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November 30, 2021

How Does Amazon FBA Work? Everything You Need To Know

Amazon FBA (fulfillment by Amazon) is an excellent program for sellers, but it can be hard to understand.

If you are not currently using this program on Amazon, you should consider setting up an account and learning how it works.

In this article, I will explain what the FBA program is and how it works in detail. You'll learn about the evolution of FBA and some changes that have been made over time. In addition to learning about these changes, I will also share some tips for maximizing sales on Amazon through FBA. 

Finally, we will go over some frequently asked questions about this topic so you can really understand how to make the most out of it.

Let's dive into all of these topics now!

What Is Amazon FBA?

Introduced in 2006, Amazon FBA is a program that allows you to use their whole fulfillment network. Amazon sums it up as: "You sell it, we ship it."

How Does Amazon FBA work?

Here is how Amazon FBA works in three easy steps.

Step 1: Packaging And Shipping

Packaging and proper labeling of products before sending them to an Amazon warehouse is the first step. There are three options for labeling products:

  • Using Amazon product labels
  • Using FBA virtual tracking (free service) on eligible products
  • Using FBA label service for eligible products. This is not free

If you have chosen FBA virtual tracking and FBA virtual service, you can prepare and package your products and send them to Amazon fulfillment centers.

If you choose to use Amazon product labels, ensure the labels are of sufficient quality and can be scanned before sending them to an Amazon warehouse.

When shipping your products to Amazon's warehouses, you can use your own carrier or Amazon’s.

Step 2: Product Storing

Amazon scans barcodes and receives your products in their fulfillment centers. Amazon records unit dimensions and weight of the products and stores them in their ready-to-ship inventory.

Step 3: Delivery To The Customer

A customer orders your products. Amazon picks the products from their inventory and packs them for delivery. Amazon also takes care of customer support and returns.

Now that we know what FBA is and how it works, let's explore its evolution, changes, fulfillment costs, and other factors.

Amazon FBA Evolution

Ever since Amazon started selling books, the company has been driven by innovation. New product categories were added, and new services emerged as well. These changes helped Amazon solidify its position as the largest online marketplace.

Amazon FBA is no different. Since its launch in 2006, many changes have occurred, resulting in what we see today. Amazon FBA's Evolution has made the program better for sellers, and even more competitive against Fulfillment by Merchant (FBM).

Amazon FBA Changes

Fulfillment by Amazon has continued to change over the years in terms of fees and services. Listed below are some of the significant changes that have occurred to the program over time.

Starting September 15, 2018, long-term storage fees changed from twice yearly to monthly. The fee applies for items that have been in a warehouse for more than 365 days.

In 2020, the commingling of inventory was introduced. Commingling, also known as stickerless inventory, means Amazon stores all the units of one product together, no matter who they are from. Amazon then ships any one of these to people who buy them.

Another change occurred in August 2020 with the introduction of the inventory performance index. This helps sellers determine how their inventory is performing. It is calculated using stranded inventory, excess inventory, in-stock inventory, and sell-through rates.

Amazon FBA is constantly changing, and the good news is that the changes are always communicated early enough. The updates are posted on the FBA news page. Amazon sellers are required to stay up to date with the changes.

Amazon FBA Fees

Fulfillment Fees

The fulfillment fee is also known as the pick and pack fee. The fulfillment fee is determined by item weight (shipping and dimensional), size, and category.

There are three product types with varying fees: Non-dangerous products, apparel, and dangerous products. 

Here are the fulfillment fees for standard size products. The fees are calculated using size tier and shipping weight.

Pictured above: Non dangerous goods fulfillment fees

Pictured above: Apparel fulfillment fees

Pictured above: Dangerous goods fulfillment fees

Below are the Amazon FBA fees for oversize products. The fee per unit is based on product type (dangerous or non-dangerous), size tier, and shipping weight.

