Amazon ​Accelerator Series Part 1: How to Sell on Amazon.com

Posted on Thu, July 28, 2016 in Business Strategy, eCommerce Tips, by Corey Thomas

This is our first post in our Accelerator Series, where we shed light on ways to grow your business by using Amazon.com. For an overview on the power of the Amazon Marketplace, check out our post, The Amazon Marketplace Opportunity.

There are three main ways for companies to sell items on Amazon.com. Each method comes with its opportunities and its costs, with its risks and its rewards, but make no mistake there are companies making tens of millions of dollars annually by using each of these methods. This is about helping your business decide which method works best for you.

1. Merchant Fulfillment

This sales method offers companies the opportunity to sell products on Amazon.com but does not utilize the Amazon Fulfillment Network. Companies using Merchant Fulfillment are responsible for shipping their products directly to customers after a customer purchases an item through Amazon.com. These companies are also responsible for processing returns should a customer decide to return an item.

Selling using Merchant Fulfillment can be advantageous if a company has access to a wide range of products and distribution centers, especially if the company can leverage a just-in-time inventory strategy and drop-ship products from their vendors. This can reduce the carrying cost of inventory and improve cash flow for companies that can manage the logistics effectively.

There are, however, several downsides to this sales method. Amazon likes to control things, and as such does not prefer companies use the Merchant Fulfillment sales method since the inventory is outside their control and product tracking. As a result, Amazon has said that their search algorithms prioritize products fulfilled by their own fulfillment network since they can stand behind their delivery guarantees.

Another disadvantage to this sales method is that the free two-day shipping offered through Amazon Prime is rarely available to customers when items are being sold using Merchant Fulfillment. This downside is magnified because many Prime members have elected to filter out all items that aren’t available on Prime during their searches, something that is problematic for product visibility.

With Merchant Fulfillment the inventory carrying-cost, the warehousing and the shipping costs are all the responsibility of the company selling the products. Companies are also in control of the resale price on Amazon.com, which allows them to maximize their revenue for each sale. For payment on sales made, companies receive weekly remittance settlements from Amazon as a sum of their sales revenue for the items sold minus Amazon’s 15% sales commission, any advertising costs, and other miscellaneous fees.

2. Fulfillment by Amazon (FBA)

This sales method offers companies the ability to sell products on Amazon and utilizes Amazon’s Fulfillment Network to handle warehousing and product fulfillment to customers. Companies using Fulfillment By Amazon are responsible for shipping their products in bulk quantities to the Amazon warehouse designated by Amazon through their web service called Seller Central. These shipments distribute a company’s items throughout Amazon’s Fulfillment Network for future sale to customers. Once an item is purchased by a customer, Amazon handles all the warehousing and shipping to the customer. Items that are returned after purchase by customers are also returned directly to Amazon for collection.

There are many benefits to using Amazon’s Fulfillment Network. Because Amazon knows the availability and location of items throughout their fulfillment network, they allow companies to offer free two-day Prime shipping for Amazon Prime Members when purchasing an item. Items within the Amazon Fulfillment Network also receive better positioning in the search algorithm, helping improve product visibility.

Companies using FBA are charged a monthly storage fee based on cubic volume in storage and are assessed pick, pack, and ship fees for item fulfillment from the Amazon warehouses. All the inventory sold using FBA is owned by the company selling the products so the company bears the cost of the inventory and the forecasting responsibilities for maintaining adequate stock for demand.

While maintaining ownership of the inventory adds a carrying-cost for companies, these companies are able to control the sale price of the items in order to maximize their sales revenue. Companies receive weekly remittance settlements from Amazon as a sum of their sales for the items sold minus Amazon’s 15% sales commission, any fulfillment fees, advertising expenses, and other miscellaneous fees.

3. Vendor Express/Vendor Central

These two sales methods function in a very similar way. In both of these instances Amazon no longer acts as a marketplace but becomes a distributor for a company’s products. Rather than owning the inventory as with the FBA and Merchant Fulfillment programs, in these two sales methods, Amazon submits purchase orders directly to companies and buys inventory for resale. These methods require that companies are willing to sell their product to Amazon at some discounted, wholesale-like, price.

The difference between these two methods is the access for companies. Vendor Express is a program that companies can apply for directly and are often accepted if their products meet certain Amazon contractual requirements. Vendor Central is more exclusive and is an invite-only program. Amazon uses Vendor Central to handpick brands and companies they want to distribute for.

If a company uses either of these methods, Amazon takes responsibility for a majority of the sales process once a purchase order is fulfilled by the company. Companies are not charged storage fees or fulfillment fees since the items have been purchased by Amazon.

These methods reduce some risks to companies because they no longer carry the inventory cost once Amazon purchases the items. Amazon also allows for their Vendor Central and Vendor Express partners to access special marketing opportunities under certain conditions. Some of these marketing opportunities include the Amazon Vine Promotion Program and A+ Product Page Content.

For payment, Amazon will often write into their contract a payment on terms requirement. In many cases this means that a seller will receive purchase orders from Amazon that will be paid using Net 60 terms. Amazon also frequently includes, what are called Co-op fees, in their Vendor Central and Vendor Express contracts.

There are three main types of Co-Op fees:

  1. Market Development Fees
  2. Freight Allowance Fees
  3. Damage Allowance Fees

Thus Vendor Central and Vendor Express merchants receive payments based on the terms of the purchase orders they receive minus any Co-Op fees, and the top-line revenue takes a wholesale price strategy rather than the higher retail pricing available to companies selling directly to customers using Merchant Fulfillment or FBA.

In Closing

There is much more detail and nuance to each of these sales methods, but the bottom line is that the Amazon Marketplace, with over 50 million Prime Members in the US alone, is a marketplace that can make a significant impact on your business if managed correctly.

At GRAYBOX we specialize in helping businesses succeed by leveraging digital tools like Amazon's Marketplace. If you think that your company could benefit from some strategic help on how to best leverage Amazon ecommerce, get in touch! We want to hear about your challenges and see how we can help.

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