So you’re a B2B manufacturer who’s finally taking the plunge to sell your products on Amazon. That’s great! You’ve determined if you’re selling 1P vs 3P, got your product assortment figured out, and you’ve crafted your strategy to manage channel conflict. You’re all set to make it live and go, right?
Not so fast!
You still need to strategize how you’re going to handle (or outsource) order fulfillment. Fulfillment is a key part of a buyer’s expectations when they order on Amazon and one of the most important aspects of selling on Amazon. Buyers want their products in their hands quickly, efficiently, and affordably.
And that’s why Amazon is as much a logistics company as it is an Ecommerce marketplace. The company operates more than 175 fulfillment centers around the world, with more than two million square feet of space dedicated to managing the fulfillment function. In 2021, Amazon surpassed FedEx as the largest shipper in the U.S. and is poised to surpass UPS as Amazon starts to rely more on its own logistics network. Just over the past few years, Amazon has invested heavily in its logistics, which currently includes:
More than 50,000 delivery vehicles
Approximately 111 owned and leased planes
40 air hubs from which nearly 200 flights leave daily
What’s more, Amazon recently created a $1 billion investment fund to invest in “warehouse, supply chain, logistics and fulfillment technologies.” At least one investment expert expects Amazon’s logistics network will be worth more than $1 trillion in under 10 years.
Obviously, Amazon’s fulfillment capabilities are impressive to say the least. But it’s important to know that there’s not just one path. In fact, there are four options for how to handle fulfillment. And you don’t have to pick just one; you can opt to have a hybrid operation. We’ll take a look at each option so you can make the best decision for your business, but first it’s essential to understand one thing: There is a huge advantage to having your products be Prime eligible.
Why Your Business Needs to Be Prime Eligible
Amazon Prime is the absolute most successful loyalty program ever. The program, which offers free same- and one-day shipping on certain products and access to a number of other Amazon services, has more than 200 million subscribers worldwide. More than 150 million of them are in the U.S.
Amazon Prime members are a core demographic that businesses should attempt to cater to, because they both spend more money and shop Amazon more frequently. Amazon also offers Business Prime, a similar program for B2B companies that offers free delivery and other business tools. Just like with the main Prime program, Amazon Business Prime users are highly valued, converting at 3-4x higher rates than non-Prime buyers. It is therefore imperative for B2B firms to work to cater to this audience.
Option 1: Fulfilled by Amazon (FBA)
Whether you’re selling 1P or 3P, Fulfilled by Amazon (FBA) is the easiest way to have your products become Prime Eligible. (NOTE: If you’re not familiar with the differences between 1P and 3P selling on Amazon, read this article before continuing.)
FBA essentially comprises five different services:
Warehousing and storage
Picking and packing
These are all included for a single fee.
If you’re selling 1P, that means you have a traditional wholesale relationship with Amazon. It also means you’re shipping products to be stored in an Amazon warehouse, and Amazon will handle sales, fulfillment, and customer service for those products.
But if you’re selling under the 3P model, where you are in control of sales and fulfillment, you can also leverage Amazon’s logistics network by using FBA. In this model, FBA is similar to a consignment program, where you’re using Amazon as a 3rd party logistics and fulfillment partner.
FBA fees are entirely based on weight and dimensions of the products you’re selling. That means each product will likely have a different cost through FBA. Luckily, they provide a handy FBA calculator to figure out whether using the service is profitable.
The truth is that it’s often cheaper and easier to ship items through FBA. There is a ton of logistics work, human resources, and other costs that are required to fulfill orders. It’s not only about putting the product into a box and sending it out. You also have to consider the costs associated with having people who can manage the fulfillment process, address customer service issues, process returns, etc. The per-item costs of FBA are often much lower than this.
Option 2: Fulfilled by Merchant (FBM)
As the name suggests, this option allows B2B sellers to fulfill their own orders. That means fulfillment is entirely reliant on your own capabilities, infrastructure, and systems to ship orders from your warehouse to the customer. That said, it can be more difficult to have your products become Prime eligible, as there are strict guidelines and requirements you’ll need to follow around:
Inquiry response times
General customer service management
You can read more about Amazon’s FBM guidelines and requirements here.
