October 1, 2012Sizing Up Amazon's 'Fulfillment By Amazon' Program
By Cliff Ennico
Anyone who's ever sold anything online - either directly from a website or on one of the major e-commerce platforms such as eBay or Amazon - knows that often the most unpleasant part of the process is packing, shipping and fulfilling orders. It is labor-intensive, and the time involved can eat into your profits (by limiting the number of orders you can process at any one time).
So it should come as no surprise that one of the hottest things in online retail right now is the "Fulfillment By Amazon" service ("FBA" for short) offered by Amazon.com.
Amazon has been building warehouses and distribution centers throughout the United States to ensure that customers receive orders quickly and inexpensively (often for free). With FBA, online sellers can take advantage of those facilities and "outsource" the packing, shipping and fulfillment part of their business, even if they are not selling on Amazon (for a fee, of course).
According to Chris Green, a leading FBA expert and author of Retail Arbitrage: The Blueprint for Buying Retail Products to Sell Online for Big Profits ($25.00 paperback, $9.99 Kindle), FBA is the future of online retail, at least for small business sellers.
"Setting up an Amazon business that uses FBA is much like buying a franchise," says Green. "With a franchise, you buy a package, get some knowledge and equipment to get started, and then it's up to you to run the business." Unlike a franchise, though, buying and selling online using FBA does not require an initial investment. "There are no major upfront costs to get started," says Green, adding that FBA fees can be as little as $2.00 for orders placed through Amazon.com. "All you really need is a little knowledge, some motivation, and some inexpensive tools and services."
Green's company, FBAPower, offers a variety of software solutions, mobile phone applications, webinars and information products designed to enable sellers to take maximum advantage of FBA.
FBA is a five step process.
First, the seller opens an Amazon seller's account and selects the "FBA" option.
Second, the seller sends its new or used products to Amazon.
Third, Amazon catalogs and stores the products in one of its network of fulfillment centers.
Fourth, Amazon fulfills orders placed directly on Amazon.com or fulfillment requests the seller submits for sales not on Amazon. When listed on Amazon.com, each seller's listings are sorted by total price (price plus shipping) so sellers who use FBA are often first even if they have a higher list price.
Fifth, when an order is placed, FBA picks the seller's products from inventory, packages and ships the products to the customer.
"FBA is a win-win for everyone," says Green. "The customer gets prompt and professional delivery at little or no cost, and the seller can focus on sourcing inventory, expanding their product lines, increasing margins, and putting merchandise up for sale without the hassle of fulfilling and keeping track of individual orders."
So what's the catch?
"You have to know and understand the rules of selling on Amazon, and especially FBA," says Green. "Amazon is much different from eBay where you can mess up and eBay pretty much isn't going to do anything about it. If you're caught breaking Amazon's rules or provide a poor customer experience, Amazon will ban your account, and there will be no second chances."
Your merchandise must also conform to Amazon's product listings and categories. Precisely. So, for example, if you are selling a power drill with only one of the two batteries required, you will not be able to sell it on FBA even if you make proper disclosure.
Probably the biggest catch - one which Amazon is taking steps to correct but may create problems for FBA sellers selling a wide variety of merchandise - is that FBA sellers may not be totally in compliance with state sales tax laws.
Online sellers are required to pay sales tax in their home states and in any other state in which they have a physical presence or "nexus". By using FBA, online sellers have "nexus" in each state in which their merchandise is being warehoused (i.e. where Amazon's fulfillment center carrying their merchandise is located).
While Amazon does send you periodic reports showing you where your inventory is located, Amazon can, without warning or notification, ship your inventory to a different fulfillment center. Also, while Amazon does collect sales tax and remit it to you, it is up to you to register with each state tax authority and pay the taxes to them when due (usually quarterly).
This situation may create compliance headaches for FBA sellers, especially in light of states' increasingly aggressive efforts to collect sales taxes on Internet commerce.
Still, Green says, the benefits of FBA, especially for small sellers, far outweigh the risks. "You are outsourcing your entire shipping department, Amazon is basically absorbing the shipping costs for you, and Amazon buyers prefer FBA sellers because they know they will get their item fast and that customer service will be top-notch. What's not to like?"
Posted by Staff at 7:01 AM
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of Small Business Survival Guide, The eBay Seller's Tax and Legal Answer Book and 15 other books. COPYRIGHT 2012 CLIFFORD R. ENNICO. Permission granted for use on DrLaura.com.