Pros and Cons of FBA and FBM
All right, it's Damian from Marketing Food Online. So in this video, I'm actually going to cover a great topic that a lot of you have asked about. Tapping into Amazon's FBA or FBM program, exactly what is better? Is it better to FBA or FBM a food product, or any product for that matter? And then, what is the difference between FBM and FBA? And is it more expensive to have FBM or FBA? So we're going to dive into that and I'm going to tell you exactly what this is on the back of my board here. We're going to get into that right now.
Welcome back, all right. It is Damien from Marketing Food Online. As I mentioned in the introduction, we have a really informative video on FBA and FBM. Now you're going to wonder which is better and what exactly are these letters you keep spitting out? Damien, what do they mean? So if you're brand new to Amazon, if you're not familiar with these two different services, FBA is fulfillment by Amazon. And it actually means that you can take a product and put it into their warehouse, and they will pull it, pack it, ship it, and handle all the customer service on the back end of the transaction all the way through the transaction. And make sure the product gets to the customer and they handle everything, but it is not free.
"What is the difference between
FBA and FBM"
So the pros and cons are going to be here on my board and we're going to figure out what is better if you use FBA and what is better if you use FBM. And I'm going to dive into each one of these and explain that, from my own experience, we actually utilize FBM, which is fulfillment by merchant. meaning that I personally fulfill every single order that comes through. We use FBA for about 40 different items that are really good shelf-stable food products. They're actually snacks, granola-type products, nuts, and those types of things. But there's a reason why we use those particular products. And I'll dive into that in another video, in regards to the pricing, the shelf stability of the product, and also the heat. Inside of these warehouses, you've got to understand that not every food product is actually beneficial, putting it into FBA.
"What's the difference between FBA and FBM"
So a lot of what we do is actually when we get an order, we literally make the product fresh. A lot of it is cookies, baked goods, and snacks that we make. We make them fresh, and then we ship them directly to the customer. So we handle all of that on our end. Now let's dive into Amazon If you have slow-moving products that are not selling like a thousand of them a minute, then it's slower-moving products that may be better for fulfillment by merchant, FBM. So for me, for instance, I have a huge variety of products, over 300 different items. There are different chocolate pretzels, there are cookies, there are Bundt cakes, there are a lot of baked goods. So there's a huge variety of those items. I can't really make those and shove them into a warehouse and then cross my fingers and hope in a couple of days they sell. Because we don't use preservatives in any of our products, they go bad very quickly.
So we have to ship them out once we make them. So for us slower moving products, not necessarily for us as slower moving products, but we have such a wide variety.We get a lot of different items ordered at different timeframes, so that works for us. Now that is great if you are selling, let's say, a hundred units a week and you have the capability to really fulfill the order. If you're making the product, maybe you've got to make it to order. And if you're not selling a lot of products, like 10,000, 1,000 units a day, then the slower moving items, that would be a better type of business model for you, is fulfillment by merchant, or FBM, okay? You can ship and handle returns. Fulfillment by merchant means that you are taking on the responsibility for the entire transaction. Amazon customers are Amazon's customers.
Even if they buy through you, the third-party seller, guess what? Amazon doesn't see it that way. They are customers on Amazon's platform. And you need to make sure that the order is taken care of. I can tell you that I've had to return and replace multitudes of damaged cookies and baked goods. Chocolate pretzels can get broken. A lot of stuff is handled on the other end of it that is not very glamorous, but we handle all that ourselves. So if you can ship and handle returns, then FBM is for you. If you're just starting out with your mom and pop, a husband and wife, kind of like our business, we have a couple of part-time people who help. As far as that's concerned, we're able to handle the volume that we do through Amazon. Now we have six stores, so do you have to compile eBay, Etsy, and everybody else?
"Difference between Amazon FBA and FBM"
But, Amazon, we have the capability to do so, so this is not an issue.You have support for your customers. Now that's also on the rest, as far as touching on shipping and returns, you also have to handle emails from customers, complaints, or even compliments, and special orders. You have to handle those. So, if you're going to have correspondence with your customers and you have the capability to handle it, perhaps you've hired one person to handle all of the internet correspondence.Then that's going to be good for you, and then FBM is going to be better. However, keep that in mind.One thing about fulfillment by merchant: it sounds really good because you can have a lot more control over things. Because this is a really good platform and a good business model if that's the direction you want to go.
