What is FBA? Definition & how Fulfillment by Amazon works

Panna Kemenes
09.03.22
5 minute read

Fulfillment by Amazon (FBA) is a popular service that handles storage, shipping, and customer service for Amazon sellers. For a fee, sellers can pass responsibility for all order fulfillment to Amazon.

FBA has many advantages. It’s worth considering these against the costs and suitability of the service.

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What is FBA, and how does it work?

Fulfillment by Amazon (FBA) is a service that offers fulfillment and shipping for third-party sellers. Sellers promote and sell goods, and Amazon handles the storage, packing, and shipping. It also takes on after-sales customer service and returns.

This allows businesses to grow by providing access to Amazon's logistics network.

What is an FBA seller?

An FBA seller is any third-party Amazon seller enrolled to use Amazon's fulfillment services. These sellers list, market, and sell their goods the same as any seller.

However, they do not have to store, pack, or ship their goods. These services, along with customer service and returns, are handled by Amazon.

Many Amazon sellers are using FBA. A 2021 Amazon report claims that half of all Amazon US sellers use FBA. The reasons to join them are compelling. On average, sellers see a 20–25% increase in sales after adopting FBA.¹

You won't be alone as an Amazon seller – third-party sellers make 58% of all sales on Amazon.²

What tasks is an FBA seller responsible for?

With FBA, the seller runs their business and sales, but not the logistics that follow. Amazon does not manage the whole business.

The seller chooses what items to sell, lists sales, tracks inventory, and markets items. They also have to arrange delivery of stock to Amazon warehouse locations.

Core business tasks are left to the seller. By outsourcing the after-sales and fulfillment functions, sellers can free up time and resources to focus on these vital parts of the business.

How can you start selling with FBA?

Enrolling with Amazon FBA is straightforward. First, you will need an Amazon seller account to sell as a third party.

You need to choose between two plans as a seller – Individual or Professional.

  • The individual plan has a sales fee per item.
  • The professional plan charges a fixed monthly subscription regardless of sales volume. In general, if you sell more than 40 items per month, the Professional plan makes sense.

You then list your items for sale on Amazon. In most cases, this is done using a Global Trade Item Number (GTIN), such as a UPC, an ISBN, or an EAN.³

This ensures uniformity across the Amazon platform. You then add your own titles, descriptions, images, and prices.

Once you have an account open and inventory listed, you can apply to make the switch to FBA. Your inventory items need to be packed, labeled, and shipped to Amazon. From there, Amazon takes over the delivery, fulfillment, and customer service.

FBA start selling

How much does it cost to use FBA?

In addition to standard fees for a seller account and each item sold, there are further costs for using FBA. There are several components to these costs.

Amazon provides extensive details of these and tools to estimate total costs.

In summary, sellers will face the following fees:

  • A fulfillment fee per item sold. This varies depending on the item category, size and weight. The smaller and lighter the items, the lower the fee – much like any postal service.

  • A monthly inventory storage fee. This is a monthly warehouse storage charge based on average daily volume. Rates are higher for peaks months of October to December.

  • A long-term storage fee. This is an extra fee that applies for items that have been stored in a warehouse for more than 365 days.

  • Removal fees. Amazon charges one-off fees when items are removed from Amazon storage. Amazon can return stock or dispose of it.

  • Return processing fees. Amazon offers free returns to customers, but will pass a fee onto the seller for each return received.

  • Other charges. There are extra fees imposed for some situations. These include fees for exceeded storage limits and inventory delivered to Amazon in the incorrect way.

As an example, consider an FBA seller listing T-shirts for sale.

  • Amazon gives an example fulfillment fee of $5.07 for each item sold (assuming a weight between 12 ounces and 16 ounces).

  • The monthly storage fee for inventory would be $0.83 per cubic foot, rising to $2.40 per cubic foot in peak months.

  • The removal fee for each item would be $1.14.

