FBA vs FBM: How Sellers Can Navigate Fulfillment Channels to Maximize Profits

As an Amazon seller, one of the most crucial business decisions you'll make is choosing between fulfilling your products through Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM). This choice can have a significant impact on your profitability, customer satisfaction, and overall success selling on Amazon. However, there is no one-size-fits-all answer - the optimal fulfillment strategy will depend on the unique needs and characteristics of your business. At the recent Amazon Accelerate 2024 conference, we had the opportunity to sit down with a panel of experienced Amazonians and sellers to unpack the key factors to consider when navigating this pivotal fulfillment decision.

In this blog, we'll explore the product characteristics best suited for FBA versus FBM, provide a roadmap for getting started with Fulfillment by Merchant, and outline the onboarding process for Fulfillment by Amazon. We'll also delve into the benefits of a hybrid FBA/FBM approach and share eight essential tools to help you analyze your optimal fulfillment mix. Finally, we'll round out the discussion with proven strategies for operating efficiently and maximizing profitability, no matter which fulfillment method you choose.

Let’s dive in.

Product fit for FBA and FBM

Understanding which products are best suited for FBA or FBM is the crucial first step in optimizing your fulfillment strategy. Here are some key considerations to keep in mind:

FBA is ideal for:

• Products with high sales velocity (15-20 units per month or more)

• Seasonal items with high customer demand for fast delivery

• Products that don't require refrigeration

• Products that can ship in a single box (not multi-piece)

• Smaller products that don’t take up a large amount of shelf space

FBM is better for:

• Items that ship in multiple boxes but are one ASIN

• Heavy or bulky items (over 50 pounds)

• Products with lower sales velocity

• Lower-cost items that don't meet the free shipping threshold of $25 for non-Prime customers

• Products you're still testing out and unsure of their sales velocity

• Back-up products in case your FBA inventory runs out

• Products requiring refrigeration

Getting Started with Fulfillment by Merchant

For sellers looking to expand into the FBM model or transition from FBA, there are several key factors to address upfront to ensure a smooth and profitable operation. Let's take a closer look at the core operational elements you'll need to put in place.

Warehousing and Inventory Management

One of the primary considerations is where you'll be storing your inventory and how you'll manage it. If you don't already have a dedicated warehouse or fulfillment space, you'll need to source an appropriate facility that can accommodate your product sizes and volumes. Factors like square footage, racking systems, and environmental controls (for temperature-sensitive items) will all come into play.

You'll also need an robust inventory management processes to track stock levels, forecast replenishment, and prevent stockouts. Tools like the Restock Inventory dashboard in Seller Central can help, but you may also want to invest in a dedicated inventory management system like Veeqo.

Staffing and Fulfillment Workflows

Without the Amazon workforce handling order picking, packing, and shipping, you'll need to build out your own team to manage these functions. This may involve hiring warehouse associates, packing specialists, and shipping coordinators.

Carefully mapping out your fulfillment workflows is crucial - from receiving inventory to packaging orders for shipment. Streamlining these processes through automation, task specialization, and performance tracking can drive major efficiency gains.

Shipping and Logistics

As an FBM seller, you'll be responsible for arranging carrier pickups, printing shipping labels, and ensuring on-time delivery to customers. Integrating with Veeqo can simplify this, providing the discounted shipping rates from carriers and protecting your performance metrics.

You'll also need to determine your shipping methods, transit times, and return policies to remain competitive with FBA Prime offers. Tools like Shipping Settings Automation can help optimize your promised delivery dates.

Setting Accurate Delivery Dates

The delivery date customers see when browsing products can determine if they purchase it or not.

Shorter delivery dates make your offers more appealing and typically lead to more sales, however sellers shipping in the US on average overestimate their delivery dates by 66%, often resulting in not having their offer featured, or customers abandoning their purchase.

Amazon pro tip: Amazon can help you set accurate delivery dates and provide your account protection from late shipments and late deliveries. Sellers who enable Shipping Settings Automation and Automated Handling Time features get over 10% more sales on average.

Managing Returns and Refunds

In addition to handling the forward logistics of order fulfillment, FBM sellers must also have a robust system in place for managing product returns and issuing refunds. This includes:

• Establishing clear return policies and communicating them prominently on your product pages.

• Providing customers with easy-to-use return labels and instructions.

• Promptly processing returned items and issuing refunds within Amazon's required timeline.

• Tracking return rates and reasons to identify any problem products or processes.

Financial Considerations

Beyond the operational setup, FBM sellers need to carefully model their costs and profitability. This includes accounting for warehouse rent, labor, packaging materials, carrier fees, and any other expenses beyond just the Amazon referral fees.

The FBA Revenue Calculator and SKU Economics reporting can help you accurately assess the financial impact of transitioning to FBM. And tools like Veeqo Profit Analyzer can provide holistic visibility across all your sales channels.

Starting an FBM operation requires upfront investment, but by planning meticulously and leveraging the right tools, sellers can build a fulfillment infrastructure that delivers an exceptional customer experience and strong profitability.

