What is Amazon FBA?
An important lesson I learned in sales is to never assume that your customer/audience knows what you’re talking about! A few people around me asked what is Amazon FBA, so I decided to explain it in simple terms here.
FBA stands for Fulfillment By Amazon
Amazon’s preferred business model for sellers
Let’s assume you’re manufacturing your products in China. When your products are produced and arrive in the U.S. you would need a place to store them. The first thing the FBA service does for you is to store you inventory throughout the multiple warehouses that Amazon has in the entire United States (or country of your marketplace).
Then when a customer places an order, Amazon will pick, pack, and ship your product to that person.
As a seller, you’re responsible for putting up a nice listing with pictures and a description of your offering so that customers know what they’re buying. As soon as the customer hits the Add to Cart or Buy Now button and makes a purchase, that’s when the FBA service takes effect.
If there’s a problem with the product and the customer wants to return it, if you’re not using the FBA model you would need to handle that yourself, manage the return, the refund, etc.
You would need to inspect the return and determine if it’s viable to be sold to another customer of disposed of. Believe me, these are things you do not want to be managing daily, or at all. That would be a MAJOR pain in the ass!
I can’t imagine doing this for even one single day with my current Amazon business. The volume of products that is moving around is astronomical. Not to mention that Amazon even handles your customer service. If there’s shipments delays, lost packages, wrong tracking information, Amazon handles this directly with the customer. If customers also have questions they might contact you directly, the seller (which they often do), but for the reasons I just mentioned they would reach out to the customer service folks.
How much does the Amazon FBA service cost?
Amazon will charge you an FBA fee dependant on the cubic volume of your product and its weight. It makes sense that if they are to handle storage and shipping, that the fee should be in proportion to that. Small and light is less expensive than large and heavy.
Amazon will also charge you 15% of the selling price as a commission, which they call a referral fee.
If you’re selling a baby pillow for $25 for example, your FBA fees may look similar to this: $3.50 + $3.75 = $7.25
That is a big chunk of cash but remember, Amazon does the most of the work for you. If you’re sourcing your pillow for $4 and it costs you $2 to get it shipped, you’re left with $11.75 of profit per unit.
Once you land your inventory into Amazon, every unit that will be sold and handled by Amazon will give you over $11 in net profit per unit. 400 sales per month, that’s $4 700!
The power of FBA
FBA is an extremely powerful business model because it eliminates the overhead you would normally need to run a retail store. Imagine for a second having to micromanage every single unit through, orders, billing, shipping, returns, customer service…OMG! You’d need to hire 1 or more people full time for that. There goes more cash flow!
Here’s Amazon’s official version of the story for their service:
“Let Amazon pick, pack, and ship your orders