Fellow Amazon seller, considering Fulfillment by Amazon (FBA) for your business?
As an experienced FBA expert with over 10 years in ecommerce, let me walk you through an in-depth guide on the key downsides of Amazon fulfillment.
I‘ll also provide insider tips to help you strategically leverage FBA while minimizing risks based on my extensive experience managing 7-figure Amazon brands.
Here‘s a quick overview of what I‘ll cover:
The 6 Major Pitfalls of FBA
- Prohibitively High Fees
- Loss of Branding Control
- Inventory Management Challenges
- Increased Return Rates
- Lack of Direct Customer Relationship
- Burdensome Sales Tax Compliance
Expert Solutions to Offset Each Disadvantage
- Adjust pricing strategies to account for fees
- Get creative with custom packaging and inserts
- Master inventory analytics and forecasting
- Optimize listings to reduce returns
- Leverage external channels to engage customers
- Automate sales tax management
Key Takeaways on Minimizing FBA‘s Downsides
- Evaluate product fit for FBA carefully
- Monitor costs, data, and performance closely
- Experiment with workarounds before committing fully
- Weigh pros and cons relative to your business needs and capacity
Let‘s get into the details!
Why Sellers Love (and Hate) FBA
FBA provides immense fulfillment automation by letting Amazon handle warehousing, picking, packing, shipping, returns, and customer service. This frees up sellers‘ time dramatically.
No wonder over 50% of Amazon marketplace sales are now fulfilled via FBA. During Prime Day 2022, over 70% of units sold were FBA.
However, handing your fulfillment to Amazon does come with trade-offs. Through conversations with hundreds of sellers, here are the most common disadvantages flagged:
1. Prohibitively High Fees
Amazon charges sellers three main types of fees under FBA:
Referral fees – These range from 15% to 20% of the total sale price depending on the product category. For instance, fees for appliances are 15% compared to 20% for toys.
|Referral Fee %
Fulfillment fees – These fees cover the costs of picking, packing, and shipping orders. They range from $2 to around $5 per unit depending on size and weight.
For example, fulfillment fees for a 10oz product would be ~$3 while a 4lb product would be ~$5.
Storage fees – Sellers pay monthly storage fees based on the volume of inventory stored across Amazon‘s fulfillment centers during that period. This varies by product dimensions too.
Here‘s an example storage fee chart:
|Monthly Fee per Cubic Foot
During Q4, storage fees can easily cross $1000 per month for larger sellers owing to holiday inventory buildup. Other peak seasons also drive up these costs.
Total FBA costs for a $100 product could break down like:
- Referral fee: $15
- Fulfillment fee: $3
- Storage fee: $1
- Total fees: ~$19
So almost 20% of the selling price goes towards FBA fees! This quickly eats into margins.
Expert Tips to Offset FBA Fees
- Adjust pricing – Account for FBA fees in your pricing strategy. Repricing tools help automatically factor these in.
Negotiate rates – High-volume sellers can negotiate custom rates directly with Amazon.
Run lean inventory – Keep just safety stock in FBA using careful forecasting to minimize storage fees.
2. Loss of Branding Control
With Amazon handling the full customer experience, sellers miss out on branding opportunities through custom packaging, inserts, and messaging.
This can impede brand building as buyers don‘t get exposed to your unique branding assets. In a 2021 survey of Amazon sellers, over 40% felt FBA limited their branding control.
However, some creative workarounds can help overcome this to an extent:
Expert Tips to Insert Branding with FBA
- Branded tapes – Use branded tapes and seals on shipping boxes.
Labels – Add custom external labels and internal product labels.
Packaging – Modify inner packaging and bags to reflect branding.
Inserts – Include branded notes, business cards, coupon flyers.
Direct emails – Email customers post-purchase to build engagement.
Off-Amazon marketing – Cross-promote your brand on other channels.
Get innovative with inserts and packaging while ensuring a positive customer experience!
3. Inventory Management Challenges
Keeping tight inventory control gets tricky with FBA owing to:
- Indirect visibility into real-time warehouse stock
Complex Amazon inventory reports and analytics
Opaque algorithms determining reorder points and restock quantities
In fact, 61% of sellers highlight inventory management as a top challenge with FBA in surveys.
Common issues like stockouts, suppressed listings, and long-term storage fees can quickly arise without diligent monitoring.
Let me share key strategies to master FBA inventory:
Expert Tips for Optimizing FBA Inventory
- Base stock on sales velocity – Set base stock levels based on sales history, not just months of cover.
