What’s not to love about Amazon FBA? List your product on Amazon, send them your inventory, and reap the rewards of the Amazon Prime badge and low shipping costs (though FBA fees are rising in 2022).
It’s a great deal for those that can get it, but it’s also limited in two key ways: 1) it’s an inflexible point solution and 2) Amazon simply doesn’t have enough space. And no wonder; Amazon added over 750,000 new 3rd-party sellers in 2020, so FBA can’t keep up with demand. Amazon’s response is to limit FBA to work well only for the SKUs that maximize their profit (not the sellers’) and to impose restrictive inventory limits.
Sellers that want to grow both on and outside of Amazon will need an alternative to FBA to keep their growth engine humming. Read on to learn more about what to watch out for with Amazon FBA and your options for other eCommerce order fulfillment solutions.
Why You Can’t Rely on Amazon FBA
Amazon FBA will do a great job of fulfilling a portion of the volume of your small SKUs sold on Amazon, but it falls short otherwise.
Source: Amazon FBA Revenue Calculator, DIY Shipping estimated using discounted shipping rates for Zone 4 Residential shipping, estimated ship date 9/20/2021
The above example is typical of Amazon FBA fees: their price for small and standard items beats other options, but even slightly oversized products like the example 5lb dog bed ends up costing almost double a merchant’s price shipping it on their own. The reason is simple – they’ve optimized their network for small, easy, and efficient products.
As a result, Amazon sellers that use FBA for their shipping are boxed in when it comes to growth, and they all compete with one another to sell the same small, cheaper items. If FBA is your only good option, you can’t profitably expand your product line to larger, less competitive options because fulfillment fees will eat up your margins. If you raise price to compensate, then you’ll lose to the savvy merchants who have diversified their fulfillment strategies and can get the product to the customer at half the price.
The challenges don’t end there for Amazon FBA. 2020’s unprecedented boom in eCommerce growth has delivered massive returns to Amazon and Amazon sellers, but it’s also left FBA bursting at the seams. To compensate, they switched from ASIN-level inventory limits to product type inventory limits in April 2021, and overnight sellers saw their inventory limits cut by up to 65%.
Source: US Census Bureau, Marketplace Pulse, Cahoot interviews with merchants
On top of the new, lower limits, Amazon FBA is also experiencing receiving delays of up to three weeks. This creates a huge window of time in which a seller can run out of stock on a key item: even if the seller sent a timely replenishment, receiving delays can create the issue. In the peak selling season, this is an even bigger problem. Demand surges can easily run an item out of stock in a matter of days or even hours, triggering a death spiral in which a product loses its search rank, which lowers impressions and conversions, which in turn lowers inventory limit again.
It’s clear that Amazon FBA is no longer an all-in-one solution for Amazon sellers. It’s a point solution that can be an important part of a fulfillment strategy, but needs to be augmented to cover for its flaws.
Evaluating Different Amazon FBA Alternatives
Amazon FBA’s structure tells a valuable, if simple lesson: the most cost-effective way to offer nationwide 1-day and 2-day delivery is to create a distributed fulfillment network that always has inventory near the end customer. This setup enables 1- and 2-day delivery with economical ground shipping; the best of both worlds.
To enjoy the same benefits of Amazon FBA’s network without the same drawbacks, sellers’ options generally fall into three main categories:
- Open Multiple Fulfillment Centers: Merchants can take it upon themselves to open multiple US fulfillment centers, but today’s environment is extremely challenging. Warehouse space has never been more limited or expensive, and there are an incredible 400,000 open job positions for frontline eCommerce order fulfillment workers. On top of that, opening one’s own centers ties up significant capital and is risky – if a seller picks a sub-optimal location, or a location becomes sub-optimal as consumer preferences change, they’re stuck footing the bill.
- Third-Party Logistics Companies (3PLs): Another option is to outsource fulfillment to multiple 3PLs. These are generally smaller, independent companies not connected to any specific marketplace. You will have to contract numerous 3PLs to get nationwide 1-day and 2-day coverage. Order routing across disparate 3PLs is complex and labor-intensive, so you may need to invest in expensive fulfillment software to make it more efficient. Fulfillment costs will vary between 3PLs, and not all of them can meet the strict SLAs needed to win the Buy Box on every marketplace, so be sure to use something like a 3PL request for proposal (RFP) template to get an apples to apples comparison.
- Tech-enabled Fulfillment Network: A modern and affordable alternative to working with 3PLs is to use an e-commerce order fulfillment network. A tech-enabled fulfillment network upgrades the traditional 3PL model to cover the whole country. Merchants will send their inventory to multiple nodes in the network, and then the network’s software will automatically send parcels from the optimal location to the end customer, saving on shipping costs. In essence, these networks are “FBA-lite” – they have the same core functionality as FBA.
Cahoot’s Alternative to Amazon FBA
Cahoot is a robust FBA alternative, and it works just as well as a backup or enhancement of FBA as it does as a full replacement. And it’s much more than that – it’s the most flexible solution in the marketplace and can ship orders for every eCommerce sales channel.
Cahoot is the next generation of tech-enabled fulfillment networks. Unlike other networks that are collections of 3PLs, Cahoot’s innovative approach unlocks empowers merchants across the country to fulfill orders for one another. Our peer-to-peer network is a collective of highly vetted eCommerce retailers who offer up excess warehouse space and resources to provide high-quality order fulfillment to other merchants.
As a result, costs are typically lower than what you get with a traditional 3PL fulfillment company, and service levels are higher. With a P2P network, multi-channel fulfillment with nationwide 1-day and 2-day delivery is the norm. Merchants can use the network solely for outsourced fulfillment – similar to FBA, or they can choose to fulfill orders for other merchants and offset some of their own outsourced fulfillment costs.