Retailers of all shapes and sizes have been reading our recent articles on the benefits of the Fulfillment by Amazon (FBA) and Seller Fulfilled Prime (SFP) programs, and have been asking us the all important question: when is it more profitable to switch from FBA to SFP.
The answer – which has success-defining potential – changes from business to business. It really depends on what you are selling and your margins, as well as your operations and fulfillment capabilities.
To help you find the answer we’ve interviewed several of our customers that use either FBA or SFP, and discussed with them their reasons for choosing one over the other, as well as how they operate their warehouses. Their answers have helped us develop a couple of scenarios that cover different industries, will help you determine which program would work best for your business, and whether making the step up from FBA to SFP is worth your while.
But let’s first go through a couple of assumptions and highlight things that should be considered when evaluating your options. Remember, these are fictitious examples that may not fit your industry exactly, but the scenarios will be relevant.
- You are a retailer fulfilling a minimum 200 orders every 90 days – this is the minimum fulfillment requirement for SFP.
- You are able to fulfill and ship orders same day, and ideally have a warehouse team to support you in these efforts..
- You sell on multiple sales channels – for example, you have a physical store, sell through your website, or on other channels such as eBay and Walmart.
- In our examples we use a $2-4 fulfillment cost that is based on interviews from our current customers. This number is a good starting point when trying to estimate your fulfillment costs. If you don’t know what your fulfillment costs are, this is a great resource to help you find out.
- Tax laws! The first big consideration that’s often overlooked when becoming part of FBA is state taxes. For example, if you ship inventory to one of Amazon’s warehouses in Montana, you’ve now established Tax Nexus in The Treasure State and are responsible for the subsequent tax filing. Amazon has Distribution Centers all over the country and after a year in business you may end up with tax liabilities in states across all across the US (+1 for SFP).
- Margins, margins, margins. With any 3pl (Amazon included) you must take your margins into consideration, especially when you have to pay for storage fees and possible low turnover penalties. However, with merchant fulfillment, large margins are just as important because you’ll be paying for two-day shipping out of your bottom line. .
- Opportunity Cost. If you’re only selling through Amazon and nothing else, (including your own website) FBA is a scalable and cost effective fulfillment partner that may prove to be cheaper than SFP. . For retailers selling on multiple sales channels, the benefits of not having to manage multiple pools of inventory - FBA inventory levels and inventory levels for your other channels - make the investment in FBA not worth it until you’re at a high sales volume (a tie for SFP and FBA).
- Storage. If your inventory moves slow - six months turnover then you should consider another option other than FBA, as this program will charge you storage fees and even penalties that will quickly eat into your margins (+1 for SFP).
- Inbound shipping (to Amazon). You’ll need to pay to ship your products to Amazon’s fulfillment warehouses. This is variable based on your products, but for this calculation we will use a generous $1.50 per unit shipped (assuming you are shipping in bulk).
- Outbound Shipping. With FBA you won’t have to pay for the outbound shipping, but with SFP you will. And this soon becomes pricey since all shipping is two-day. One way to combat this cost and not have it eat away at your margins too drastically is to limit which of your goods are Prime-eligible based on weight and/or the shipping distance to buyer. Example, if you are shipping your goods out of New York you can restrict which goods are Prime-eligible based on the availability of UPS 2-day ground shipping to the buyers location. This will save you a lot of money in shipping.
- Multi-Channel Fulfillment with FBA. For multi-channel retailers with heavy inventory investments in FBA, all is not lost. For a small fee, Amazon will ship FBA inventory to your customers on other channels. Fulfillment in this method will be more expensive than traditional FBA fulfillment but may be a scalable short term solution for some multi-channel retailers. To do this effectively, software that can route orders to FBA and pull back tracking numbers to automatically feed into the sales channel of the order’s origin is a must. Scalability is all about automation.
- The buy box! As an Amazon seller you know how important it is to get the ‘buy box’ for your sales volume and with merchant fulfilled Prime you have the opportunity to get it, just like every other FBA seller.
You really shouldn’t go into this exercise thinking Seller Fulfilled Prime will be saving you money, because in all honesty that is not always the case. Amazon’s 3pl service will more often then not be less expensive than fulfilling yourself, solely due to the fact that you have to pay for shipping. However, if you’re a business with multiple warehouses throughout the country or have designated which goods you want to be Prime based on shipping distance to the buyer, then this option is still worth considering. The real benefit of merchant fulfillment is having all of your inventory in one controlled environment that is accessible at any time. This is a major benefit for those that sell on multiple sales channels like Walmart, Newegg, Jet.com, your own website, and, of course, your brick and mortar store.
Still with me? Great! Let’s dive into a few scenarios that will help you understand when it’s worth making the move from FBA to SFP. And if at any point you want to run a test on your own business, I have created an FBA vs SFP cost calculator for you here. Thank me later.
Cost of Merchant Fulfilled Prime compared to Amazon Fufillment
Scenario 1: Private Labeled Products
In our first example you are a baseball retailer based in Portland, Oregon, specializing in custom baseball bats. Your main sales channels are Amazon (which accounts for 60% of your orders) and your own website. Your business has been growing year over year and you’ve now decided to open a warehouse to continue scaling your business.
