The Pros and Cons of Buying a 'Fulfillment by Amazon' Business FBA businesses are the hot new trend, but that doesn't necessarily mean it's right for you.
By Mark Daoust Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
What happens when an entrepreneur leverages the power of a big business to create a small one?
For an increasing number of small business owners, the answer can be found in the Fulfillment by Amazon (FBA) business model.
The FBA model is exactly what it sounds like: business owners provide products, and Amazon handles packing, shipping and contextual customer support.
FBA businesses have grown in popularity since Amazon launched the service in 2006, but both creation and sales of FBA businesses really began to skyrocket between 2015-16.
With FBA trending hot and heavy, is buying an Amazon-based business right for you? In this post, I'll explain the pros and cons of buying an FBA business, and let you decide.
Five benefits of buying an Amazon FBA business.
The appeal of an FBA business might seem obvious to you.
After all, who wouldn't want to hand off most of the headaches that come with fulfillment to someone else? But that's just the primary benefit of acquiring an FBA business. Consider these five benefits as well.
1. Outsourcing fulfillment frees you up to handle higher-level tasks.
With Amazon handling the - sometimes literal -- heavy lifting, you can focus on growth-oriented tasks such as conversion rate optimization (CRO), targeted marketing and new product development.
2. You and your customers benefit from Amazon's perks.
From free two-day shipping with Prime to greater product visibility in the marketplace and the automatic credibility that comes with selling your wares on the site of an established, trusted retail giant, your FBA business will provide customers with a next-level experience that's hard to replicate via traditional ecommerce. And don't forget, Amazon will also provide top-notch customer service.
3. Scalability is built-in.
Beyond the perks of Prime and processing, Amazon's worldwide reach, massive warehousing and fulfilment capabilities, and well-established infrastructure give you the power to grow your business more effectively as time and demand dictate.
In addition, FBA businesses can act as a nexus for multiple sales channels. Offering your products across the web, and directing those sales through your FBA business, can attract customers, who may not start their search for your goods on Amazon, yet still fill the needs of those customers through its system.
4. You don't need to pound the pavement for customers.
Amazon has already built the world's largest customer base, and you're gaining access to it with an FBA business. This base can be expanded further with multiple channels.
5. Reduced costs mean increased profits.
Without the need for a website or your own shipping and customer service, profits will likely be higher, even with Amazon's service fees.
An FBA business is definitely not "hands-free," but it does leverage the power of Amazon to give you the ability to make the most of your time, effort and resources in building a steady earner in the ecommerce space.
Three challenges of an FBA business.
Of course, it's not all wine and roses. As with most acquisitions, FBA businesses come with their own set of challenges and potential dealbreakers for potential buyers.
1. It's a jungle in there.
Every FBA business is fighting for survival and prominence in a complex ecosystem ruled by Amazon's own Buy Box algorithm. FBA businesses receive greater prominence than non-FBA businesses in Amazon's model, but that's still no guarantee of survivability or even profitability.
The company's main product is, after all, information, and it leverages data - data it does not share -- with ruthless efficiency to decide where, when and how products will appear to consumers. It will also track the popularity and pricing flow of items, and use this information to produce its own competing products in an effort to supplant third-party businesses as sales leaders for those products.
Related: Business Plans: A Step-by-Step Guide
2. You might need to be more hands-on than you think.
You'll need a working knowledge of Amazon's marketplace and the performance metrics it uses to gauge success and failure.
You'll probably also want to keep a close eye on competition, which can wildly surge (as can the performance and profitability of all the items in the business), to have real-time information on your best performers in the short and long term.
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3. You'll need a game plan for growth.
In addition to negotiating the perilous waters of Amazon's Darwinist marketplace, you'll need to keep a sharp eye out for growth opportunities at every turn.
The same expanding competition and market saturation that eat into your profits will work against you inside the closed walls of Amazon's ecosystem, so be prepared to pursue multichannel opportunities if you're keen on serious growth.
To FBA or not to FBA - that is the question.
FBA businesses are an exciting, evolving part of the small business marketplace. And as with any other small business, deciding whether or not an FBA business is right for you begins with answering a few simple questions.
- Does this business match my interests and goals?
- Does this business have the current or potential power to achieve my desired profitability, sustainability and growth?
- Do I have the necessary understanding of Amazon's marketplace, the FBA business model and the potentially punishing algorithms that drive success on Amazon?
- Am I prepared to put any work into this business?
Related: Starting a Business: The Idea Phase
If answered "yes" to all of these questions, you're on your way to FBA success.
But if you're not sure about one or more, it's a good idea to sit down with your broker, and discuss whether buying an FBA business is the right for you. A little due diligence, along with taking the time to develop your subject-matter mastery, can help you make an informed - and profitable -- decision.