Pictured above: Fulfillment fees for oversize products

Here are examples of how much you will pay for a small standard size item and large standard size apparel. The fee payable is based on product dimensions, unit and shipping weight, and product size.

Pictured above: Fulfillment fees examples

You can also use the FBA Revenue calculator to estimate fulfillment fees. To get an estimate with the calculator, you can provide your product name, UPC (Universal Product Code), ASIN (Amazon Standard Identification Number), ISBN (International Standard Book Number), or EAN (European Article Number). For a new product, you need to input the product dimensions, unit weight, and product category.

Inventory Storage Fees

This fee is charged for all items stored in Amazon warehouses. It is measured in cubic feet. Storage fees vary based on time of the year and product size.

Below is a rate card showing the monthly storage fees. The card shows the fees according to the month and product classification; dangerous and non-dangerous. The rates are different for standard-size and oversize.

Pictured above: Monthly storage fees rate card

Here are other FBA fees you’ll encounter:

  • Long-term storage fees: Fee charged for items that have stayed in Amazon's fulfillment centers for more than 365 days.
  • Unplanned services fees: Fees for inventory that is sent to the warehouse without proper preparation and labelling.
  • Removal order fees: For items returned or disposed of by Amazon and it is charged per item.
  • Returns processing fees: The returns processing fee is charged when customers are allowed free return shipping by Amazon.

The Pros And Cons Of FBA

To help you make an informed decision on whether fulfillment by Amazon is right for your eCommerce business, let's look at its pros and cons.

Pros of FBA

  • Free shipping: Your products qualify for free shipping and Amazon Prime. Products with an Amazon Prime logo are shipped within two days.
  • Customer service support: Amazon offers customer support via phone or email 24/7 to FBA sellers.
  • Returns managements: Amazon handles all product returns and refunds for FBA sellers.
  • Discounted shipping rates: Amazon is a global fulfillment giant, so they can offer online sellers some great shipping rates that might not be possible for an individual seller. 
  • Join other FBA specialized programs that include: FBA small and light, FBA export, FBA subscribe and save, FBA Pan-EU, and multi-channel fulfillment.
  • Access to unlimited storage space: Amazon has more than 100 fulfillment centers that FBA sellers can use.
  • Buy Box: Chances of your products getting on the buy box are high if you use FBA. Buy box means you will experience an upsurge in sales resulting in a better BSR.

Cons of FBA

  • Cost: As we've seen above, FBA sellers have to pay Amazon fees; this might hinder people from using this program. Although the costs are worth it, they might be a barrier to sellers with limited capital.
  • Sales tax: Since sales tax is handled at the state level, you might be confused about which rate to use. This happens when your products are warehoused in a different state from where your business operates. Sales tax compliance can be a nightmare because you have to keep up with all the rules from different states.
  • Increased returns: Some FBA sellers have reported more product returns because of Amazon's open return policy.
  • Payment of fees: Amazon FBA fee payment cannot be avoided because the fees are deducted before Amazon pays you.

Pictured Above: Amazon Buy Box

Tips For Increasing FBA Sales

To increase your FBA sales and profits, there are 4 key areas to focus on:

  • Product Selection and Sourcing
  • Pricing and Listing Strategies
  • Amazon SEO

Product Selection And Sourcing

Making wise buying decisions can turn a slow seller into a big winner or put you in a position to take advantage of changing market conditions.  

It is very easy when sourcing new products to fall into the trap of trying to find the next best selling product that you can sell for a significant margin and make a decent profit. But, while this might work in the short term, your business will suffer if there isn't a stable stream of buyers entering the market. 

Having products removed from Amazon because of poor sales or getting banned from selling because of complaints is something nobody wants to experience.

Instead, aim to do product research first and to source products with solid demand that will sell at a steady rate over time. These are the types of products that command higher pricing and more significant margins.

When sourcing for products you should look for high quality manufacturers that provide the best quality at affordable prices.

