What Is Amazon FBA and How Does It Work?

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The majority of people are very familiar with the fact that Amazon is a giant in the online retail space. It’s also one of the most advanced fulfillment networks in existence.

As of right now, the platform hosts over 300 million active customer accounts all around the world

And with the addition of incredibly useful business tools to the platform, Amazon deserves this impressive reputation.

For example, you can employ an Amazon VA to complete tasks on your behalf, or can utilize Amazon FBA to outsource order fulfillment to the Amazon platform. 

Amazon FBA is a simple yet innately powerful process that works to directly stimulate the growth of online businesses – without the need to invest thousands in staff and storage facilities yourself.

Instead, products are stored in an Amazon fulfillment center. These are then picked, packed, and shipped to customers. 

The downside is that this process can be a bit confusing as there are so many components to it. Fortunately, we’ve narrowed all of the relevant information down for you in this article. 

What is Amazon FBA?

The abbreviation FBA stands for Fulfillment By Amazon

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This is a service that is provided by Amazon as a way for third-party sellers to automate order fulfillment and shipping services. In layman's terms, it works as follows: sellers sell products, and Amazon ships them.

The sellers that are enrolled in Amazon FBA can leave all of the shipping processes to Amazon themselves. This includes anything from refunds and returns, picking and packing, and also product warehousing in one of Amazon’s many warehouses.

How does it work?

Amazon FBA requires you to use your normal Amazon selling account but then follow a few additional steps to add these products to the FBA section.

What Is Amazon FBA and How Does It Work

In just a few small clicks you can cost-effectively expand your business, under the guidance of Amazon.

The way this program works is relatively simple: a seller will send their products directly to Amazon. The company will process orders as they happen and will store everything in a warehouse ready for when you make sales.

As a seller, your job is to make sure that your products are always stocked on Amazon and to keep track of the sales that you make.

However, you do have to pay Amazon fees for this service, of course. But for this competitive price, you will get the following things included:

  • All shipping and fulfillment costs
  • 24/7 on-hand customer service support
  • Significant savings on postage
  • Access to one of the world’s biggest and best fulfillment programs

What you must do

There are a couple of tasks that you must complete if you choose to use this program. Specifically, you must keep on top of the following things:

  • Selecting your products: While Amazon will deal with the complex parts of this process, you will still need to do your research about the things you can sell.
  • Keeping inventory up to date: Amazon will automatically inform you when your stock levels are low. However, it’s your responsibility to ensure stocks are replenished when necessary.
  • Creating listings and marketing products effectively: As you know, Amazon is a huge marketplace. It’s important that you write effective product descriptions and titles and effectively market what you sell so that customers can actively find your products.

The costs of FBA

One of the best parts about Amazon FBA is that although it will cost you money to use, it won’t drain your bank account as long as you are seeing consistent sales.

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However, you will have to pay fulfillment and storage fees with this Amazon FBA program. So it’s best to keep in mind that the bigger the inventory that you have stored, the more money you will pay out for these smaller costs!

Plus, if your items are stored in an Amazon fulfillment center for over 180 days, the fees associated with FBA will automatically go up

This is an excellent incentive to force you to keep motivating other people to purchase your products and keep all sales actively moving.

There are different costs involved in Amazon FBA and there are many factors related to pricing that must be considered. But Amazon is great at providing assistance and information to make sure its seller policies are as transparent as possible.

The impact of Amazon FBA

Amazon FBA has become so streamlined that many customers will not realize they are purchasing from a third-party seller using Amazon FBA instead of directly from Amazon itself.

This is because there is little to no difference between purchasing from a seller using Amazon FBA and directly from Amazon

In essence, they both have the same return and refund policies, offer the same type of delivery options, and provide the same level of service – so it’s pretty hard to tell them apart.

As a result, this service can prove to be extremely profitable for an Amazon seller. Not only does it save on postage costs but it will also save a lot of time packing and fulfilling orders. 

By not having to carry out as many time-consuming tasks, sellers will have a little bit more free time.

But like any other type of business strategy, it will take time to officially launch a product and see consistent sales while using an Amazon FBA service.

How do you get paid?

When your seller account has been settled and you have a positive balance, Amazon will directly transfer the funds to your bank account using an electronic funds transfer or an Automated Clearing House (ACH)

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After Amazon initiates a payment, it can take anywhere up to five business days for the funds to reach your bank account.

Before it’s transferred to you, Amazon will take money out to cover any outstanding fees that you may owe to them.

Main Pros and Cons

Looking at a pros and cons list is a great way to decide whether Amazon FBA is the best solution for you or not.

Pros

  • Quick Delivery: FBA products will automatically get the prime badge. This means they are eligible for free Prime shipping and shipping times (to the customer). 
  • Discounted Shipping Rates: Amazon is a global shipping company which means you’re going to spend less on shipping when using the FBA platform. Despite paying fees for this service, you are saving money in the long run in place of managing your shipping costs.
  • Omnichannel Fulfillment: FBA is great for selling products on Amazon. It’s also an excellent service as it provides you with access to a variety of multi-channel fulfillment solutions such as eBay and BigCommerce while still having Amazon fulfill your orders.
  • Customer Service Management: You have a full customer service team behind you when you use the FBA service. Plus, you can route all of your services through a single platform for easy management.
  • Increased Storage Space: The amount of inventory you can store without the use of a warehouse is very limited. You’d also have to factor in moving and managing your inventory on such a large scale, which will often prove to be very difficult. By using the FBA program, you’ll have access to practically unlimited storage space as Amazon has warehouses dotted all over the place. All of these warehouses have a significant amount of storage.

Cons

  • Long-Term Storage Fees: It’s common knowledge that Amazon hates to sit on a load of inventory. As a result, you will pay more money for the items that sit in storage for longer periods. They aren’t going to mark the end of your finances but must be factored into your current budget to guarantee that FBA aligns with your business goals.
  • FBA Fee Payment: You cannot get away from the fact that you owe Amazon a fee for the work they do for you. Amazon will make sure to deduct all fees that are owed to the company before they make a payment to you. If you don’t have the balance to cover these fees, you will need to cover the remaining balance yourself.
  • Overall Cost: Money is everything, especially for those looking to get their start in the business world. FBA is handy but it costs money, like any other business, which is something many sellers might not have to hand. The service isn’t ideal for low-cost items due to the way that overall fees are calculated so you must be selective with the products you choose to sell to see whether it’s a profitable business move.

Summary

Amazon FBA is a useful tool if you are looking to scale your business and reach a larger number of customers.

Ultimately, the way Amazon FBA works for you depends on your business objectives and the type and amount of products that you want to sell. 

Sure, for many Amazon sellers, it’s a simple way of outsourcing many tasks associated with running an eCommerce business. Yet you must take precautions to ensure that the benefits of the service completely justify the additional costs.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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