Any third-party seller can tell you that Amazon makes a bunch of money by charging them fees associated with Fulfillment by Amazon, or FBA. The profit margins on storage and handling fees are probably pretty good. Amazon says 40% of their third-party sales go through FBA, so the fees are nothing to sneeze at.
But other factors are at play. Amazon has some convincing reasons for promoting FBA besides fee revenue. The company is very interested in signing up more sellers for their fulfillment services. They are making the necessary investments to grow this part of their business.
Amazon is opening six more distribution centers and fifteen sorting facilities to take care of the logistics sellers are willing to turn over to Amazon through the FBA service. More facilities means faster fulfillment and lower shipping costs. This is great for Amazon and their customers. Sellers are flocking to FBA not only because it relieves them of shipping hassles, but because FBA items are eligible for Amazon Prime. Prime is the membership option for Amazon shoppers. Members can take advantage of free two-day delivery on somewhere around twenty million items.
Prime members tend to look for items covered by Prime first, before placing an order. Sellers whose products are Prime-eligible are likely to win a higher percentage of sales than competitors who self-ship. Some sellers have experienced large sales volume increases after signing up for FBA. There aren’t many moves a third-party seller can make with a potential to rapidly increase sales by 20% or more. FBA appears to be one of them.
As more sellers use FBA, they add more products to the catalog appealing to Prime members. Additional product availability convinces more customers to sign up for Prime, which is good news for Amazon.
Amazon’s interest in growing the volume of Prime members isn’t limited to collecting the $99 annual fee. More valuable to Amazon is the sales-per-customer statistic. A study by Consumer Intelligence Research Partners reveals Prime members spend an average of about $1500 per year on Amazon. Non-members spend only about $625. Prime membership makes a customer more than twice as valuable!
Amazon may be the biggest FBA beneficiary. They make money on every shipment. But Fulfillment by Amazon appears to be a win for all involved. Sellers get to reduce storage space for inventory, gain access to a desirable subset of Amazon shoppers, and no longer have to deal with packing and shipping logistics. Amazon customers get their items quicker and at low cost. They also benefit from access to the Amazon video streaming content and Amazon’s e-book lending library that are part of their Prime memberships.
Third-party sellers have their reasons to be wary about enrolling in a program that Amazon sees as highly beneficial to their own company. As with any business decision, the choice between jumping on the FBA bandwagon or do-it-yourself fulfillment must take individual circumstances into account. FBA may not be for everyone. But Amazon would be happy to take on as many sellers as they can handle. It is easy to see why.