Pricing & Listings Strategies

Getting your prices right is vital, but so is communicating these prices to customers. This could be via titles, bullets, or even reviews.

If we're talking about increasing sales, we need to talk about how the price of your products impacts sales volume and profit.

It is easy to forget that you can't just list a product for $100 and expect it to sell at that price point. It just won't happen unless there are very few sellers on Amazon or those that are there aren't very good at what they do.

Take a look at the leading marketplaces for Amazon, and you'll soon spot price patterns emerging as every region has its demand patterns and pricing behavior.  

The USA marketplace has the highest average price for most items. This is because many sellers on this platform tend to list their products for as close as possible to $XX.X0.

The next marketplaces that Amazon operates are the United Kingdom and Canada. Here we can see that sellers list their products at much lower price points.  

Finally, we have the European marketplaces including Germany, France, Spain, and Italy; here, it is a case of high prices across the board.

Also, don't forget that you will need to factor in your shipping costs when setting a selling price. Shipping costs are a huge factor, especially when you’re buying from Alibaba. Learning how you can minimize Alibaba shipping costs will help you have better margins. 

Remember that Amazon applies FBA fees at different rates depending on the size and weight of your parcel, so make sure you factor in the fees before deciding on a selling price.

Amazon SEO

Let's now look at how you should optimize your product listings and description pages for Amazon SEO (Search Engine Optimization).  Amazon SEO is what you need to rank high in Amazon's internal search results for certain keywords. This means your FBA products will show up high in the search results since most people searching for products on Amazon use the internal search. 

As we know, Amazon is a search engine that operates much like Google and Bing do. Like those search engines, there are lots of things you can do to improve your listings.

A few tips:

  • Add quality high-resolution images and use them right across your listing (not just in the gallery). Don't forget to add alt tags and descriptions for these images.
  • Have a look at your competitors' listings and see what they have done. Find out which keywords you should focus on, and ensure that any listing title or bullets are not copied from other sellers selling the same item.
  • Do some keyword research to find more long-tail variants of your keywords. Use the keywords in your product listing to improve ranking.
  • Optimize your listings for mobile users by using a responsive design template that displays well on mobile devices.

For full details on how to optimize your listings and product pages for Amazon SEO, please check out our blog post on how you can rank on the first page of Amazon.

How To Get Started With Amazon FBA

To join Amazon FBA, you need a seller account. Choose a professional seller account that costs $39.99 per month and try to familiarize yourself with seller central before listing your products. 

You can also read Amazon's guide on FBA. It has all the relevant information on becoming an FBA seller and there are also videos.

Amazon FBA FAQ

How much does the average person make on Amazon FBA?

According to Jungle Scout, the average person who invests in learning how to sell on Amazon FBA and launches a new product can expect to pocket around $1,000 per month.

This figure could be much higher or lower depending on several variables but what is clear is that with experience comes the knowledge that will allow you to move up faster.

Can you really make money with Amazon FBA?

Yes, but like any business venture, there are no guarantees.

It takes work, dedication, and the ability to learn on the go, but it can be done, especially if you follow a detailed guide.

What can I sell on Amazon FBA?

Virtually anything, but the popular categories are:

  • Health & Personal Care
  • Home & Kitchen
  • Toys & Games
  • Sports & Outdoors

Final Thoughts

So, there you have it, a complete guide on how Amazon FBA works. A recap on what is outlined above: Amazon FBA changes, fees, tips, pros, cons, and frequently asked questions.

By following the steps outlined in this article, I hope that you will be on your way to getting started with Amazon FBA and making money online. Amazon FBA costs money, and it is not a get-rich-quick scheme, but neither is it a scam or an impossible task.

With the right knowledge and attitude, there is no reason you cannot achieve what you set out to do when it comes to selling on Amazon.

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Mike Vestil

About the Author

Mike Vestil is an author, investor, and speaker known for building a business from zero to $1.5 million in 12 months while traveling the world.

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