But you have to pay those people. So if you have somebody sitting at a desk and they're handling customer support for you, And Amazon's not doing that; you're still having to pay them. Because when I get into this list, we're going to talk about fees because it isn't free. That's for sure. All right, so you want a larger profit margin. So now remember that the fees that are involved with fulfillment by Amazon have increased dramatically. If you want a larger profit margin, then you have the capability to have a lower fee at the transaction point. So when someone's purchasing something from you and your fulfillment by merchant, I'm the one doing the fulfilling, so I'm making more money. But then again, I have to pay somebody.
I'm going to have somebody either helping out at the desk or I'm going to have somebody, you know, shipping the product. You've got to take into consideration your employees and that payroll factor. Now the size of your items is large. That is something that will really freak you out when I dive into the one fulfillment by Amazon. I'll give you an example of what I've had to experience. The size of the items is large. So, physically, if your items are huge, everything you put into Amazon's warehouse takes up space. That space is expensive. So the larger the product, the more it's going to cost. Also, if you own a warehouse and have the ability to store or manufacture your own products,For us, our commercial kitchen is not that big compared to much larger kitchens, but the kitchen that we have cost money.
So do you have the money to actually have a warehouse and fulfill your orders, supply the orders, store the orders, and then pull them when you need them? Maybe you're not making your product like we do, but maybe you're buying a bunch of it, but you have to store it somewhere. So you have to pay for a warehouse that doesn't come into play. When you're obviously going to pay for that over here too, for FBA. So you can handle the logistics, basically. Can you ship? Can you get the box to the shipper if it's UPS, USPS, or FedEx? All of the logistics on the back end of the transaction are done. You pick up the product, put it in a box, tape it up, print the shipping label, put the label on the box. I mean, all of that stuff that goes along with it, that's logistics. Can you do that? If you can, then FBM is best for you. Next up is a space for your boxes, shipping, and physicals. So, on top of having a warehouse so you can put the product in, you're going to need space for shipping boxes, the cartons, the tape, maybe even tables, everything that goes along with actually shipping the product. If you don't have the space, then this may be the better model for you. So if you have the physical space needed to do it, fulfillment by merchant is the way to go. Now with that being said, let's hop over to fulfillment by Amazon. All right, so the next one up is fulfillment by Amazon.
This is where it can be beneficial if certain guidelines are followed, but it also costs a lot more money.So let's go into FBA fees. Now, Amazon FBA is better if FBA fees are higher and you have the ability to pay the higher fees. Now what does that mean, Damian? So here's how it works. So if I have the product, I send it to Amazon. They're going to put it on a shelf. They're going to charge you for the shelf space that your product takes up. Now there is a storage space for the timeframe that the product sits in the warehouse. They're going to charge you for that as well. Now, if you have a product that could expire, like I do with a lot of food, snacks, and other items,They have a certain period of time up to the expiration date where if it's not sold, they will pull it and throw it away. They're going to charge you a fee to pull the product off the shelf and drop it into a trashcan. Or pull a product off the shelf and ship it back to you. They're going to charge you a fee for that. So these are fees that will come into play if you're willing to pay for them.
The other fees are, of course, the FBA fees themselves. What it costs to actually fulfill the order because they have to pay an employee again, to pull the product, and the shipping, which by the way, comes out of your pocket. The shipping is going to be put into the product itself, and then they're going to ship it out. Now if there are any issues on the back end, they're going to call up and say, "Hey, Amazon, the bottom's broken." And they're going to do the customer service for you too. But guess what, you're still paying for that. So FBA fees, if you have the ability to absorb those fees and you don't have the staff, you don't have all of this, then this is the better one for you. Now you can count. You can't provide full customer service through the order.