Onboarding to Fulfillment by Amazon

Just as the FBM model requires careful planning, the FBA onboarding process also demands meticulous preparation to unlock its full benefits. From product preparation to inventory planning and beyond, here's what you need to know.

Product Preparation

Before sending any inventory to Amazon's fulfillment centers, you'll need to ensure your products are properly prepared according to their guidelines. This may involve applying specific barcodes, packaging items in a certain way, or even pre-labeling units. Failing to adhere to these requirements can result in your shipments being delayed or even refused. Carefully reviewing the FBA Product Preparation instructions and testing your processes ahead of time is crucial to avoid any hiccups.

Inventory Planning

One of the biggest advantages of FBA is that Amazon handles the warehousing and fulfillment for you. However, you're still responsible for replenishing your stock and maintaining the right levels to meet customer demand.

Tools like the Restock Inventory dashboard and the Inventory Performance Index (IPI) metric are invaluable for forecasting needs, tracking stock health, and optimizing your inventory levels. Carefully monitoring these will help you avoid stockouts or excessive storage fees.

Understanding FBA Fees

The FBA Revenue Calculator is a must-use resource to model the various fees associated with the FBA program. This includes fulfillment fees based on product dimensions and weight, as well as storage fees that fluctuate seasonally.

Factoring these fees into your product pricing and cost of goods sold is essential for maintaining profitability. And don't forget to account for any prep work or inbound shipping costs you'll incur before your inventory reaches Amazon's facilities.

Customer Service and Returns

While Amazon handles the physical fulfillment of orders, you as the seller are still responsible for providing customer service and managing returns. Familiarizing yourself with Amazon's policies, response time requirements, and returns processing workflows is key.

Leveraging Amazon's suite of seller tools, like the Customer Service Dashboard and Returns Center, can streamline these post-purchase activities and maintain strong customer satisfaction metrics.

Onboarding to FBA does require an upfront investment of time and resources. But by meticulously planning your product prep, inventory management, fee structure, and customer service, sellers can unlock the powerful benefits of the FBA program and position their business for long-term success on Amazon.

The Beauty of a Hybrid FBA and FBM Approach

It's important to note that the decision between FBA and FBM doesn't have to be an "either/or" scenario. Many of the most successful Amazon sellers utilize a hybrid model, strategically leveraging both fulfillment methods to maximize profits. Let's explore the key advantages of this flexible approach.

As Ben from eChapps shared, his business is primarily FBA (around 96% of sales), but they still find value in maintaining an FBM component as well. Some of the key benefits of a hybrid approach include:

• Faster Time to Market:

For products that are frequently out of stock on FBA, having an FBM offer can allow you to win the featured offer when new inventory arrives, without having to wait for Amazon's fulfillment centers.

• Secondary Offer for Non-Prime Customers:

While the majority of Amazon shoppers have Prime memberships, there is still a sizable segment that does not. Maintaining a secondary FBM offer allows you to capture those non-Prime customers by providing a free shipping option that may be cheaper than the Prime offer.

• Testing New Products:

Using FBM to launch and test new products can be less risky than sending large quantities to FBA, especially if you're unsure of the sales velocity. You can monitor performance and gradually ramp up FBA quantities as demand is proven.

• Maximizing the Product Mix:

Different products may be more suitable for one fulfillment method over the other. Leveraging both allows you to optimize your overall portfolio and take advantage of the unique benefits that each model provides.

By thoughtfully combining FBA and FBM, sellers can create a resilient, diversified fulfillment strategy that protects them from supply chain disruptions, inventory challenges, and changing marketplace dynamics. It's a flexible approach that deserves consideration for most Amazon businesses.

Veeqo: A Powerful Tool for Shipping, Inventory, and Profit Analysis

For sellers looking to navigate the nuances of FBA and FBM, Veeqo offers a comprehensive suite of tools to streamline operations and maximize profitability. And guess what? We’re completely free to use.

Shipping and order management:

Veeqo's shipping software allows ecommerce sellers to access the lowest rates*, up to 5% back on shipping spend, and protection for Amazon account metrics like on-time delivery rate.

*Access the lowest commercially available rates, based on our pre-negotiated pricing from UPS, USPS, FedEx, and DHL and up to 5% back with Veeqo Credits.

Inventory Management:

Veeqo's advanced inventory tracking and forecasting features help sellers maintain the optimal stock levels for both FBA and FBM. Get a clear view of stock levels for every product SKU at all your FBA and self-fulfilled locations. Stay on top of inventory, and easily see when to send more to Amazon or order more to your own warehouse – so you never stockout.

Profit Insights:

Veeqo's Profit Analyzer tool provides granular insights into the profitability of all your sales channels - not just Amazon. It accounts for all relevant fees and costs across both FBA and FBM. This empowers you to make data-driven decisions about your optimal fulfillment mix.

By integrating Veeqo into your Amazon operations, you can streamline workflows, reduce costs, and make more informed strategic choices about your fulfillment strategy. It's a powerful ally in navigating the complexities of the FBA versus FBM decision.