Analyze reports daily – Review Inventory, Fulfilled Stock, and Restock alerts reports daily.
Monitor stock levels – Keep real-time tabs on inventory levels for each product.
Control restocking – Manually control restock quantities based on sales spikes.
Liquidate stale stock – Use FBA removals and liquidations to flush old inventory.
Get intimately familiar with the intricacies of Amazon inventory reports and make data-backed decisions for inventory optimization.
4. Increased Return Rates
Amazon‘s customer-friendly returns policies lead to higher return rates for FBA sellers compared to selling directly.
In fact, industry average return rates are over 30% for FBA compared to around 15% for direct D2C sales.
Top product categories by return rate include:
- Clothing and shoes – over 40%
- Jewelry – 35%
- Luxury beauty – 30%
Managing returns eats into profits in multiple ways:
- Refunds issued to customers
Return shipping costs back to Amazon warehouses
Open box items harder to resell
Potential product damage during returns
Expert Tips to Minimize Returns
Vet selection – Avoid categories with high return rates.
Optimize listings – Provide detailed product information and sizing guidance.
Highlight policies – Clearly state return policies and exemptions upfront.
Offer support – Have an active customer service presence to resolve issues.
Send reminders – Remind customers of return periods to prevent late returns.
Proactively minimizing reasons for returns is far easier than handling them retroactively!
5. Lack of Direct Customer Relationship
One subtle but critical downside of FBA is lack of direct customer access and insights. Sellers remain unaware of:
- Detailed customer demographics and psychographics
Nuanced feedback on product performance and features
Opportunities for cross-selling and upselling
Prospects for loyalty building and retention
Without this understanding, sellers miss out on customer intelligence to drive product and business improvements.
Here are workarounds to still build customer ties:
Expert Tips to Connect With Customers
- Post-purchase surveys – Send structured feedback surveys after the sale.
Transactional emails – Provide order status updates and personalized emails.
Social media groups – Build user communities to get insights.
Off-Amazon captures – Direct buyers to your site and capture emails.
Reviews and testimonials – Actively request product reviews from buyers.
Getting creative with "around Amazon" customer communication still provides useful insights to bridge the information gap.
6. Burdensome Sales Tax Compliance
One of the big operational challenges with pan-US inventory placement via FBA is navigating state sales tax laws.
- There are over 12,000 tax jurisdictions across US states and cities
Rates vary from 0% to over 10% depending on the jurisdiction
Taxability rules differ across product categories
FBA presence creates nexus requiring sellers to collect and file taxes
Keeping up with the complex, fluid compliance requirements across states can be extremely cumbersome for sellers:
- Tax registrations and filings in every state
Updating rates whenever jurisdictions change them
Integrating tax calculation at checkout across channels
Ongoing audits and reconciliations for errors
Without proper sales tax management, non-compliance risks grow exponentially. Let‘s discuss expert strategies to simplify compliance:
Expert Tips for Sales Tax Management with FBA
- Outsource to a provider – Tax firms handle registration, returns, audits for you.
Automate with software – Solutions like TaxJar integrate with checkout and filings.
Review responsibilities – Clarify if Amazon‘s program covers collection for you.
Watch nexus limits – Stay under economic nexus limits if possible to minimize compliance.
Getting sales tax right may not be easy, but imperative to avoid interest, penalties, and audits down the road.
Key Takeaways – Working Strategically With FBA
As we just discussed, Fulfillment by Amazon offers immense benefits but also comes with notable drawbacks.
The biggest downsides sellers face are:
- Much higher fulfillment costs
- Lack of custom branding opportunities
- Indirect inventory visibility and control
- Heightened customer returns
- Minimal customer insights and relationships
- Multi-state sales tax complexities
However, thoughtfully prepared sellers can strategize workarounds:
- Adjust pricing to absorb fees
- Insert custom branding assets into shipments
- Tightly manage inventory using analytics
- Optimize listings to reduce returns
- Communicate off-Amazon to build engagement
- Simplify tax compliance with automation
The overarching keys are thoroughly evaluating if FBA fits your product mix, business model and focus.
Monitor relevant performance data diligently to catch any issues early. Test creative solutions to offset the pitfalls unique to your business needs.
With the right trade-off analysis and tactical execution, you can absolutely minimize the disadvantages of FBA while benefiting from its process efficiencies.
I hope this comprehensive expert guide equips you to make the smartest FBA decisions for your Amazon business. Feel free to reach out if you need any specific advice – happy to help fellow sellers succeed!