Now what I mean by that is just what I had just mentioned at the end of the first part of this, which is that they're going to handle everything on their end. So if you're not in a position to pay somebody to be there to handle email problems and questions, if it's got complaints, if it arrives late, if it didn't arrive, or gets lost, You've got to handle that, you've got to figure it out. If you're paying somebody to do that instead of having Amazon do it, because they'll be happy to do it. But again, they're going to charge you for that. Then FBA is the way to go. A lot of small startups, if you're like a wife and husband that started, don't have a staff of 20 people that you're paying to handle all these different aspects of logistics, customer service, refunds, damage, and all that. So FBA will take care of that for you. If the size is small enough, the weight and the price are high enough to give you a great margin. Now this is what I'm going to talk to you about. I'll give you an example of small and size. The larger the product, the more space it takes up on Amazon, and the more weight it weighs, the higher the fees.I'll give you an example.
I was looking to see if we had one here in the studio, but I don't. We have a bag of trail mix that we had. When I first started out, I was actually selling it one pound bag at a time. The bag itself sold for around $16.99. It was a pretty big bag, and it was a gourmet trail mix, so what have you? I put that into Amazon but it cost over $6 to fulfill. A one-pound bag of trail mix cost $6 to fulfill. From the $16 that I would sell that for, they took six, leaving me with 10. Now it also costs me money. By the way, when you ship a product and you ship a hundred units, a thousand or 10,000 bags of trail mix to FBA, guess what? They're going to charge you for that too. So, obviously, UPS has to ship it.They're going to charge you for the UPS shipment.
So that also increases the per unit cost of my bag. At the end of the day, I was walking away with something like $2, I think, for that bag. It was not a good experience, but it's okay, it was good. It was kind of an experiment, and I was able to learn from it. So there's nothing wrong with that. Trust me, you need to learn from this stuff too. I can't lay out a whole entire plan or roadmap of everything that you particularly would need for your particular product because everyone's product is different. Everyone's size, packaging, everything, every dynamic of the business is different. So I can't say one size fits all, but this was a really good learning experience. So the size of the package was 16 ounces. So here's what I did. I actually went down on the weight.
I went to 14 ounces for the entire package, including the bag, everything, the whole weight of it. The drop came down to $3.20 cents, which is what it cost for me to ship that product. Now I was putting almost another $3 per unit in my pocket. So I was walking away with about $5 a bag, and I was good with that. So the size of the product plus the margin means the price point has to be really, really important. can't provide logistics on a large scale. So you're saying, yeah, you know what, Damian, I can do the logistics. I can ship out 10, 15, or 20 boxes a week, no problem. Okay, but think about the scaling of your business. Can you handle that if you start shipping 20 boxes a day? If you can't, well, Amazon has one of the world's best logistical programs set into place on the planet basically. Their warehouses are amazing. So the logistical end of it, when it's functioning properly, the logistical end of it is phenomenal. So they have the ability to fulfill 2000 boxes a minute if they had to. So if you can't do that well, then FBA is better for you.
I have no desire to ship stuff every single time. So that's one thing that I wish I could step away from. and we're trying to get that changed. I'm going to get somebody within our shipping department to do it. I handle mostly all of the shipping myself through the boxes. And when my wife handles the actual production of the food or baked goods products, I handle all the shipping. So I don't really enjoy it as much as I used to, obviously nowadays, because we are picking up dramatically in our business. So if you have the ability to do that, if you want to be shipping things all day, it doesn't bother you. If you have someone that you hire, then that's okay, but then FBA is not for you. You can stick to fulfillment by merchant, but they'll handle all the shipping. Next up is that items sell very fast. This is, again, a logistical question. If, again, you're selling a product that used to be a hundred a week or maybe a hundred a month and you started selling a hundred a day.
That's a fast-moving product that has what's called "velocity" behind it. So that fast moving product will be better in Amazon's hands because they can knock that out like that. Obviously, if you're not in a position to physically tape up the boxes of a hundred units a day, well, then you need to probably think about fulfillment by Amazon. So these are some great basics in understanding how FBM and FBA differ, the pricing and what is more expensive. Is FBA more expensive than FBM? and so on. So you can get a good idea of what it costs, and the time and everything else involved with it. Now this is the first of three videos. I've got two more videos that I'm putting together.
They'll be up shortly to explain additional benefits and pros and cons of FBA and FBM. So if this was helpful, definitely give us a big thumbs up. This is a great way to explain the question: Is it better to FBA or FBM? And I'm actually going with FBM for right now. Some of the products that we have are FBA, or you can mix the two like I do. And I'll see you guys in our next video.