June 6, 2022
One of the biggest mistakes that brands make is they don’t completely understand the Fulfillment By Amazon (FBA) costs that come out of their disbursements from Amazon. It’s one of the easiest pitfalls to selling on the platform. It’s easy for a brand’s margins to be eroded if they aren’t mindful, so in this post we’ll cover how these costs appear, how to avoid FBA fees, and how to maximize your margins to stay ahead of your competition.
How FBA Impacts Your Brand’s Margins
The FBA program is the primary way that brands should be fulfilling their products when being sold through Amazon. What the program is, in a nutshell, is you send your products to Amazon’s warehouse in bulk, and then they will distribute it through their massive warehouse network to fulfill orders directly as customers place them.
The important thing to remember is that Amazon charges brands a fee to utilize the FBA service. What most brands don’t know, however, is the impact of that fee, or the control they have over that fee from Amazon. In this post we want to leave you with a better understanding of the basics of the FBA program, and the rules and regulations involved with the program. We’ll go over some of the preparation that the product needs to go through before it reaches an Amazon warehouse, things like needing to be packaged a certain way, or labeling requirements.
One of the things that causes confusion for brands most often is what Amazon calls “Size Tiers”. Amazon measures the dimensions and weight of a packaged product ready for shipment and determines the fees it will charge to fulfill that item based on that. It can make quite the difference in the long run if you are selling a product with specific packaging design for eCommerce or Amazon exclusively. It also comes into play when selling multi-packs or bundles as well. These are some of the key components to understand when trying to maximize your margins, and get the most out of the FBA program.
How To Avoid FBA Fee Pitfalls
The best way to avoid being hit by unexpected fees from Amazon is to understand what Amazon asks and expects of sellers, and the rules and regulations involved with the FBA program.
The number one core value at Amazon is customer satisfaction. They want to maximize the customer experience in order to keep them as a long term customer regardless of what they’re actually buying. It’s easy for brands to get frustrated when they’re having to change entire fulfillment processes in order to stay compliant with Amazon’s policies, but these processes exist to give customers a phenomenal experience. And you, as a brand, are benefitting from that too. So if they request a product be prepared, packaged, or labeled in a certain way it’s for the benefit of all involved.
We’ve written about it in previous pieces as well, but Amazon is just as much a logistics service as they are an eCommerce company. They have hundreds of warehouses and sorting stations all around the country to process and ship out the products customers are buying. With a network as big and complex as they have built to sustain this system it really becomes a numbers game. They rely on those standardized rules and regulations to keep things flowing smoothly in those facilities from the time inventory arrives until it is shipped out after sale. We’ve worked with brands who haven’t been fully compliant with Amazon’s rules and regulations, even with minor issues, and Amazon will slap them on the wrist. The brand hadn’t done anything intentionally wrong, but they had just fallen out of the range Amazon was looking for.
What Brands Need To Know
One of the main things brands need to have a handle on is prepping their product for Amazon. By “prepping their products for Amazon” we’re talking about the things that need to be done before Amazon stocks the product on the shelf for Prime fulfillment. This can happen at the factory or manufacturing location, or it could even be handled by a co-packer or a 3rd party logistics company.
In some cases, you can have Amazon handle the prep requirements for you. There is an associated cost involved, but Amazon keeps their costs competitive versus what you’d pay from a 3rd party (e.g. 3PL or co-packer).
There is no right or wrong answer when it comes to what is best for your brand. Obviously the cost associated will be a big factor in your decision, but it’s not always the deciding factor. Let’s say you have a pallet of one thousand small, thin items, and Amazon says that you need to label them all individually over the UPC code for FBA compliance. It probably doesn’t make sense for one or more people from your team (or your 3PL’s team) to open them all up individually and apply the labels, so in this case the best option would most likely be to pay the cost to have Amazon handle it.
Earlier on we briefly covered the size tiers that items will fit into once they’re in the Amazon inventory, and that is a very important metric to keep in mind. The bigger and heavier your product is, the more intensive the shipping process for it becomes. In Seller Central there is a guide to help calculate what your FBA fee may look like based on the dimensions and weight of your product (link to specific fees). It’s important to make sure you’re calculating this correctly, as Amazon will use the greater dimensional weight or the unit weight for most of its size tiers. However you send it to Amazon is exactly how they’re going to measure it to determine it’s FBA cost.
This becomes crucial when you begin to look at bundling or selling multiple items as we alluded to earlier. When you go into a grocery store and see a bundle of products, let’s say for instance ketchup, mustard, and relish all in one package, those bundles are usually always strategically packaged to maximize the storage and shelf space that bundle takes up, and the exact same thing happens at Amazon.
Keep Amazon In Mind During Design
If you’re rolling out a new product for your brand, one of the pieces of advice we give to brands most often is to design with Amazon in mind. Given how important Amazon will be for your brand, you don’t want to find out there need to be changes to your packaging or product to make the margins you need on a per unit basis. Think things like trying to keep your item within the best size tier, or you may even have labels or barcodes required by Amazon printed directly on your packaging to save on labor fees you’d incur otherwise for applying those.
Recent Changes To FBA Fees And Rule Changes
Like other logistics services such as UPS, FedEx, and USPS, Amazon changes their FBA fees annually. With the current rise of inflation costs have already risen this year, and it is expected for these costs to increase every year. Most recently (In April, 2022,) Amazon announced they were implementing a 5% surcharge on all FBA fees. It’s just on FBA fees, and it essentially amounts to a fuel surcharge because of the current high gas prices in the US and around the globe.
It presents a decision point to brands: Do they eat those costs, or do they pass them along to the customer and raise their prices? There are so many brands that we have worked with through the years that have kept their selling price the same, but their margins keep getting smaller and smaller because their FBA fees keep increasing. There is no right or wrong answer because every brand and situation is different, but it’s definitely something worth keeping in mind, and trying to stay ahead of.
How To Maximize Your FBA Margins And Beat Your Competitors
Whether you’re an established brand already selling through Amazon, or a new brand looking to enter the market, how can you put the things we’ve discussed in this post to work for your brand?
Audits: Amazon is a massive company with millions of items in their inventory. Mistakes can happen. Make sure to download a fulfillment report from Amazon and see what they list the dimensions and weight of your product at, then measure it yourself and make sure the figures are correct. If you think the Amazon measurements are wrong you can request a re-measure for your item.
Watch For Fee Changes: Sometimes Amazon will actually re-measure and re-weigh an item on their own, and what can happen is if you have an item that is being sold through Amazon by other distributors or 3rd party sellers and they are packaging or prepping it differently Amazon may start charging you based on their measurements. The Amazon measurements are set at the product level, not at the seller level. You have to watch for changes because Amazon does not notify sellers about those kinds of changes proactively.
If you understand these above points, and the margins you need to hit for each unit sold, then you’re going to stay ahead of your competition on Amazon.
Not sure if you’re maximizing your FBA margins? Schedule a call to discuss best practices