The Ultimate Guide to Selling on Amazon - Chapter 5 - FBA vs. MFN – Which Fulfillment Option Is Better for You?

For several years, sellers on Amazon have had two options when it comes to order fulfillment. They can choose to take orders themselves, as a Merchant Fulfilled Network (MFN) and ship the goods to customers using their own network, or they can hand over the shipping and handling to Amazon’s in-house Fulfilled by Amazon (FBA) program instead.

So, if you’re going to start selling on Amazon, is FBA an avenue you should consider taking? Let’s take a look at the advantages and disadvantages.

Here’s how FBA works. You sign up for the program and list your products on the Amazon Marketplace. You send your goods to Amazon who warehouses them, packages them up and ships them to customers, Amazon then takes its fees and commission and you receive what’s left.

The pros of using FBA are as follows:

Removes the hassle of handling, shipping and customer returns.
Reduces shipping and handling costs.
Automatic Amazon Prime qualification.
Buy Box priority.
Multi-channel fulfillment.

Meanwhile, the cons are:

Amazon Fulfillment fees could mean lower profits for your business.
Pooled inventory can cause inferior merchandise from another seller to be passed off as your own.
Stale inventory and difficulty keeping track of inventory.
Goods are Amazon-branded as opposed to seller-branded, leading to poor company recognition.
Overly-complicated shipping to Amazon process.

So, let’s take a moment to delve a little deeper into those pros and cons.

One of the main perks of using FBA is that your goods will be eligible for Prime shipping. It’s a proven fact that Prime members spend more on average than non-Prime members, and most of the time they only buy Prime items from Amazon. After all, why would they buy merchandise from other sources when they’re paying a premium to access the Prime service? It’s therefore advantageous to many sellers to go with FBA to gain access to those crucial Prime members.

On top of that, by using FBA, you increase your chances of ‘winning the Buy Box’, as Amazon’s complicated algorithm favors those sellers who list Prime shipping as one of their fulfillment methods. We’ll cover winning the Buy Box in more detail later in this guide.

As an FBA seller, your customers can take advantage of all of Amazon’s shipping offers. Amazon is one of the fastest and most efficient shippers in the business, so there’s this to bear in mind when considering becoming an FBA seller.

On top of the above benefits, Amazon offers its customers the option to search for products offered by FBA sellers, meaning you’ll have priority over those who don’t use the service. And there’s also the fact that Amazon’s own research has revealed that over half their customers refuse to use sellers who aren’t enrolled in the FBA program. That’s definitely something to bear in mind before making your decision.

And now to the cons of using FBA. Primary among them is, of course, cost. FBA comes with fees and monthly storage charges, which will be increasing from October 2017. These are as follows:

Amazon

In addition, Amazon also charges a long-term storage fee for items that have been in their warehouses for a certain length of time. If you’re storing merchandise – for example, seasonal products – that are sluggish or sporadic sellers, you may find you’re hit by fees that are unsustainable in the long term. You’ll find further information on long-term storage charges here.

Finally, there are Amazon’s FBA fulfillment fees to be taken into account. These fees cover staff picking out your merchandise, the packing and packaging involved, the cost of shipping items to the customer, any customer service that may be required and the handling of customer returns.

These fees must be taken into account when calculating your overall costs. Luckily, Amazon has a handy tool you can use – the FBA Revenue Calculator.

Using The FBA Revenue Calculator

The FBA Revenue Calculator is a handy tool that will give you a rough idea of how much revenue you’ll generate from the products you sell through FBA. It will also help you calculate revenue if you’ve decided to go down the MFN route instead.

The calculator breaks down what you will be charged by Amazon as an FBA seller. It factors in the following fees:

Amazon Referral Fee – This is the cost of your listing on Amazon. It is calculated as a percentage of the item’s retail cost (depending on which category the item falls into).
Prep Service – The cost of preparing your package, such as applying UPC code labels and shrink-wrapping goods, etc.
Pick & Pack – The cost of finding your item in the warehouse, packing it and the price of the packaging itself.
Monthly Storage – The monthly storage fee calculated in cubic volume.
Weight Handling – The cost of shipping to the customer, calculated by the weight of the package being sent out. If the item is eligible for free two-day Prime delivery, you will be liable for a percentage of the cost of this (with a small percentage absorbed by Amazon from its Prime subscription fees).

Using the calculator is fairly simple. Here we’ve used the example of an RCA alarm clock, priced at $9.90:

Amazon

1. Enter the ASIN, UPC, EAN, etc. number into the search bar. This will bring up your product and open up the revenue calculator.

Amazon

2. Enter the shipping costs, the cost per unit to fulfill a customer’s order, and the total fulfillment cost (including Amazon fees). If there is a cost of acquiring a product from a supplier, or you need to factor in what a product will cost to manufacture, you should also add that to the ‘Cost of Product’ field. Next, add the item price, the cost of shipping to Amazon (if applicable) and the product cost in the blank fields under ‘Amazon Fulfillment’.

Amazon

3. Once you’ve answered everything, hit ‘Calculate’ and Amazon will give you a breakdown of Revenue, Cost, Seller Proceeds and Net Profit. This allows you to roughly see if it’s better to fulfill the order yourself, or if it’s better to let Amazon fulfill it via FBA.

The revenue calculator is also a handy tool to calculate your net profits regardless of whether you’ve decided to go down the FBA route or not. No wonder it’s proved to be one of the most popular Seller Central tools.