Ask any ecommerce retailer what their biggest expense is, and they won’t point to web hosting, design, or marketing. They’ll point to shipping as their biggest expense—and with good reason. Although the cost of many business expenses has risen over the years, shipping costs have skyrocketed. They surged along with fuel prices and haven’t calmed down since.
Amazon’s FBA (Fulfilled by Amazon) program seems to be the answer to ecommerce business owners’ prayers. The service uses Amazon’s extensive warehouse system and sophisticated ecommerce engine to pick, pack, and ship. Retailers send pallets of products to Amazon, which in turn ships them out on the retailers’ behalf. As part of this deal, retailers agree to accept returns and ship replenishment stock at Amazon’s request.
If it sounds like too much of a good thing to be true, it might be. Some small business owners love the service, while others find it’s overkill. Whether you proceed with Amazon FBA depends on several factors.
The Pros and Cons of Amazon FBA
Business owners face many pros and cons when deciding whether to use Amazon FBA. Consider these when comparing Amazon with other fulfillment services.
- Your products will be listed on Amazon’s site, which reaches millions of potential shoppers with its powerful search engine.
- You might be able to increase sales by listing with Amazon and using their FBA service.
- The Amazon site has a reputation for providing good value for products purchased through them.
- It’s the least expensive when used with other Amazon tools.
- High pick and pack fees: You may be able to ship items yourself at a lower rate, even when factoring in the the cost of paying staff to do it.
- High monthly storage fees. Again, your local warehouse rates, or rates to rent storage space, might be less expensive.
- You have to ship items on a pallet that meets Amazon’s specifications, and pallets get heavy. Heavy items cost more to ship, so you’re paying twice—once to ship to Amazon, and once to have them store it.
- The partnership can add to the cost of orders that are made through your own website because Amazon fulfills them too. The retail giant wants all the orders going through their site.
For retailers looking to expand their online reach, Amazon FBA can be a good option. The biggest benefit you get is the expanded reach from Amazon’s website. Because customer shipping costs are wrapped into your prices, you pay only one price for each pick/pack/ship item sold through Amazon, and you won’t have to worry about order fulfillment and tracking. Amazon takes care of all that for you.
Not Sure? Consider the Other, Better Options Available
Amazon isn’t the only outsource fulfillment warehouse available to small business owners, and you always have the option of fulfilling and shipping orders yourself.
The main carriers for small retailers include the U.S. Postal Service, UPS, and other services such as FedEx and DHL. Among these four, the U.S. Postal Service and UPS are the most small-business friendly in terms of pricing and services.
USPS and UPS
With both DIY vendors, you need to store items on your own and provide your own shipping materials. You are responsible for readying the order for shipment, weighing the package, and completing forms or printing labels to ship the packages out. Both vendors offer package pickup and various shipping options to help you control costs.
- Shipping costs: Both vendors base costs on weight, package dimensions, and distance shipped.
- Shipping times: Both offer faster delivery at a higher cost with next day, 2-day, and ground or 6-10 day delivery.
- Pickup times: USPS offers scheduled pickups. You can log onto their website and schedule a pickup for the next day. The package must be ready and stamped with the correct date, or the driver might not accept it.
- Tracking: Both companies offer tracking, with UPS providing slightly more detailed tracking by scanned location.
- Packing materials: USPS offers free boxes, but you must use their boxes only when shipping items through their vendors. UPS does not offer free packaging materials. You can always use your own shipping materials.
Outsourced Fulfillment Options
There are 4 costs associated with fulfillment:
- Intake: These are the costs for receiving and storing your items. Most warehouses insist on items being palletized for intake. They might also insist on a minimum pallet size so that they aren’t dealing with many small pallets or half pallets, which can waste warehouse space.
- Storage: You pay for storing items on the pallet or on shelves. You typically get charged on a monthly basis. These costs can vary considerably based on your sales volume.
- Pick/pack: This is the cost to pick items off pallets or shelves and pack them into boxes. Prices vary according to item weight and quantity in a shipment.
- Shipping: Factor in the cost to move goods from the warehouse to the end consumer. Shipping might be from another third-party vendor, such as the U.S. Postal Service, FedEx, UPS, and so forth, or the fulfillment company could have their own distribution network.
- Other fees: Some services charge more to accept returns. Others have additional charges to integrate their software into your ERP system or other business systems so that you can monitor shipping and customer service.
Each of these costs by themselves might not seem to be too bad, but when added up, they can be substantial. Among the various costs associated with shipping, labor costs are usually the highest. Most companies hire hourly workers to pick, pack, and ship goods from their warehouses. Seasonal or temporary workers can be used to round out the workforce. Take into consideration these costs as you tally up your annual budget and assess fulfillment costs.
Shipping Heavy, Fragile, or Large Goods
Another area where fulfillment costs can quickly escalate is if you are shipping heavy, fragile, or oversized goods. Not only must you take into account the increased postage from heavier or oversized objects, but the packaging costs also change. Oversized objects might need special boxes. Fragile objects might call for additional packaging materials, double-walled boxes, and other materials to cushion them during shipping. Some objects cannot be handled by certain freight companies, or companies charge a premium to ship them. All of these factors can alter the costs of shipping and should be factored into your assessment when considering DIY versus Amazon fulfillment costs.
Is Amazon the Right Choice for You?
Amazon FBA offers many advantages but also numerous disadvantages. Depending on your business model and the breakdown of the costs impacting your shipping, you might choose to go with a different vendor.
There are cheaper alternatives to Amazon. You should compare costs across multiple vendors. Here are a few tips for comparing outsourced fulfillment vendor prices:
- Pricing structure: Ask for the vendor’s pricing structures. Some charge by the piece under a certain weight or size. They might add a premium for oversized or heavy objects. Review and compare the pricing structure among companies under consideration for each service offered.
- Warehouse services: Review which warehouse services are included in your contract. Some companies charge a minimum flat rate regardless of how many items are picked, packed, and shipped. Also review warehouse locations and whether you can actually visit a warehouse to see the operation in action.
- Returns: Find out how returns are handled by the vendors you’re evaluating. Ask if they charge restocking fees, and if so, how much.
- Customer service: If a return hits a snag, who will help the customer? Some companies offer optional customer service tasks such as answering emails or phone calls about returns and order fulfillment. Be sure to review the service itself, not just the prices.
- International shipping: If the fulfillment vendor offers international shipping, do they charge extra for it? Can they drop ship from warehouses in other countries? If international business makes up a large proportion of your sales, carefully review the fulfillment vendors’ services in this area.
Bottom Line: Research Before You Decide
Amazon might have the most name recognition when it comes to fulfillment services, but companies have plenty of other options. Whether you conduct fulfillment operations yourself or outsource the work, it’s always a good idea to research services annually to make sure you continue to receive the best price for your needs.
It’s also a great idea to review warehouses—especially those providing customer service for your company—in person. When you actually see their services in action, you can ensure that they’re providing you with the same quality of service you’d give your own customers.
from Fundera Ledger https://www.fundera.com/blog/amazon-fulfillment