When many take the journey of exploring an eCommerce business to start, selling with Amazon can be highly attractive. After all, they’re the biggest company in the world, right? However, when it comes to managing inventory and costs, it’s important to understand what you’re actually getting into.
Inventory management and understanding the basic costs of doing business matters when building and scaling a profitable business. Having good oversight of your operations when it comes to the parameters of outsourcing your fulfilment operations is critical to your success. You have a fiscal responsibility to make sure you understand what’s coming in, what’s going out, and if you’re getting the best return on investment with your fulfilment provider.
It’s not easy running a business. There are a lot of moving parts, and you must make specific educated decisions to determine your profit margin to pay your bills, employees, utilities, etc. One of the biggest mistakes business owners make early on is improperly handling cash flow and making bad projections.
“In the UK, 20% of businesses fail within the first year while a staggering 60% go bust within 3 years”
This idea matters when you partner with a 3pl or Amazon fulfilment centre. Understanding your partnership agreements and costs will either be a hindrance or a benefit to your business.
In this article, we want to do an analysis of Amazon FBA so that you can be educated on the specific costs of doing business. This way you can make an informed decision when partnering with a third-party logistics provider. We will be taking a deep dive into the popular Amazon FBA program to explain their services, and how a 3pl like Selazar compares.
If you are enrolled in Amazon FBA and have stock in their fulfilment centre, you will be paying a wide range of fees. From referral fees to monthly plans and more, you will see how quickly the costs add up for outsourcing your stock.
Running a successful business means being crystal clear on your profit and loss, and how these fees will affect those numbers. See the following fees below to understand Amazon’s pricing.
1) Monthly plans – Individual and Professional
An individual plan is 75p for every item sold and £25 a month for a professional plan (no matter how little or how many items you sell).
2) Referral fee – This is a fee with both plans that takes profit from the sale of the product. This commission ranges from 7% to 45% depending on the product.
3) Monthly storage fees – Storage costs range from 48p per cubic foot per month between January and September, and up to 68p between October and December.
4) Long term storage fees – After 365 days if you still have unsold stock in an Amazon fulfilment centre, you will be penalised for keeping it there. The cost adds to your monthly costs, ranging from 9p – 86p per unit.
5) Fulfilment fee – Charge to pick and pack each product. The cost depends on the items category, size, and weight. This cost ranges from £1.35 for small envelope size items up to £5.52 for items with weight over 10kg.
6) Labelling fee – A fee of 15p will apply for each Amazon label printed for your SKUs at FBA headquarters.
7) Shipping fee – This is the cost for shipping your products to customers. These range from smaller packages (10 mg or less) of £1.75 to larger packages (3kg to 21kg) for £3.81.
8) Returns processing – Any returns from customers are given a processing fee of 20% of the original product, up to £5 for each line item, minus the original profit you made.
As you can see, there is a wide range of fees. Selling with Amazon is not as simple as you might expect before you outsource your order fulfilment. As a 3pl, Selazar has fewer costs, giving sellers more clarity.
If you’re interested in seeing the precise numbers for FBA yourself, you can use Amazon’s FBA calculator.
During the summer of 2020 when the pandemic was surging and eCommerce was thriving, Amazon sellers got a surprising announcement.
“To maximize selection for customers during peak season, we are introducing ASIN-level quantity limits on products in FBA. Most products will have enough space available for over three months of sales.”
This means that Amazon was putting a limit on sales.
This was sad news for third-party sellers. They could no longer send substantial amounts of inventory to be available to consumers, thus losing out on sales.
A maximum of 200 units suddenly became the threshold for sellers with new products. This was shocking for many, especially those who compete with other related products and have already lowered their costs due to pricing wars. A maximum of 200 units did not mean a lot of profit for many sellers.
Then, again in April of 2021, Amazon announced there is no longer a maximum for ASIN-level quantity limits. What they said instead is that restock limits will be set at the “storage-type level.” This means that now there will be different limits for storage types, such as smaller items and larger items.
All smaller standard sized products will have a combined storage limit, and your larger items will also have a combined storage limit.
Amazon storage limits are calculated using several factors:
• Your sales volume
• Available capacity at the fulfilment centre
• Your Amazon quality score (below)
Inventory management can prove to be challenging with these various changing rules placed on sellers. You need to decide if you’re willing to work with these types of penalties and regulations.
Amazon has developed a system to gauge the performance of third-party sellers’ products. This metric is known as the Amazon inventory performance index and influences your overall success in their marketplace. This is basically your Amazon inventory quality score.
Scores when selling with Amazon can range anywhere from 0 to 1,000.
Is this like a credit score? Yes, basically.
Below 500 – Needs improvement and your business must take certain actions to improve it. Before July 1st, 2021, it was 450.
Above 500 – Good. This means that your business has a good standing with Amazon.
The score is also used by Amazon to measure how you manage your inventory over time. Are you fixing listing issues, replenishing levels well, and how is your feedback from customers? It also indicates how well your products are selling and sets a limit for how much inventory you can have at Amazon. So, yes, a bad score will have a negative impact on your sales.
Also, because this score is measured on a monthly basis, if you have a hot selling product over Christmas, your score will decrease when it is off-peak season. This means that if you sell 10,000 products over Christmas, but someone else sells 500 consistently, they may have a better score than you. Does that seem fair?
The Director of enforcement strategy at Open Markets Institute had this to say about Amazon:
“Amazon has the power to bury sellers and suppliers if they don’t comply. Amazon is able to cut off its competitors’ access to inventory by leveraging its monopoly power.”
Many sellers have complained about fake negative reviews on Amazon, as this affects their quality score (IPI). Whether from competitors or not, these reviews deeply affect sales.
“79% of consumers are influenced by products with the best ratings and reviews”
As sellers have complained more and more about this issue, many of them believe there is not enough being done. They feel this is because:
1) It’s too challenging for Amazon to investigate the sheer number of fake reviews
2) There are not enough verification regulations in place to connect the buyer accounts with the fake verified reviews
When Selazar set out to create an innovative tech-first approach towards fulfilment services, it also decided to take a unique approach towards costs. By creating a fulfilment service that truly benefits the seller, this will encourage better business and better service for customers. This is done in the following ways.
•No onboarding costs
• No long-term storage penalties
• No profit-sharing costs
• Offer complete custom packaging solutions for brand control
• Offer a navigation portal with robust technology for clients to manage all their inventory, from anywhere, free of cost
• Offer hassle-free returns
• Offer bundling services for businesses with multiple products
• No storage limits
Deciding when to switch to a 3pl may feel overwhelming when your business feels like your baby. Here are a few other questions to consider.
1) Do I have complete control over my inventory and selling limits?
2) How much am I willing to pay for monthly storage and fulfilment costs?
3) Do they offer custom packaging?
4) Do they offer same day dispatch and order processing?
5) Can the 3pl provider meet my sales demands as my business grows?
6) Do they offer customer service?
7) How quickly can the 3pl take on my stock?
8) Will my orders reach customers in two days or less?
9) How accurate is the pick and pack process?
10) What are the additional fees associated with my account?
11) Do they offer eco-friendly packaging?
These are all critical questions to know when you start with a 3pl fulfilment provider. Selling with Amazon may not be in your best interest as a business owner. It is important to understand everything from exact costs to the exact services. If you’re interested in our 3pl services, please set up a discovery call with us today so we can learn more about your business needs.
