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Amazon FBA, Pros and Cons of Fulfilling via Amazon?

Companies marketing their products on Amazon have numerous distribution options, and making the right decision for your needs and type of business can mean the difference between success and failure. If you're looking at an eCommerce business for sale or putting your company on the market through a website broker, it's equally important to understand what the current distribution model offers as far as benefits and disadvantages to see how your business may be valued by buyers. For those new to Amazon, this article helps you understand Fulfillment by Amazon and whether it's a benefit or disadvantage in a business. The answer is, it depends; but for many, it can be a very effective marketing channel. Read on to understand why.

What is Amazon FBA?

Amazon FBA (or Fulfillment by Amazon) is a distribution model the eCommerce giant offers sellers. Companies (manufacturers and retailers alike) can list their inventory for sale on Amazon. When doing so, you can choose to handle all of the shipping and distribution matters yourself, or you can pay Amazon to do it all (from warehousing to shipping to returns) for you. It basically works as follows.

You decide what products you want to list on Amazon and have Amazon fulfill.

You ship a certain amount of those products to Amazon after preparing them with appropriate tags and UPC codes.

Amazon houses the items in its own warehouse.

Amazon picks and ships items when customers order them.

Amazon handles return and refund issues.

You receive payment for your sales minus some Amazon FBA fees.

The Pros: Top Perks of Amazon FBA

The Amazon FB program has a lot of perks, and if you're looking for an eCommerce business for sale, you know one that already has Amazon FBA in place has a powerful distribution channel at its disposal. One of the biggest benefits of Amazon FBA is that you, the business, don't need to manage your own shipping processes. Amazon picks the product, ensures it ships in a timely manner, and handles complaints and issues about shipping. That takes some risk — and a lot of labor requirements — off your business. You can accommodate more product movement with less staff and concentrate on other areas of your company, such as marketing products or R&D.

Another huge benefit of Amazon FBA is that your products automatically get the Prime logo and shipping option. Millions of customers use Prime to get free, fast shipping when they order from the site, and many only view products filtered by prime. That logo means your products are more likely to be seen. Amazon also gives FBA customers buy box priority, which means in a list that includes other third-party sellers, your products will appear closer to the top. That's akin to your webpage ranking on the first page of Google: it means more people will click on, view, and hopefully buy your goods.

The Cons: Biggest Disadvantages

of Amazon FBA

It's not all ideal news for Amazon FBA customers. Inventory can be more difficult to maintain when it's not in your own location, so you'll need to ensure you have excellent record-keeping processes regarding stock. FBA is also a fee-based service; you pay a certain amount per square foot to store your goods and you can't get too close to zero storage or Amazon might charge a penalty fee. The online retailer wants to keep customers happy, so they make it essential that you keep stock on hand for quick fulfillment purposes.

Those accurate records mentioned above come in handy in determining how much stock you should send Amazon. Understocking leads to penalties or unhappy customers; overstocking means you pay continuously for Amazon to store items and may eventually require Amazon to destroy the stock or ship it back to you, both which come with a cost.

While Amazon FBA saves you a lot of work on backend distribution tasks, prepping to ship inventory to Amazon can be tedious. Amazon requires that you label every item with its ASIN/UPC system. You can't simply prep items for shipment as you sell them, so you'll need to commit to labor time to prep bulk batches.

Amazon uses a pooled storage method to warehouse goods. If you sell seemingly the same item as competitors, the products might all end up in the same bin and Amazon will pick randomly from that bin when fulfilling orders. This isn't always a huge issue, but there have been cases of competitors selling counterfeit or defective products and innocent FBA clients getting hit with the issues.

Finally, Amazon charges a hefty sum to warehouse and ship products on your behalf. When you take selling fees, CC processing and FBA into account, many sellers can pay 30% or more of their ticket price to Amazon as fees when using FBA. This means your products need to have strong margins to support this level of expense and still leave a reasonable profit behind for the seller. Accordingly, when using FBA, not all products will pass the profitability test.

The Bottom Line: Weighing the

Scales for Your Company or Business Purchase

For many businesses, the pros outweigh the cons when it comes to Amazon FBA. Yes, you pay for the services, but you get a huge break on shipping going through Amazon. You also get access to Amazon's marketing tools and multichannel distribution approach, which means potential exposure to a customer pool that would be very expensive or impossible to tap on your own. 

