax problems for some Marketplace merchants. One seller testified to the House Committee on Small Business about the consequences of Amazon moving his company’s goods to different FBA warehouses. Then one of these states came after him for back taxes. The resulting bills wiped out his profits and put him in the red.
In California, a business owner filed a lawsuit against Amazon for failing to collect taxes on products sold by Marketplace sellers. The suit claims that Amazon meets California’s definition of a retailer, so Amazon should be liable for all sales taxes. That case is still pending. However, in 2019 Amazon lost another lawsuit filed by the State of South Carolina over sales taxes.
Marketplace facilitator laws offer hope for sellers
The sales tax picture for people using FBA could be getting brighter. In South Carolina, the courts ruled that Amazon, not the Marketplace sellers, had to pay uncollected back taxes. Some states have enacted marketplace facilitator laws.
These laws require eCommerce marketplaces like Amazon to collect the taxes on all orders on their platform, even those by third-party sellers.
However, not all states have marketplace facilitator laws. In addition, states may still try to collect back taxes from sellers rather than Amazon. The bottom line is that storing your products with FBA can lead to sales tax compliance problems. That’s one more thing to worry about as an Amazon seller.
Pitfall 7: Amazon’s Fulfillment Inventory Swap
This is perhaps the most troubling problem sellers have encountered with Amazon. To explain it, let’s go back to Bob in Florida. One of Bob’s most popular items is a Rise ‘N Shine brand coffee maker. Amazon FBA has Bob’s coffeemakers in warehouses around the country, but not on the West Coast.
Then Zelda in Eugene, Oregon orders a Rise ‘N Shine coffeemaker from Bob. Amazon has some Rise ‘N Shine coffeemakers with the same SKU in a warehouse in Los Angeles California. The products belong to another Amazon FBA seller. In the name of efficiency, Amazon ships a Rise ‘N Shine coffeemaker from its California fulfillment center to Zelda in Eugene. However, Bob in Florida gets credit for the sale.
There are some benefits to this flexibility to swap products with other merchants. It saves on shipping time and costs, which is good for Bob and his customer. But what if the product in the California warehouse is actually a knockoff another merchant is selling under the same SKU? When Zelda opens the box and finds she’s gotten a lower quality item, she will not be happy. The bad rating from this incident will go to Bob, not the person selling the inferior product. That can damage Bob’s seller reputation, even though he didn’t market substandard goods under false pretenses. Mistakes like this have happened to more than one seller.
In an ecosystem the size of Amazon FBA, personal attention is hard to come by. The flip side of the company’s huge logistics machine is mistakes that can ruin your company’s reputation. Is this a risk you are willing to take?
Is Amazon FBA worth it in 2020 and beyond?
There’s no question that Fulfillment by Amazon can help your products win the buy box. An Amazon FBA business is still worth it in 2020. However, you have to consider the cost of long-term storage fees, problems with customer support, and the chances that your products could be mishandled at the fulfillment center. Fortunately, an Amazon seller has more options beyond FBA now.
Seller-Fulfilled Prime lets you get the Prime sticker for a product you sell when you meet Amazon’s shipping standards with a third-party fulfillment center. An eCommerce fulfillment center is more likely to take care of your products using your high standards. You will be a valued customer at your 3PL, rather than just another Amazon seller in the company’s vast warehouse network.
Red Stag Fulfillment can help you qualify for Seller-Fulfilled Prime. We process orders quickly, with a high level of accuracy that meets Amazon’s standards. At Red Stag, we also handle returns and treat your products as if they were our own during every step of the process. We want to be your partner for successful selling on Amazon. Give us a call to find out how.