Amazon’s third-party seller marketplace has grown from its humble beginnings in 2000 to account for nearly three million sellers and more than half of Amazon’s retail sales. One of the biggest enablers of that tremendous growth was Amazon’s launch of Fulfillment by Amazon, or FBA, which today dominates the logistics landscape for third-party sellers. The tide is turning, though, with more and more sellers turning to FBM.
In 2021, 43% of Amazon sellers used at least some FBM – a huge jump from only 34% the previous year. This shift asks two questions: first, why are sellers shifting to FBM, and second, is FBM right for you?
In this post, we’ll explore the relative advantages of FBA vs FBM, why more sellers are shifting to FBM, and how you can make the choice that’s right for your business.
What’s the difference between Amazon FBA and FBM?
First, a few definitions. Fulfillment by Amazon, or FBA, is a service by Amazon for 3rd party sellers that handles inventory storage, picking & packing, and shipping. It’s a full solution that qualifies products for the coveted Prime badge and covers customer support on the back-end.
In contrast, Fulfillment by Merchant, or FBM, is the description for 3rd party sellers that don’t use FBA for fulfillment. With FBM, the seller (or a third-party logistics company that the seller hires) handles storage, picking & packing, and shipping for products sold on Amazon.
What are the relative advantages of FBA vs FBM?
Fulfillment strategy is an underappreciated aspect of eCommerce, and both FBA and FBM bring their own advantages and disadvantages that can make or break a seller. So – what are the biggest differences between the two approaches?
Prime badge eligibility
First up: the all-important Prime badge. Simply turning on a Prime badge for a product can boost sales by 50%, so if you can get it, you should.
FBA makes it simple – if your product is in FBA, it gets the badge.
FBM is more complicated – it depends on if your fulfillment approach qualifies for Seller Fulfilled Prime (SFP). SFP sets rigorous targets for how quickly merchants deliver items to customers, as of course fast & free shipping is the central value proposition of the Prime subscription. As of late 2021, Amazon isn’t accepting new applications to the SFP program, so new FBM sellers can’t access the Prime badge.
Due to the sheer number of sellers using FBA, Amazon can’t keep up with demand for the program. They’ve responded with ever-escalating rules for what inventory sellers can place in their warehouses, which often leave sellers unable to place all the product they’d like in FBA.
FBM, on the other hand, is only limited by how much warehouse space a seller can rent or purchase on their own, or by how much space they can get from a 3PL. 3PL space is essentially limitless from the perspective of an individual Amazon seller, so you’ll never ‘run out’ of space for FBM.
As we’ll cover later, many sellers don’t even have a choice when it comes to FBA vs FBM. They simply need FBM because they can’t use FBA as much as they’d like to.
FBA and FBM each have their own unique cost advantages – neither is better 100% of the time.
FBA excels with small, fast-moving SKUs. They offer the best prices in the industry for fulfilling small and standard size SKUs, so if that’s what you’re selling, you’ll generally want to use FBA as much as possible.
That comes with a huge caveat, though – FBA has punishing long-term and holiday storage fee increases. If you have a new SKU that will have a low fulfillment fee with FBA, but you’re unsure of how well it will move, it’s often best to start that SKU in FBM so that you don’t open yourself to the risk of big FBA fees.
It’s also worth noting that FBA is increasing its fees in 2022, and in particular it’s raising storage fees and adding a new, shorter time limit before long-term storage kicks in.
As you can see in the example above, FBA’s fulfillment price advantage collapses for large and oversized items. While the small cables and standard headphones shave significant costs off of DIY shipping, FBA’s fulfillment fee for the oversized dog bed is nearly double that of DIY shipping.
Control of the customer experience
If you use FBA, then Amazon controls your customer experience – full stop. Your item will ship in Amazon boxes, with Amazon branding, and issues will be handled (or not) by Amazon’s customer service.
In contrast, with FBM, you’ll own much of the post-purchase experience. That means that you have the opportunity to use the unboxing experience to cross and upsell, for instance, and you’ll also handle issues with fulfillment.
So, FBA makes fulfillment easy, but it also represents a missed opportunity to upgrade the customer experience. With FBM, you can turn your post-purchase process into a value add for the customer, build loyalty, and increase your profit-boosting repeat rate. Additionally, successful resolution of customer issues can actually increase customer loyalty, so with a great customer service team, you can turn challenges into opportunities. With FBA, you give up all of those great opportunities for growth.
Maximizing your time
As a seller, you want to focus on selling, not logistics. FBA handles fulfillment for you, so less of you and your team’s time will have to go into operations. This difference between FBA and FBM is especially apparent if you’re fulfilling orders yourself, in which case you could be buried by a surge in orders.
On the other hand, FBM with a trusted third party logistics (3PL) provider can be just as easy, if not easier than FBA. Just like FBA, a great 3PL will take fulfillment off of your hands and leave the majority of your time free to focus on growth.