The key to successfully using the FBM model is staying on top of your inventory—both what’s in your system and what’s listed in Amazon’s system. If you don’t, it’s entirely possible for someone to place an order on Amazon, only to find you’ve already sold those products though a different channels. One of the fastest ways to have your Amazon account shut down is to not have your inventory in Amazon’s system updated in real time, particularly during peak selling periods.
Luckily, this can be automated with Amazon’s Seller APIs, which enable you to integrate your order management and/or ERP systems with Amazon. In fact, many of the larger E-commerce platforms offer this as part of their features, so you may want to check and see if yours does (if you also are selling through your own E-commerce site). If you’re considering taking this route, it’s worthwhile to check with your platform provider to see what integrations they offer.
Now, you might be wondering: Why would anyone use FBM when Amazon can handle it much easier. And in some cases, you’d be absolutely right. However, FBA is great for light-weight products that easily fit into standard Amazon packaging. Selling larger, bulkier items can get expensive through FBA, though, and you might just be better off managing them yourself. That’s why it’s a good idea to run each of your products through the FBA profitability calculator we linked above.
Option 3: 3rd Party Logistics Warehouse
Another option is to contract with a 3rd party company that manages the fulfillment for you. There are a number of firms out there who operate warehouses and are specifically designed to provide FB support. And while most 3rd party companies aren’t Prime eligible, there are a few who are.
This is a great option for some sellers, as it removes the burden of managing the entire fulfillment process. It puts the most crucial fulfillment operations into the hands of an experienced specialist. This option is great for sellers who are not themselves set up to ship in small quantities, which is the case for many B2B manufacturers. Additionally, some 3rd party logistics firms also manage the customer service and returns aspect of fulfillment, which can be labor intensive and expensive to maintain.
Option 4: Traditional Distributors
The last option is to rely on your traditional distributors to fulfill your Amazon orders. In this model, your distributor handles the warehousing, picking and packing, and shipping aspects of fulfillment, while you handle the customer service aspects. This is a great option because you still retain control of your brand content on Amazon, but the actual selling account is owned and managed by the distributor.
Similarly, there are service companies out there where they purchase your products from you wholesale, then set up and manage the Amazon account while handling all fulfillment responsibilities. This can actually be your easiest path into Amazon, but it’s important to note that it’s often expensive and you may have to cede some control of the fulfillment process.
How to Choose the Right Fulfillment Model
As mentioned previously, you do not have to choose only one of the above options; you can choose different models based on each product’s individual fulfillment cost. For example, we have a client named Big Ass Fans who sells both B2C and B2B on Amazon. They have lines of fans that are “small” as well as industrial-sized fans with 12’ wingspans. They sell both types of products on Amazon, using FBA for smaller items and FBM for larger ones.
You, too, might have some products that work great and achieve excellent profitability when shipping through FBA, while also having larger products shipped through one of the other options. What’s more, FBM can also be a good backup to FBA. If your products stock out on Amazon, you can still take and fulfill orders on Amazon while using your own fulfillment infrastructure.
To decide which products to fulfill under each model, you need to look at fulfillment from three separate angles:
What are your product characteristics? Are they even able to be eligible for Prime? This will all depend on product velocity (i.e. how much you can expect to sell), price point, and bulkiness.
Are you ready/capable of handling fulfillment? Are you set up to ship individual products vs. shipping products in bulk? You need to be realistic about what you can do here.
Profitability: You need to compare shipping costs and profitability for each product under each fulfillment model. Look at wholesale revenue (1P) vs. retail revenue (3P), along with the cost of fulfilling orders under each.
How important is controlling the fulfillment experience to your business? Do you want to/have the capacity to manage customer service issues and returns?
One way to think about it is the anvil vs. circuit board analogy we like to use when working with clients on their fulfillment strategy. An anvil is a relatively inexpensive low volume/low price point product, but it’s extremely heavy and bulky. That makes them expensive to ship, particularly through FBA. Conversely, a small piece of electronics like a circuit board is light weight, easy and affordable to ship. They also command higher price points with a significantly higher profit margin. It’s far easier to sell circuit boards in volume, as they can be in high demand and easy to fulfill. Products like these are excellent candidates for FBA.
Need some help strategizing your Amazon fulfillment? Enceiba can help! Schedule a call with one of our Amazon specialists, and we can discuss what might be the best approach for your business.