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Pros and Cons of Amazon FBA Business in 2022

July 18, 2022

According to research firm Finbold, Amazon averaged 3,700 new sellers per day in 2021! Before diving into selling on Amazon, every new seller should weigh the pros and cons of Amazon FBA. 73% of sellers currently sell under the Amazon FBA program, according to SellerApp. Amazon puts a massive emphasis on getting sellers to use their FBA program, but is it really worth it? 

Most likely yes, especially if Amazon’s claim that sellers who implement FBA average a 20 - 25% increase in sales compared to FBM. However, a better answer is that it depends on the circumstances of your business. In the following article, we break down the pros and cons of Amazon FBA so you can make the best business decision for yourself when getting started in E-Commerce.

What is Amazon FBA? 

Amazon FBA, or Fulfillment by Amazon, is an online business model where you provide your products to Amazon and they handle the order fulfillment of your products to the customer. Here’s a quick overview of the process. 

An Amazon FBA seller’s journey usually starts with Amazon FBA product research. You look for an opportunity on the Amazon Marketplace and then source a product that meets that market opportunity. 

Next, you have your products delivered to Amazons Warehouse. As shoppers purchase your product from Amazon, Amazon takes your products and delivers them quickly to your shared customers. 

If there are any issues with the product, Amazon handles customer service and returns so you don’t have to. Meanwhile, you keep track of your inventory in the Amazon Marketplace and ensure there is enough inventory to meet demand on Amazon. 

Of course, it’s a bit more difficult and time-consuming than it sounds. However, Amazon fulfillment really simplifies a lot of the usual work that goes into selling products online.

Amazon FBA Pros

1. Leveraging Amazon’s Brand Recognition

According to a study by Radial of Amazon shoppers, 95% of customers on the platform consider Amazon to be trustworthy. As the largest E-commerce marketplace in the world, Amazon’s brand recognition is HUGE. Furthermore, it’s a brand that people trust because of their emphasis on being a customer centric company. 

Amazon operates in thirteen countries and offers worldwide shipping outside of those borders as well. Customers that purchase from Amazon know they are going to receive a product if they order it. They also know that they are eligible to return that item in a specified period if, after receiving it, they find it isn’t what they want. This eases a lot of the internal buying friction customers face when purchasing products online without being able to physically see and touch the product before purchase. 

2. Low Barrier to Entry

With a little money to pay for your Amazon seller account and buy some products to sell, anyone can get started selling through Amazon FBA. If you’re just getting started in E-commerce, Amazon offers one of the best starting points because they don’t require formal business documentation but provide access to a massive customer base. When comparing selling on Amazon vs Walmart, that is one of the main reasons new sellers flock to Amazon’s platform instead. 

All you need to get started selling on Amazon are:

  • Amazon customer account or business email
  • Phone number
  • Tax information
  • Government ID

  • Bank account where Amazon can send proceeds

  • Internationally chargeable credit card

3. Access to Prime Members

According to a 2020 report by Bank of America, Prime members were spending around 4x more than non-Prime members on Amazon at nearly $2,000 per year! 

Amazon Prime members receive benefits like free shipping within two days or fewer. As an Amazon FBA seller, your products are automatically considered Prime eligible because Amazon has total control over the fulfillment of your order. Your listing receives the Amazon Prime badge, which buyers look for when making purchases because it is a trusted symbol and they know they will receive their order rapidly. Plus, your products will be able to take part in Amazon’s annual Prime Day event.

4. Leave Customer Service and Returns Management to Amazon

According to HubSpot, 93% of customers are more likely to repeat purchase from companies that offer excellent customer service. Luckily for FBA sellers, Amazon excels at customer service, offering customers 24/7 access to phone, email and chat support.

One of the most common reasons customers reach out to businesses for post-purchase support is product returns. However, handling product returns can be a complicated task for a small business. Instead of spending your valuable time or money hiring out customer service and returns management, Amazon is well equipped to handle it for you.

5. Naturally Improved Opportunities on Amazon

Besides attracting Amazon Prime members to your listing, Amazon FBA offers other benefits that can help you excel on Amazon. One of the most important factors on Amazon for success is where your product ranks compared to the competition. Are you on the 10th page where hardly anyone can see you for a relevant-high volume keyword? Or, are you on the 1st page for a high volume keyword where many buyers will see and purchase your product?

Amazon’s ranking algorithm accounts for a variety of factors which determine your product’s visibility on the platform. As a FBA seller, your products are automatically shipped to customers in the fastest possible time, which results in a better customer experience and a higher chance of positive customer feedback. This serves to improve your product’s ranking naturally. 

Aside from improving your ranking, Amazon FBA also improves your opportunity to win the Buy Box. According to BigCommerce, selling through FBA is the easiest way to increase your chance of winning the Amazon Buy Box. This is because Amazon considers its own fulfillment to have perfect metrics, making FBA participation a major factor in Buy Box ranking.

