F ulfillment by Amazon was introduced over ten years ago with Amazon’s goal to provide a mechanism to help sellers scale their fulfillment and customer service operations. Since then, Fulfillment by Amazon has gained significant momentum among sellers, in part due to the explosion in Amazon Prime memberships, and also due in part to Amazon themselves, whose gradual increase in the restrictions and expectations of marketplace sellers has pushed more and more stores toward the FBA model. The single most important feature of the service has nothing to do with operational effectiveness; rather, it allows sellers the ability to win the Buy Box on Amazon.

Winning the Buy Box (being the default Add to Cart seller) is based on the Buy Box algorithm. If the use of FBA by the seller – in and of itself – significantly improves the seller’s likelihood of winning the Buy Box, it is clear to see why FBA is presumed to be a must for sellers to succeed on Amazon.

The Verdict?:
In short, yes, the need for FBA is becoming greater for sellers each day on Amazon. While some product exceptions do exist, the power of FBA to help a seller win the Buy Box is so significant that it is hard to see how a seller can maintain and grow its sales revenues without incorporating FBA into its long-term Amazon strategy."
  - AUGUST 20, 2015 • JAMES THOMSON via Practical Ecommerce

In the aftermath of this apparent revelation, a plethora of advisors, companies, and even an entire industry have risen up around the basis of managing or helping to manage FBA and its associated inventory. In short, FBA has become the focal point for nearly every marketplace solution provider in existence since it was popularized by this Buy Box hypothesis.

But what if they are wrong?  What if the belief that FBA is essential is, itself, incorrect?

Today, there are more than 488M unique items listed on the Amazon marketplace. The pace by which product offerings are growing on Amazon exceeds 200% annually. Yet the staggering fact is that no more than 17% of these items are sold from Amazon directly or through FBA sellers!

I like to split the products sold on Amazon into three distinct tiers, cleverly named Tier 1, Tier 2, and Tier 3. Tier 1 includes the top selling items of the top selling brands in the top selling categories. This represents Amazon’s best sellers and fastest movers, including exclusive brands that are unavailable to most sellers. The demographic of the sellers that sell Tier 1 items is mainly Amazon themselves, as well as a handful of authorized sellers – all FBA. Tier 2 items still represent bestselling items, but are a notch below Tier 1 items in terms of accessibility and exclusivity. Like Tier 1, most of the sellers are FBA sellers as well as a slightly less prevalent Amazon direct presence. Tier 3 items cover all the rest of the product spectrum which, as noted, represents the vast majority of the items listed on Amazon. Unlike the first two tiers, Tier 3 sellers are rarely Amazon direct or FBA sellers. These items are not FBA friendly, and thus for the most part offered as FBM (Fulfilled by Merchant) items only… and this is where the real opportunity lies!

We all know the upside and the opportunity that FBA offers sellers.  I would like to shed some light on some of the downsides of FBA:

  • Cash outlay— the more you want to sell on FBA, the more cash investments are necessary to fund your sales, as larger amounts of money are required to take possession of the items you intend to send to Amazon for fulfillment. This is not just a risk (note below), but a significant constraint as your growth is dependent on the amount of money available for the inventory you need to take possession of.
  • Risk – to make FBA a profitable and sustainable business, the items you place in FBA warehouses have to be sold within a short period of time, or else the cost to keep the items in FBA becomes prohibitive. Alternatively, you could take the items back (assuming you have a warehouse) and potentially offload them at a loss, however, this is a very risky proposition.
  • Competition (Amazon direct and other FBA sellers) – It’s not just that you assume the risk of items not selling well enough and those consequences, when items sell well you assume a different risk. Amazon at any given moment can decide to directly compete with you, or other sellers could get a better deal for larger volumes and thus win the highly coveted Buy Box, and you are faced with the same dilemma as if the items did not sell well. The result in both of these cases is the same – you are stuck with inventory that you must sell – but cannot.
  • Scalability – The math is simple: to sell $3M per month you need to invest close to $2M in inventory. To sell $10M per month you will need over $7M in cash or credit. The point is, to truly scale and grow to reach significant sales; the money needed to float such sales quickly becomes a prohibitive factor. What seems to elude most is that there’s a far larger opportunity to be found in leveraging virtual inventory in order to take advantage of the Tier 3 item market. This strategy does have its own difficulties: to maximize the opportunity and sustain it, one needs to execute at near perfection, and the caveat is that it seems impossible due to the inherent drawbacks of the dropship model.

On paper it seems very logical and straightforward to accomplish. Get other dropship distributors to be your virtual warehouse, and publish the product on Amazon. Since more than 90% of these items will not be sold by Amazon or other sellers using FBA, your competition is lessened, and your opportunity to win the buy box through rotation is fairly high. The more items you list the more buy boxes you win, which will allow you to command better prices and better shipping rates which will allow you to be more competitive and as a result grow your sales. However, many have tried and all failed to fuse drop-shipping and Amazon, it appears as though the obstacles presented by the dropship model are too much to overcome.

Given that the drawbacks of the dropship model are the largest barrier to entry to this enormous opportunity, it is critical for us to know what the key hurdles of the dropship model are. The ones that make it such a monumental challenge to overcome are:

  • Out of stock conditions– Since you do not take possession of inventory and the same feed can go out to thousands of other sellers, you can never be assured that by the time you get an order, the item is still in stock.
  • Shipping errors – We do not control the timeliness of shipping, the accuracy regarding shipping methods nor the quality of the packing. Thus late deliveries, incorrect address or goods damaged during shipping occur too often.
  • Product data – it is impossible to scale to millions upon millions of items and try to find the matching counterpart for each on the various marketplaces. So electronic matching is the only feasible way. Yet inaccurate data and lack of data depth and breadth leads to mismatches that result in too many erroneous or unfulfillable orders.

Putting these pitfalls in context of the stringent marketplace performance requirements, it seems a foregone conclusion that dropshipping and the online marketplace cannot co-exist.

And this has been the case until the birth of OmniBridge™. An innovative technology platform, deriving its prowess from and architected around its revolutionary real-time event based Business Activity Management framework. With this framework, we have solved the seemingly unsolvable conundrum of fusing dropshipping and the online marketplace. With OmniBridge™ you can reap financial rewards you did not think possible, and sustain them for years to come. And all, with minimal risk, low investment and no long term commitments. For all the details please refer to OmniBridge™ solutions.

My verdict?

FBA although a solid alternative, is not at all necessary to succeed on Amazon, and is not nearly as scalable and low risk as the alternative offered by OmniBridge™