7 More Tools to Help Analyze the Best Fulfillment Method for Your Business

Choosing the right fulfillment strategy isn't a one-time decision - it requires ongoing analysis. Here are eight essential tools to help you make the most informed choices for your product portfolio:

1. FBA Revenue Calculator:

This calculator provided by Amazon within Seller Central allows you to input details about your products, such as dimensions, weight, and price. It will then show you the estimated FBA fees you'll pay, including fulfillment, storage, and other ancillary costs. This helps you determine the true profitability of an FBA model for specific products.

2. FBA Opportunities Dashboard:

Located in Seller Central, this dashboard identifies products currently being fulfilled by the merchant (FBM) that could potentially benefit from the Prime badge and increased sales if fulfilled by Amazon (FBA). It shows the estimated sales lift, current FBM offer, and whether the product qualifies for the New Selection promotion when transitioning to FBA.

3. Shipping Settings Automation (SSA) and Automated Handling Time (AHT):

These Amazon tools for FBM sellers help set more accurate delivery dates, which are typically shorter and more appealing to customer, resulting in more sales, which is crucial for competing with the fast shipping of FBA Prime offers. SSA sets accurate Transit Times based on the customer's location, your closest warehouse to the customer and, up-to-date transit times for your preferred shipping services. AHT sets accurate Handling Times based on how long you have historically taken to ship each SKU, and grants you Late Shipment Rate (LSR) protection.

4. Amazon Buy Shipping:

By using Amazon's discounted shipping rates in Veeqo, FBM sellers can protect their performance metrics against delivery-related claims and protect their On-time delivery rate (OTDR) when used in combination with SSA and AHT. This helps maintain the strong seller metrics needed to maintain your Amazon account.

5. Fulfillment Insight Dashboard:

This analytics tool in Seller Central provides FBM sellers with data on whether they are setting unappealing delivery dates by excessively over-promising delivery dates, also known as a "Promise Gap". Keeping this "promise gap" as small as possible is crucial for conversion rates when competing with fast, reliable FBA Prime shipping.

6. SKU Economics:

A robust reporting feature in Seller Central, SKU Economics gives you a detailed view of the true profitability of each product, factoring in advertising costs, return expenses, referral fees, and other fees beyond just the product cost and sales price.

7. Inventory Performance Index (IPI):

Your "FBA credit score," the IPI is a metric that Amazon uses to evaluate the health of your inventory management for FBA. Maintaining a high IPI score is necessary to qualify for FBA promotions and programs that can drive additional sales.

How to Operate Efficiently to Maximize Profitability

Whether you're primarily an FBA or FBM seller, there are strategies you can implement to improve efficiency and boost your bottom line. Let's unpack some best practices for both fulfillment models, as well as universal tips for all Amazon sellers.

FBA Sellers:

• Closely monitor your IPI score and Restock Inventory dashboard to maintain the right amount of stock.

• Regularly review your FBA inventory storage reports to identify and remove slow-moving or unprofitable inventory.

• Use the SKU Economics tool to identify your true margins and make pricing adjustments accordingly.

• Continuously evaluate your product mix and seasonality to optimize what you send to FBA.

FBM Sellers:

• Automate your shipping processes with tools like Shipping Settings Automation, Automated Handling Time, and Amazon Buy Shipping to improve performance metrics.

• Automate order processing and shipping workflows using tools like Veeqo to save time and reduce errors.

• Measure your per-SKU labor costs to ensure you're managing your workforce and stock effectively. Ben explains: "We've measured how long it takes us to process each one of our SKUs individually... That way we know our exact labor costs per SKU and it also tells us how many hours of inventory we have on hand at the warehouse."

• Leverage repricing strategies to stay competitive against FBA Prime offers in your product categories.

• Invest in a warehouse management software like Veeqo to streamline inventory tracking, picking, and packing processes.

All sellers:

• Keep on top of your product pricing. Ben Chappell shares: "We are constantly adjusting our pricing. We're almost day trading with our products."

• Optimize your product listings by A/B testing titles, images, descriptions, and keywords to drive higher conversion rates.

• Closely monitor your advertising costs and ROAS (return on ad spend) to optimize your PPC campaigns.

• Build a diversified product portfolio that includes both high-velocity and longer-tail items to balance risk and capitalize on different market trends.

• Establish strong supplier relationships to secure better wholesale pricing and ensure reliable product sourcing.

Conclusion

Navigating between FBA and FBM requires ongoing analysis and adaptation. Ross Miller, Senior Account Executive at Veeqo summarizes it well: "Really, what we see from some of our most successful sellers on Amazon, it's just this constant evaluation or commitment to evaluation, whether that be either FBA or FBM, and just exploration between the two."

By understanding product fit, utilizing the right tools for analysis, and implementing efficient operational strategies, you can optimize your fulfillment mix to maximize profitability. Remember to reassess your strategy regularly as market conditions change, and don't be afraid to adjust your approach as needed. With the right balance of FBA and FBM, you can create a robust and profitable selling strategy on Amazon.

Take your Amazon business to new heights by signing up for Veeqo today. Veeqo's free suite of shipping, inventory, and reporting tools will allow you to streamline your operations, reduce costs, and make more informed strategic decisions about your fulfillment mix. Visit veeqo.com to get started.