6. Amazon Private Label Brands are Getting Bought Out at 4-8 Times Their Annual Revenue

The revenue you receive from your Amazon business can provide you with a stable income. However, an Amazon business is also a valuable asset that you can sell when you’re ready to move onto another endeavor. According to Marketplace Pulse, Amazon private label businesses are being acquired for 4-8x a seller’s annual take home profit. Therefore, if you earn $50,000 in profit on your Amazon business and sell under the private label model, you could expect to sell your business for $200,000 - $400,000! Furthermore, Amazon businesses are only becoming more valuable as the market becomes more competitive, so those figures are likely to continue increasing and will likely be higher by the time you build an FBA business and are ready to sell.

7. Amazon FBA Inventory Reimbursement Policy 

When you hand over your products to Amazon FBA, the products become their responsibility. Amazon’s inventory reimbursement policy states that if your item is lost or stolen after you have sent it to Amazon’s fulfillment center, Amazon will replace the item of the same FNSKU or reimburse you with the money.

8. Leverage Amazon's Efficient Customer Fulfillment System

Amazon runs like a well-oiled machine. Its efficient systems and processes have catapulted it to the top of the E-commerce world. From its enormous fulfillment centers that prepare millions of packages for delivery every day to its fleet of carefully selected delivery service partners that distribute those packages to customers in as little as a few hours, you can’t beat Amazon fulfillment. 

Furthermore, by outsourcing fulfillment to Amazon FBA, you can focus and excel on other aspects of your business. Instead of trying to balance the usual task load of running an E-commerce business, Amazon FBA enables you to sharpen your skills in certain parts of the business and leave the rest to Amazon.

9. More Flexibility With the Amazon FBA Lifestyle

Although it’s not the only online business model that is associated with a sought after lifestyle of time and location freedom, Amazon FBA is a great option if you want to build a lifestyle that allows you freedoms a normal 9-5 never would. You can build your business from anywhere and live where you want to.

10. Amazon Handles Inventory Storage for You

Instead of storing a bulk order of products in your garage at home or renting a special space just for them, you never even have to touch your products with Amazon FBA. You can have your products shipped straight from the manufacturer to Amazon’s fulfillment center and store them there for an affordable rate until purchased. 

One of the main reasons the dropshipping business model became so popular is because you don’t have to receive the products. However, dropshipping can result in lower profit margins and dissatisfied customers as products are purchased one at a time and can take weeks to arrive from overseas if sourced through China. With Amazon FBA, you can buy products in bulk to receive a much lower per unit rate while allowing Amazon to fulfill customer orders rapidly by storing your products at the Amazon fulfillment center. 

Amazon FBA Cons

1. Difficult to Build Your Own Loyal Customer Base

The benefits you receive from selling under the guise of Amazon are a double-edged sword. While you have access to an immense pool of customers, they really only know your product as something they purchased on Amazon. Because Amazon FBA handles your customer service and returns, it’s difficult to build any sort of brand loyalty. The inability to develop your own customer base if selling strictly on Amazon puts your business entirely at Amazon’s discretion. 

2. Amazon Seller Suspensions Can Destory Your Business

As an Amazon seller, you are susceptible to suspension if Amazon decides you have violated one of their policies. In the blink of an eye, you can lose the entire income stream of your business. Common reasons for account suspension include:

  • Sale of restricted products
  • Copyright infringement by using unapproved images and texts
  • Operating multiple sellers accounts without Amazon’s approval
  • A customer reports to Amazon you have sold them an inauthentic product

  • Selling of unauthorized products

  • Ignoring intellectual property complaint notifications

3. FBA Fees That Continue Rising

Amazon handles much of your operations when you sell under their FBA program, but they don’t do so for free. Besides the 39.99/month seller fee they charge for anyone selling on the platform, you also need to consider: 

  • Referral fees (8 - 20% for most items)
  • Fulfillment fee (based on product type, size and weight)
  • Inventory storage fee (based on product size)

There are also many other fees you could be subject to depending on your business situation. For example, if you keep your products as inventory in the fulfillment center too long, you can expect to pay a hefty long-term storage fee. Check out the full list of fees on Amazon Seller Central

Furthermore, Amazon FBA fees have risen over the years. Sellers have no control over fee raises and many sellers have been forced off the platform after losing their tight profit margins to fee raises. Profitability with Amazon FBA is a delicate balance that can easily be wiped out with a FBA fee raise. 

4. Extremely Competitive and Difficult to Rank

According to eDesk, there are 1.9 million active sellers on the Amazon Marketplace worldwide vying for market share. One of the primary reasons it can take a while to be profitable with Amazon FBA is because you’ll need to pay for visibility, at least at first. Unless your product ranks well for keywords with sufficient volume to drive sales, Amazon PPC advertising is your primary means to be visible on the platform and generate sales. 

