What Is Fulfillment by Amazon?

Fulfillment by Amazon could be the most powerful sales tool available to online sellers today. Unfortunately, a lot of people do not understand this solution or even know about.

The Short Second Life of Bree Tanner

Basically, Amazon owns and operates a network of giant warehouses it calls fulfillment centers. When you order something through Amazon and it comes to you in Amazon packaging, that item went through a fulfillment center. Merchants ship items to the fulfillment center, where it is stored. When an order is received, Amazon’s employees pull the item, pack the merchandise, and ship it to the customer.

What many people do not realize is that almost anybody can ship items to Fulfillment by Amazon (FBA), including used books. Amazon makes money on the deal by charging the seller fees for labeling, sorting, shipping, storage, etc.

I stumbled upon FBA by accident when researching drop shipping last year. Drop shipping is a form of online retail in which you market items through your website or eBay on behalf of a wholesaler. I found that it was a good way to lose money but that FBA was a great way to make money.

Amazon’s Money Machine

The business is profitable and growing; two million sellers now participate in the program, and they shipped around two billion items in 2014, Tech Crunch reported. FBA accounted for around 40% of Amazon’s business in 2014, according to The Wall Street Journal.

Amazon (NASDAQ: AMZN) is making a lot of money; its revenue reached $88.99 billion in December 2014, and many observers expect its revenue to exceed $100 billion by the end of 2015. That makes Amazon the fifth largest retailer in America in terms of revenue; its revenue is now larger than those of Target (NYSE: TGT), Walgreens (NASDAQ: WBA), and Home Depot (NYSE: HD).

ycharts_chart (49)

Amazon is making a lot of money through FBA and is growing; use of FBA grew by 65% in 2014. Amazon has built a potent money machine with FBA, and it wants you to participate in that money machine.

Amazon’s experiment with FBA has been so successful that eBay, Staples, and even Walmart have set up their own third-party selling programs. Walmart is even building its own fulfillment centers to compete with Amazon.

Why You Should Participate in FBA

The reason why you should participate in FBA is simple: it will give you access to a vast pool of customers without having to spend any money on marketing or advertising. The Motley Fool reported that Amazon had 244 million customers in May 2014 after adding 30 million new customers in 2013. Re/Code estimated that one Amazon program alone—Amazon Prime, which offers customers free shipping—may have between 30 and 40 million customers in the U.S. and another 40 to 50 million customers worldwide.

 

Celebrity Authors’ Secrets – The World’s Greatest Living Authors Reveal How They Sell Millions of Books by Stephanie Hale. $12.99 from Smashwords.com
Twelve of the world’s greatest living authors reveal their tips for writing a book that sells over a million copies in Celebrity Authors’ Secrets. A must-have guide – filled with publishing and book marketing info – for aspiring writers, authors, publishers, editors, writing coaches, creative writing tutors and anyone who loves books. Find out how to make your book stand out from the masses!

 

When you list an item on Amazon, you get access to all those customers. When you ship items through FBA, you put your merchandise one step closer to all of those customers.

More importantly, you can save yourself a lot of time and hassle with FBA. When you use the program, Amazon stores, pulls, packs, and ships the order for you. It also takes care of all the customer service, including the returns. Amazon will even label the items for just 20¢ apiece. That can save you a lot of time and storage costs.


Subscribe to The Prudent Speculator

It could also reduce your tax burden if you live in a state with an inventory tax, such as Colorado, because you are effectively shipping part of your inventory to another state with no such tax. You can also write any fees that you pay to Amazon off on your income tax.

Amazon will take a large cut of your profits (up to 40% with some items), so you will have to ship a large volume of items to FBA to make a profit. The nice part of FBA is that once an item is there, all you have to do is wait for Amazon to automatically deposit funds from selling it into your bank account.

A Lion Among Men

One drawback to FBA is that Amazon effectively holds money in escrow for about a month before releasing it. That means you will not have immediate access to the money you make through it. You cannot get a business debit card like you have with PayPal nor access to lines of credit.

Another time-saving feature with FBA is that it does your bookkeeping for you. Amazon subtracts the commission it charges from your final payment, which means you do not have to a pay a monthly fee. You will not get a big monthly bill like you might from eBay.

FBA is a much better solution for used book sellers because individual books and items worth less than $40 are effectively excluded from eBay’s answer to it: the Concierge Service. I might also note that the concierge is brand new, so there are sure to be bugs.

Make Amazon Your Brand

Something else to consider is that your merchandise will be shipped through state of the art of facilities that use the latest technology to move your merchandise. You will also attach your products to a name that people trust and like—Amazon.com. Your books will be for sale at what is now America’s “department store of choice.” Simply, you will be able to use Amazon’s brand to build your business.

My advice would be to stick with the stable and proven seller that is growing for now. eBay is currently in a state of transition because of its plans to spin PayPal off as a separate company. That means there could be major changes in eBay’s operations and a good possibility of an acquisition by Amazon’s Chinese rival, Alibaba Group (NYSE: BABA). One possibility is that eBay will scale back operations and shut down experiments like the concierge.

If you want to launch a large-scale online sales operation that generates large amounts of revenue, you will probably have to utilize FBA whether you want to or not. Those selling books with a strong mass market appeal such as best-selling fiction from the last 20 years and textbooks probably have no choice but to go through Amazon.

The final reason why you should seriously consider FBA is that it allows you to expand your reach and your business without expanding your physical operations. You can increase your inventory and your sales without renting or buying additional storage space and without hiring additional employees. Nor will you have to increase the time that you spend sorting, packing, and shipping books.

Leave a Comment

Your email address will not be published. Required fields are marked *