You currently send your best sellers to Amazon for FBA, but that limits what you are able to sell through your website and possibly other new sales channels like eBay. But now with the addition of your brand new operational warehouse, it’s worth looking at the options available to you.
|Box width (inches)||31.8|
|Box height (inches)||3.2|
|Box depth (inches)||3|
|Shipping (two day)||$12.40|
Your Business Info
Your Fulfillment Cost (per order): $4
|Pick and Pack||$4.09|
|Weight Handling||Included in net fulfillment cost||$1.78|
|Net fulfillment cost||$4.00||$7.51|
|Total Fulfillment Cost||$16.40||$7.51|
|Total Amazon Cost||$37.40||$28.51|
And the winner is… FBA
However this could quickly change! Without software that allows for Multi-Channel Fulfillment with FBA, you’re now operationally responsible to manage two sets of inventory to ensure continued sales on all channels. Worst case scenario here is that all your inventory gets trapped in FBA, closing down sales on other channels which don’t come with Amazon’s heavy Referral Fees. Additionally, if your inventory takes longer than six months to fulfill then it’s also worth considering another option.
Storage and penalty fees
According to Amazon you will be charged $11.25 per cubic foot for items that have been stored for longer than six months and $22.50 for 12 months or longer. So let’s go back to our baseball merchant example again, but this time taking into account storage penalties.
One of your custom bats measures 31.8” x 3.2” x 3” and weighs 1.8 pounds. To make things simple we are going to say five of these bats is equivalent to one cubic foot.
Storage and penalties
|Duration||Fees Accrued||New Net Profit|
|6 month Penalty||$11.25||$34.40|
Suddenly we can see that the merchant fulfilled option may be the more efficient choice. When deciding between FBA and self-fulfillment, you must take your inventory turnover into consideration.
Additional thought: You could also consider increasing the retail price to offset the shipping expenses when fulfilling yourself. You will still receive the “Prime” logo and all the Prime seller benefits.
Scenario 2: Apparel
Leaving baseball bats back in Portland, you’re now an apparel company based in California. You sell a very popular line of women’s yoga pants and athleisure apparel through your website, as well as Amazon, eBay, Walmart, and have now started considering opening your own physical store. You have a 10,000 sq. ft. warehouse that facilitates inventory across all these channels. So which is the best option for you?
|Box width (inches)||10.8|
|Box height (inches)||7.9|
|Box depth (inches)||1.7|
|Shipping (two day)||$6.95|
Your Business Info
Your Fulfillment Cost (per order): $2
|Pick and Pack||$1.06|
|Weight Handling||Included in net fulfillment cost||$0.82|
|Net fulfillment cost||$2.00||$4.66|
|Total Fulfillment Cost||$8.95||$4.66|
|Total Amazon Cost||$14.95||$10.66|
*Fulfillment cost was reduced to $2 due to the size and weight of the product.
And the winner is… Both. Why?
The retailer could realistically go with SFP or Amazon’s FBA/multi channel fulfillment. Despite FBA orders being cheaper to fulfill than their SFP counterpart, your highest margin sales are going to be those on other sales channels. The added savings on FBA fulfillment to SFP will be recouped by better inventory control and returns management. A huge drawback to Amazon’s all encompassing fulfillment is their return leniency - they’ll accept almost any return (without checking whether or not that’s the right product) while providing zero transparency into which units of inventory were returned from which customers. This makes it impossible for retailers to push back against return abuse and turns into a costly headache.
In this scenario, especially considering the retailer is considering opening a physical location, we would recommend fulfilled by merchant due to the number of sales channels and peripheral costs associated with FBA. The worst outcome for a multi-channel retailer is to have their inventory tied to a low-margin sales channel, no longer able to take orders on a website or other higher margin channels. In this scenario the retailer should strongly consider omni-channel software to manage their operations, including Amazon.
Scenario 3: Expensive Goods
Let’s look at our final example, and you find yourself a computer and electronics retailer. Right now you sell only on marketplaces like Amazon and Newegg, with Amazon making up 52% of your sales volume. It’s back to the important question – FBA vs SFP: which is the best choice for you?
|Box width (inches)||19.6|
|Box height (inches)||12.1|
|Box depth (inches)||2.5|
|Shipping (two day)||$42.35|
Your Business Info Your Fulfillment Cost (per order): $4
|Pick and Pack||$4.09|
|Weight Handling||Included in net fulfillment cost||$3.48|
|Net fulfillment cost||$4.00||$9.34|
|Total Fulfillment Cost||$46.35||$9.34|
|Total Amazon Cost||$128.85||$91.84|
However, while FBA wins on paper, there are a couple of things a retailer should consider when it comes to electronics – especially computers – and that’s Amazon’s notoriously lenient return policy and fraud. When it comes to Amazon fulfilling your orders, a perk in some cases is that they also handle your customer service and returns. Now this can be a great thing for small businesses that sell less fragile goods, but when it comes to electronics, return fraud is a well documented issue.
So should this stop you from selling on Amazon? Of course not! But you need to be aware of all possible outcomes.
Want all this information in one place?Download eBook In conclusion, if you are considering stepping up from Amazon’s fulfillment services (FBA) to merchant fulfilled (SFP) you must take the non-quantifiable information into consideration, because on the surface merchant fulfilled is not typically a cost saving program. It’s the optimization of your operations and ability to fulfill orders at scale that will out outweigh the savings in using another fulfillment house.
- If you are a multi-channel retailer selling on more than just Amazon you need to consider your inventory control.
- If you sell products that tend to stay on the shelves for a while you must consider your storage and penalty fees. Especially now that Amazon is raising their rates in October this year – see their updated storage rates.
- If you sell expensive and fragile items, Amazon’s provided customer service may not be the best option for you.
- TAXES! This one gets overlooked a lot and it can be the absolute breaking point for a business. If you send inventory to an FBA warehouse in another state, you then need to pay taxes to that state. This tax headache alone keeps some businesses from touching FBA at all.
- If you want to test out some scenarios that fit your business better, use our custom SFP vs FBA cost calculator here.
And if you have any questions about what I’ve talked about today, or would like to know which option is best for your business, contact us and we can help you!