Enabling multi channel growth
What if you want to grow outside of Amazon? More and more sellers are pursuing a multi-channel sales and fulfillment strategy that diversifies their portfolio and gives them more avenues for growth.
Amazon FBA can be used to fulfill orders for select eCommerce shopping carts like Shopify, and when it does so it’s called Amazon Multi Channel Fulfillment (MCF). Amazon MCF uses the exact same infrastructure as FBA, but it comes with all of the drawbacks of FBA and few of the benefits.
As you can see in the below table, MCF is significantly more expensive than FBA. It will deliver your products fairly quickly, but it doesn’t guarantee the same SLAs as FBA. On top of that, your orders for non-Amazon products will ship in Amazon boxes. Not ideal!
On the other hand, FBM with a great third party logistics (3PL) provider will unlock multi-channel growth for you. The best 3PLs integrate seamlessly with all major marketplaces and shopping carts, so getting your operations set up with a new channel can be as simple as a few clicks.
Why are more Amazon sellers shifting to FBM?
Remember our data point from the start of the blog – in 2021, 43% of sellers used at least some FBM, up from 34% in 2020. Why?
The first and most obvious driver is that Amazon FBA’s inventory limits are forcing sellers to adopt a mixed fulfillment strategy. After all, only 9% of sellers are fully FBM – so most that use FBM also have some FBA. If you can’t place all the inventory that you’d like in FBA, though, you have no choice but to find an FBA alternative.
Even if you can place all of your inventory in FBA, FBM is vital to protect your Amazon business. Given how tightly Amazon sets inventory limits, your best sellers are likely susceptible to stockouts if a promo or your peak season results in unanticipated growth. FBA sellers are often beset by weeks or even months-long receiving delays, so even if you’ve done everything right, your product can still go out of stock because Amazon didn’t get it on their shelves quickly enough.
As you likely know, stockouts are incredibly punishing for FBA sellers because they trigger a negative cycle that hurts sales rank, which hurts sell through rate, IPI score, and then inventory limits. It can be difficult to recover, because you’re then even more susceptible to another stockout, which further hurts the product’s results. That’s why many sellers are mixing in FBM to their Amazon fulfillment strategy – it serves as backup for FBA to make sure stockouts never occur.
Last but not least, multi channel selling is a huge growth opportunity, and FBA isn’t a competitive fulfillment option for other channels. So savvy sellers are adopting FBM to build resiliency in their Amazon business and also open up new sources of revenue.
How to choose FBA vs FBM for your business
When considering whether FBA, FBM, or a mix of the two is right for your business, ask yourself a few questions:
- Do you need the Prime badge to succeed?
- What size are your products?
- Do you have plans to sell on channels other than Amazon?
- Are you comfortable with letting Amazon dictate the customer experience?
- How accurately can you predict demand?
You only need FBA if you’re selling small products only on Amazon, you’re comfortable letting Amazon control your customer experience, and you can predict demand fairly comfortably. FBA will take care of fulfillment for you and qualify you for Prime, enabling you to focus your efforts on growing on the channel.
For anything else, you’re going to want FBM. Large products are more cost effective to ship via FBM, so there’s a strong case that you should immediately find an efficient 3PL for them. Likewise, if you have multi channel growth ambitions, you’re going to need to fulfill yourself or a fulfillment partner other than Amazon, so the sooner you can consolidate operations under one roof, the better it is for your efficiency. If you want to use the post-purchase experience to improve your customer loyalty and repeat rate, you’ll need FBM as well.
Then of course, so many sellers use a mix of FBA and FBM because they fall somewhere in the middle. They have some small & light products for which they want to adopt a “set it and forget it” approach on Amazon – so they put all of those into FBA. They then realize how many growth opportunities they fundamentally can’t pursue by just using FBA, so they adopt a partial FBM strategy to cover those other avenues. The truth is, you’ll probably fall somewhere in the middle as well. If so, your 3PL should be able to do FBA forwarding in addition to its excellent eCommerce operations – that way, you’ll only need the 3PL plus FBA to cover your fulfillment needs.
Cahoot: Your Best FBM Solution
Cahoot’s FBM fulfillment services will fuel your profitable growth on Amazon and unlock opportunity on all other eCommerce channels at the same time. Unlike most other 3PLs, we’ve built our network to the highest standard, so we enable affordable Seller Fulfilled Prime for many of our FBM clients.
On top of that. our innovative peer-to-peer fulfillment network offers low-cost, fast fulfillment by design. We’re changing the industry by empowering merchants with excess warehouse space and resources to provide high-quality order fulfillment to other merchants. Unlike other 3PLs, we empower merchants to help other merchants, and our community levels the playing field with Amazon. Thanks to our unique model, our pricing is typically lower than what you’ll find from other 3PLs, but we can beat them on fulfillment speed and reliability.
If you’d like to find out how Cahoot can help your business, please get in touch with us. We can’t wait for you to join our community and boost your profitable growth.