Amazon’s algorithm uses a variety of factors to determine where a product ranks on the platform. For new sellers, it can be an uphill battle to rank on a page that potential customers may actually scroll to. Established sellers already have review counts and regular monthly sales that help them maintain their position with high ranking. In order to take their spot, you need to optimize your Amazon product listing and put enough money into Amazon advertising to generate and sustain sales figures that surpass products with prime ranking spots on one of the first pages.

5. Potential for Anticompetitive Practices

In an article published by the Wall Street Journal, Amazon allegedly copied the product of a successful third party seller for its Amazon Basics private label product line and then banned the third party seller from selling their version of the product. 

Another article by Bloomberg makes the same claim, with Amazon copying a best-selling product and selling it for half the price. Although we don’t know for sure how common these instances actually are or even if they're 100% legitimate, anticompetitive practices are a concern for Amazon sellers. 

6. Stringent Product Prep Requirements

Before sending your products to the Amazon fulfillment center, you need to prepare your products within Amazon’s strict guidelines. If your products arrive at Amazon without proper labeling and preparation, you may incur an unexpected preparation fee. Examples of Amazon preparation requirements include:

Boxed units must be 6-sided, should not collapse when you apply medium pressure on both sides and needs to pass a 3-foot drop test if it has perforated sides. 

Poly-bagged units with an opening 5 inches or larger must have a suffocation warning, use a minimum warning print size based on the size of the bag, bag must be transparent, and must no protrude 3 inches past the dimensions of the product. 

No loose products, you must contain each unit and all of its accompanying pieces within a single secure bag. If you're selling multiple items as one unit, you must attach a "Sold as Set" sticker. 

7. Increased Product Returns

One of the biggest benefits to customers shopping on Amazon is their lenient return policy on most product categories. There is a 30 day window to return most products, but Amazon notes they will accept returns beyond this timeframe to provide an optimal customer experience. Since you have to abide by Amazon’s rules, you are likely to see higher product returns than you would selling through other channels. 

8. Unsatifactory Support for Sellers

One of the most common complaints for Amazon FBA sellers is the lack of high quality help from Amazon Seller Support. Working with Amazon Seller Support is often reported as being a frustrating and time-consuming process. Amazon is a customer-first company, so the majority of its resources are on the customer side. Because Amazon already has plenty of third-party sellers on its platform and a steady flow of new sellers, they don’t need to make seller assistance a priority. 

9. Confusing Sales Tax Compliance

As an Amazon seller, sales tax compliance can become complicated as your products are stored and shipped from various states to customers residing all over the country. In the USA, each state is subject to different tax laws, so sellers face some confusion on where to register for tax law compliance.

There are many states that have enacted Marketplace Facilitator laws, which shifts responsibility from a third party seller to marketplaces like Amazon. In states that have those laws in place, Amazon calculates, collects and remits tax for you. However, there are many states that have not enacted those laws where sellers are responsible for sales tax compliance.

Amazon-Related Alternatives to Amazon FBA

Amazon FBM

If you want to take advantage of Amazon’s enormous market of established customers but try to cut costs by fulfilling your own orders, you can sell as an FBM seller. With FBM, you handle everything from product sourcing to order fulfillment and inventory storage yourself. You essentially just use Amazon’s platform to list your products. While you won’t have access to Prime customers, you do have the ability to do dropshipping as an Amazon FBM seller

Seller Fulfilled Prime

If you want to fulfill your own orders while taking advantage of those loyal Amazon Prime members, there is the Seller Fulfilled Prime option. Seller Fulfilled Prime is a program that allows you to deliver to domestic Prime customers while using your own warehouse for storage. There are many requirements for the Seller Fulfilled Prime program, including using Amazon’s Buy Shipping Services for 99% of orders. 

Amazon Multi-Channel Fulfillment

Amazon Multi-Channel (MCF) Fulfillment is an option for sellers who want to sell on platforms outside of Amazon but outsource storage and order fulfillment to Amazon’s advanced systems. You can easily integrate with all your E-commerce channels like Shopify or WooCommerce. Amazon MCF offers Prime-like delivery speeds at low predictive pricing with up to the minute tracking.

Conclusion

There are pros and cons to every business model. It’s up to you to decide whether the pros outweigh the cons in relation to your own situation. Overall, there are a lot of benefits to Amazon FBA and it offers many attractive qualities like passive income potential and scalability people often seek out in online business. While it’s not our favorite option to make $100k/year online (that would be local lead generation), if you put in the work to build your Amazon FBA business, you can create an incredible lifestyle for yourself.

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    1. Hi J R. Thank you for taking the time to comment. I really appreciate your kind words and am pleased to hear you enjoyed the article. I post new content regularly so stop by again anytime.

  1. Great article with a couple of gems. Am currently working on improving my product ranking. Any suggestions of a great Amazon keyword tool that can improve my product listing.

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