When running an ecommerce business, boosting your net profit often means finding ways to cut costs wherever you can, without…
Selecting the Right Amazon Fulfillment Option [+Infographic]
This article provides an overview of Amazon’s fulfillment options: Fulfillment by Amazon (FBA), Seller Fulfilled Prime (SFP), and Merchant Fulfilled Network (MFN). We’ll cover the pros and cons of each to help you decide which option is the best for your business.
According to a recent report, Amazon was responsible for 44% of U.S. e-commerce sales and 4% of all US retail sales in 2017. Amazon is one of the largest, if not the largest, sales channel for US sellers. It’s imperative that sellers maximize their exposure on Amazon while optimizing their fulfillment strategy to ensure they can get products in buyers’ hands quickly and cost effectively.
One factor that sellers have to weigh when evaluating their fulfillment options is reaching Amazon’s most coveted customers, Amazon Prime Members. According to a recent study, prime members spend $1,400 annually on Amazon compared to non-members who spend $600 annually on Amazon. Memberships continue to grow, recently surpassing 100 million members.
Fulfillment by Amazon (FBA)
FBA is a service where Amazon manages your inventory at their fulfillment centers and will pick, pack, and ship orders to your customers. The seller is responsible for the associated fees, including storage and fulfillment fees.
By using FBA, sellers leverage Amazon’s world class operation and large fulfillment center network. The seller doesn’t have to worry about managing their own warehouse and fulfilling their own orders, allowing them to focus on running other facets of their business.
FBA gives sellers the option to offer free, one or two-day shipping to Prime Members. This is a huge draw to sellers as it gives them the best chance of winning the buy box with prime members.
While having massive scale and operational expertise is one of Amazon’s biggest advantages, it can also be one of their biggest weaknesses in terms of flexibility and cost for sellers.
According to Amazon, the company now operates 75 fulfillment centers and employs 125,000 full-time employees in the US. They are spending billions of dollars a year to run these fulfillment centers and these costs are passed down to the sellers. Amazon’s ever-changing fulfillment and storage fees for FBA sellers is well documented and can be pain point for sellers as these costs eat into their profits.
Like most businesses these days, sellers have to be nimble in order to keep up with customer demands and industry trends. Once your product is shipped to Amazon to be stored and fulfilled, your flexibility becomes a lot more limited. Sellers’ products are tied up at Amazon centers making it challenging to sell via other channels. In addition, sellers can no longer make changes to the packaging, add new inserts, or do any other custom kitting. This can be a deal breaker for a lot of sellers, especially high growth brands.
Seller Fulfilled Prime (SFP)
SFP is a program that allows sellers to sell their products on Amazon with the Prime badge, while storing and fulfilling their own inventory at their warehouse or through their third party logistics (3PL) partner. Sellers who qualify are required to maintain Amazon’s strict shipping guidelines and manage all customer inquiries.
We did an in-depth analysis of SFP and provided a cost model in the advantages of seller fulfilled prime article we published in September. Here’s a brief summary of what we covered.
SFP gives sellers complete control of their inventory while their product still gets the Prime badge. For a Prime member, their experience will be the same if the seller is using SFP or FBA. By the seller managing their own inventory, they have more transparency and ability to manage their storage and fulfillment costs. These can lead to large costs savings, allowing sellers to run a more stable and profitable business.
Also, by having physical control of their inventory, sellers have more flexibility of how they distribute their product to non-Amazon sales channels such as brick and mortar retailers and etailers. This flexibility is especially advantageous when there are spikes in sales due to seasonal events and promotions.
Another major advantage is SFP gives sellers more control of the customer experience. With having physical control of their product, sellers can customize the manner in which the product is presented. For example, sellers can ship their product in branded boxes, insert marketing materials, or use custom packing materials. Not to mention, sellers can adapt more quickly to changing customer and business needs.
