Amazon's FBA shake-up: time to rethink your strategy?

Amazon has just rocked the e-commerce world by announcing one of the biggest shake-ups to its Fulfilled-by-Amazon (FBA) program so far. In this article, I'll try to break down what this change is, what it means for you as a merchant, and how you can respond.

If you're a merchant selling on Amazon, or looking to start, you want to be in the know for this one - so read on.

E-com Lingo Bingo: FBA

First things first, it's time for some good old e-com lingo bingo.

What is FBA?

The Fulfilled-by-Amazon (or FBA) program lets merchants store their products in Amazon's warehouses. Amazon then takes care of the entire order from end to end: taking payment, packing the order and delivering it.

Why is FBA so important?

There's two reasons, really:

• It's drawn in a lot of merchants and brands with a simple proposition: get your product in front of millions of customers, without radically complicating your own operations. And it's been a roaring success because of that - over 90% of the merchants on Amazon are FBA these days;
• It's has propelled Amazon from being primarily an online retailer into the world's biggest marketplace - without Amazon taking on the inventory risk. E.g. just have a look at the two graphics below which show that third party sales have become the dominant source of growth for Amazon and that the vast majority of these sellers use FBA.

FBA Auctions - the silent revolution coming on March 1st

It's perhaps an unpopular opinion, but in my mind FBA was always an unsustainable model for Amazon. Firstly, it's super capital-intensive for Amazon itself to operate warehouses for third party sellers - on which they only earn limited fees. Secondly, it was always part of a broader strategy to drive more sellers and products onto the marketplace - so it had to be "artificially cheap". Now that Amazon has achieved that goal, they've just shifted their focus to making FBA a cash cow.

Enter Auctions. As of 1 March, sellers will no longer just be able to request additional storage capacity. Instead, they'll have to bid for shelf-space and the highest bidder will get the capacity.

What's more, the new auction system will come with pricing changes that incentivise fast-growing sellers to bid higher in the auctions:

• Capacity limits: i.e. a monthly hard cap which, as the name suggests, lets Amazon say "you're only allowed to store this many units of a particular product this month"
• Overage fees: if your on-hand inventory in FBA exceeds your capacity limit (i.e. if you've sold less than expected)
• Tiered access (even though they're not calling it this): merchants will get different priority in the Auction depending on things like your Inventory Performance Index (IPI) score, the sales forecasts for your SKU's (or as Amazon calls them, Amazon Standard Identification Numbers), shipment lead times and capacity in the fulfilment centre of your choice.

Now, what does this change mean for merchants?

The positives

On the bright side, it should become easier to get new capacity - for example if your product really starts taking off, and you need to scale rapidly without going through the current application process. Capacity limits should also allow you to plan for greater growth and apply for a higher limit - irrespective of whether you'd use it straight away.

For example, if you're a seller with only has 1,000 cubic feet of inventory space allocated, you could decide to bid for an additional 500 cubic feet at $0.10 per cubic foot. Amazon will either give the entire 500 or deny the request depending on what increases other sellers bid for. Amazon will allocate extra capacity to sellers with the highest bid first.

The negatives

But the new system is also a double-edged sword for many sellers:

• It's complex and requires a lot more planning (and data) than before
• It can get really expensive really quick if you're in competitive bid cycles (e.g. around key times of the year like BFCM)
• Capacity limits do also introduce a "hard cap" on your growth - if you don't have more capacity, you can't really sell more
• Goliath wins: In some ways, the new rules do benefit larger and more established merchants - who'll likely have shorter lead times, better sales forecasts and more historical data for their IPI score.

So, what should I do as a merchant?

As I see it, merchants selling or looking to sell on Amazon really only have two options

• Option 1: move part (or all) of your business to FBM - i.e. fulfil yourself
• Option 2: diversify away from Amazon and launch additional channels - e.g. a Shopify Store

Option 1: Move (part of) your business over to Amazon's Fulfilled-by-Merchant program

In case you're not familiar with it, the FBM program is a way for sellers to store and ship their own products to customers instead of using Amazon's warehouses. In other words, Amazon shares the order with you but you're responsible for making sure Amazon has the correct inventory number and for making sure that the customer gets it.

Especially for mid-sized brands that are doing a couple of hundreds or thousands of orders per month in one geography (e.g. UK, US) this is a really great option. Bringing fulfilment in-house will not just save you costs, it'll also remove the caps that Amazon can put on your growth.  It's also a great opportunity to (re-)negotiate better rates with your third-party logistics providers (3PLs) and ultimately reduce your total cost of holding inventory

One practical way that you could "test" this is to just take a few products at first (not best-sellers) and move those to FBM to test drive, before moving over your whole inventory. Another way to test would be to only move one brand (if you have multiple), or do FBM for one geography. You get the idea.

Option 2: Adopt a multi-platform strategy

In simple terms: if the cost of holding inventory with Amazon goes up significantly, you want to diversify where you sell so your blended cost (across all orders) is lower.

For this reason, and a plethora of others, I'd recommend that you explore the option of selling on multiple platforms if you're not already doing this. The key one here would be to spin up direct-to-consumer (D2C) operation on platforms like Shopify.

There's a ton of benefits to this:

• you own the customer (not Amazon), making it easier to build loyalty and launch new products
• you save on transaction and marketplace fees
• you control promos etc.

I'm a big fan of this option, because its a bold move. It's incredibly hard to move multi-platform but you diversify your revenues, grow stronger as a brand and take back control over your margins. In other words, you're setting yourself up for profitable growth.

What's the catch?

Glad you ask, because there is one: whichever option you pick, you'll have to seriously level up your operations game.

Both of these recommendations come with the same massive health warning: if you don't have a solid handle on key operations - like managing your inventory, catalog and warehouse - you won't make money.

The reality is that while FBA may be expensive, the program is packed with value that makes selling a breeze: analytics and reporting, inventory optimisation, fulfilment, returns handling, etc.

If you run your own operations, you'll need to make sure that each of these things is done to the same - or even a higher - standard. For example, you won't have access to as much predictive reporting and optimisation, and you'll have to make sure you (or your 3PL) runs flawless operations - so you're not stuck with a mountain of returns, missing inventory, or stock-outs.

Especially if you'd choose to go for the second option and go multi-channel, you can't afford to run ramshackle operations off a spreadsheet. Doing so will result in too many mistakes, long replenishment cycles (with a significant amount of cash tied up in inventory), and leaky profits.

This is even more the case if you have a complex catalog, in which you sell bundles and variants, or if you plan to work with multiple warehouses. And trust me - as you grow, your catalog will become more complex.

That said, I still think it's worth it. The changes to FBA capacity limits and overage fees will already force you to get better at things like forecasting and planning - so really, you might as well do things properly and fix your entire ops stack. What's more, your margins will improve over time if you fix your ops. And with that extra cash and flexibility, you'll be able to unlock more growth.

Conclusion

To wrap up, the latest changes to Amazon's FBA program are significant and will affect you as a seller. They're also a very good opportunity to asses your strategy, and make bold moves that will benefit your business. But please, don't jump head-first into those bold moves without planning how you'll deal with the complexity and have systems and partners that are reliable.

If you want to chat more about this, I'm a massive e-com ops geek - so just reach out!