🔍 You can also read the guide on Amazon seller fees to learn more.

What are the pros and cons of using Amazon FBA?

There are several things to consider when looking at Amazon FBA. The service has plenty of advantages for businesses, but comes with costs and other challenges.

Pros

  • Outsourcing a resource-intense service frees up time. Storing, sorting, packing and shipping are time-consuming tasks. Removing these from your workload allows you to focus on other areas of business management, promotion, and sales.

  • Access to Amazon Prime. When using Amazon FBA, your items will be listed and handled using Amazon Prime. This offers Prime customers fast and free delivery. One of the main reasons for "shopping cart abandonment" is unexpected shipping costs, and Prime removes this. As an extra benefit, the fees charged to the seller are the same whether the customer uses Prime or not.

  • Use of Amazon customer service. FBA includes after-sales customer service and handling of returns. This is an efficient 24/7 service provided by Amazon. For small and medium-sized companies especially, this is very likely a better service than they could offer themselves.

  • Flexible storage space. Charges are based on the total volume of goods stored. This can be increased as the business expands. Increasing – or decreasing - your own physical storage space is not so simple.

  • Open up to international sales. Amazon sellers can easily offer items for sale in other countries. This is a major consideration for some sellers, and it opens new markets.

  • Access to other sales channels. Amazon offers a multi-channel fulfillment solution for sales on other platforms. These platforms include eBay and BigCommerce.

Cons

  • FBA comes at a cost. Businesses need to look at this and compare the total cost against internal fulfillment.

  • Fees increase the longer the item takes to sell. After a year, there are additional fees, and further fees will apply if the item needs to be removed or disposed of. FBA works best for fast-moving items.

  • Higher returns volume. Amazon offers free returns; this can encourage more customers to return items. Amazon will handle this, but it comes at a cost to the seller.

  • Complex product preparation. Inventory items need to be properly prepared, labeled, and packaged before sending to an Amazon warehouse. This can be time-consuming, and there are penalty charges if not done correctly.

FBA packaging

Should you use Fulfillment by Amazon?

Whether Amazon FBA makes sense or not depends largely on your business model and sales items.

  • If you sell large quantities of the same items, passing the fulfillment to Amazon could save a great deal of time and effort.

  • If you sell smaller volumes of items or lots of individual items, FBA may not be right for you. Second-hand booksellers, for example, may struggle with lots of one-off items to prepare and long storage times for some items.

Cost is important, of course. You need to be aware of the costs, fully understand them, and compare them against what it would cost to offer services yourself.

For example, outsourcing warehousing is a good cost-saving – but not if you already have access to space. Amazon offers a tool to help you estimate costs.

It is also worth keeping in mind the branding and customer experience elements of FBA. This can make a big difference in the eyes of your customers. Take a look at what your competition is doing – many customers may lean towards Amazon or Prime sales if other things are the same.

International sales are another consideration. If you plan to expand internationally, Amazon FBA can help. Amazon has the network and resources to enable businesses to expand. 20,000 US sellers launched internationally in 2021 using the Amazon network.⁴

Receive international payments with Wise Business

One of the big advantages of Amazon FBA is that it allows you to sell internationally. This opens up new revenue channels, but also means you need to be aware of handling foreign currency payments.

Wise Business is a great option for this.

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Wise is the World's most international account. You can open up to ten major foreign accounts all in one place, to get paid just like a local. Wise account details are compatible with Amazon US, Amazon Europe, Amazon UK, and Amazon Australia.

Making it easier for customers to pay you is a direct way to get paid faster. The Wise Business account lets you do just that.

🔍 Read more Amazon seller articles:

Sources:

  1. 2021 Amazon Small Business Empowerment Report
  2. Beginner's Guide: How to Sell on Amazon
  3. Beginner's Guide: How to Sell on Amazon
  4. 2021 Amazon Small Business Empowerment Report

All sources checked March 8, 2022.


This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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