It’s not an easy task to qualify and maintain the SFP status. Amazon understands that their Prime members are extremely important to their own business, so their SFP requirements around delivery and customer service are as rigid, if not more rigid, than their own. For example, SFP sellers are required to maintain a 97% on-time delivery rate and if the seller falls short of this metric or other operational requirements, the seller runs the risk of losing their SFP status and ultimately, exposure to Prime members. Not all sellers have the operational expertise to consistently meet SFPs requirements.
When fulfilling using FBA and selling to Prime members, Amazon covers the shipping cost. This is not the case for SFP as the seller is responsible for paying for the two-day shipping that comes standard with Prime member purchases. If sellers don’t plan properly, expedited shipping costs can eat into their profits and make SFP a more costly fulfillment option.
Merchant Fulfilled Network (MFN)
MFN is when sellers ship and manage their own products from their facilities or 3PL partner when an order is placed on Amazon. Sellers are responsible for stocking and storing their own inventory, fulfilling their own orders, managing returns, and working directly with the customer. MFN sellers do not get the Prime badge next to their listings on Amazon.
MFN sellers have complete control of their inventory and the fulfillment process enabling them to have better control and visibility of their costs. They have the freedom to manage their labor, materials, freight, etc. Sellers will often bid out their business to 3PLs to drive costs down even further, while offloading the storage and fulfillment headaches.
Similar to SFP sellers, MFN sellers own the customer experience. The branding on the boxes, marketing materials, and any other customization. This can be a big draw for sellers looking to make a good customer impression with the goal of driving repeat business.
Often times, MFN sellers have smaller sales volumes so having control and flexibility of their inventory is paramount. Imagine if a seller gets a large order from a retailer, but all their inventory is stored at an Amazon fulfillment center. Or the sellers gets a large spike in order volume on the website due to a promotion or a season event like Black Friday and they don’t have the inventory on hand. Either scenario could negatively impact their business, reputation, and profits.
The lack of exposure to Amazon Prime members for MFN sellers is possibly the biggest drawback of the program. Listings without the Prime badge are often overlooked or can be de-prioritized by the Amazon search algorithm. Amazon Prime members pay $112 a year and one of the major draws to the program is free two-day shipping which is denoted by the Prime badge.
The advantage of a seller managing their own inventory can also be seen as a disadvantage. Managing the entire storage and fulfillment process can be costly and time consuming if the seller lacks experience in this area. Sellers can be easily distracted by storage and fulfillment operational issues which takes away other facets of their business. These risks and distractions can be mitigated with a knowledgeable 3PL partner.
Summary: FBA vs. SFP vs. MFN
FBA is Amazon’s one-stop-solution for all your storage and fulfillment needs. Their large fulfillment network and experience are ideal for sellers who don’t want to deal with the headaches that come along with managing their own warehouse. Sellers get the benefit of cheaper, expedited shipping services and the Prime badge.
The downside of FBA is that sellers are at the mercy of Amazon when it comes to storage, fulfillment, and other service fees. Also, sellers don’t have physical access to their products so can’t customize orders and offer branded experiences for their customers.
SFP allows sellers to manage storage and fulfillment of their products at their own facilities or at their 3PL partner’s facility, but still reach Amazon Prime members and keep the Prime badge next to their listings. The SFP and FBA experience from a buyers perspective are identical. Sellers have complete control and visibility of their storage and fulfillment processes and costs.
The biggest disadvantages of SFP is that the seller is held to strict operational metrics which can be a challenge for some sellers or their 3PL partners. Also, the seller is responsible for covering the expedited shipping costs that comes with the Prime membership.
MFN is used by sellers when they want to sell their products on Amazon and manage their own storage and fulfillment. Sellers have complete control of their inventory enabling them to control the customer experience, including their branding and customization of the orders.
The biggest disadvantage that MFN sellers face is that they do not get the coveted Prime badge. This limits their ability to reach and attract the 100 million Amazon Prime members.
DCL Logistics fully supports the technical and service requirements for FBA, SFP, and MFN. If you need help deciding which Amazon fulfillment option is best for your business, go to DCL Logistics’ Amazon Fulfillment Services page to learn more or please contact your DCL Logistics Account Manager or contact us here.