Finally, when you run or purchase an eCommerce company that relies on Amazon FB, you get to handle your business, not your shipping. As long as you have good record-keeping processes for inventory and strong margins, the wins typically trump any intermittent losses. 

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For many online entrepreneurs, selling their business is often the end game.  They start with an idea, develop it into an online business, grow the website or storefront into a stable money-making machine and then sell the business to prepare for their next venture or in some cases, retirement. Understanding how the market values an online business helps owners to both focus on the aspects of their business that create value as well as understanding its current worth to assess if it is the correct time to exit.

If you are currently developing an online business or thinking about selling your ecommerce website, understanding how these types of businesses are valued is essential. Many different factors can affect the business valuation process and managing these variables is key to getting high quality offers for the business when it’s time to sell.

What Influences a Business Valuation?

When valuing a business, three main motivators play a role in determining your business’ worth: potential, transferability and risk. “Potential” refers to the ability and likelihood of the business to grow and be profitable. “Transferability” refers to how easily the business can transition from one owner to another. “Risk” refers to the potential for loss associated with taking over ownership of the business.        

Specific Factors that Affect Business Valuation

A business’ potential, transferability and risk are affected by several specific factors which play a role in determining the value of your internet business for sale. Understanding these factors allows you to not only estimate your business’ current value, but also to improve it if you aren’t planning to sell the business right away. These factors include:

· Brand identity - A strong brand identity leads to a higher business valuation, while a weaker brand identity can reduce the estimated value of your business. This is particularly important if your business depends heavily on marketplaces like Amazon.com, where price competition within and across brands is fierce, for a significant portion of its sales.

· Financials - All financial aspects of your business can affect its value. Examples include assets you own, liabilities you owe, future commitments, supplier agreements, the specifics of your payroll procedures, your business’ scalability and more. Having clean, verifiable finances for your business is an important part of establishing trust during the sales process. Value is enhanced by sales and profits trends that show stability, or even better, sustained growth.

· Owner involvement - The owner’s level of involvement may also affect your business’ valuation. If the website could not easily operate without your expertise, connections or reputation, your business may be worth less than you expect. To be valuable, your business will have to go on without you. It is always best to design the operational aspects of your business to allow the owner to leave gracefully without negatively affecting its performance.

· Customer base - An active, loyal customer base increases the value of your business considerably, especially if these customers are expected to remain active after a transfer of ownership. Statistics regarding email list size and revenue from return-customers help to support this attribute.

· Traffic - Another factor that can impact the value of your ecommerce business is website traffic. However, it is important to remember that not all traffic is the same. For example, organic search traffic traditionally generates more revenue than many other sources of traffic like PPC.

Types of Business Valuation

Not all business valuation methods will produce the same results. For example, business valuations may be formal or informal. Formal valuations are detailed processes that determine an absolute value of your business and are often performed by legal or accounting firms. This type of valuation is common for larger companies or when you are applying for a line of credit or trying to calculate your net worth. An informal valuation, on the other hand, provides insight into your business value based on key attributes and current market trends.

It is also important to note that the result of a business valuation is not necessarily the same as market value. Your business’ market value is whatever a buyer is willing to pay. This amount may be higher or lower than the result of a formal or informal valuation. It may also differ from your expectations. It is important to go through the valuation process with an individual or website broker versed in e-commerce business attributes along with current market multiples being paid for businesses in your category to ensure your expectations are correctly aligned with the market.

Understanding Business Valuation Methodologies

Multiple of Seller’s Discretionary Earnings

The most common valuation method used when determining the market value of an ecommerce business is a multiple of the seller’s discretionary earnings. This method looks at the net profit the business earned over the most recent 12-month period and multiplies it by a specific number. In most cases, the multiplier will range from 1.5 to 4, with most multipliers being no more than 3. To determine the exact multiplier used in this valuation method, several factors are considered. These factors may include the amount of work required to operate the business, as well as the business’ scalability, capital requirements, consistency and revenue growth.

Discounted Cash Flow Analysis

A second method that may be used to determine the value of an ecommerce business is discounted cash flow analysis. The purpose of this valuation method is to estimate the buyer’s future return on investment, while taking into account the changes in the value of money over time. To calculate a business’ value using this method, operating cash flow from the last 12 months is reduced by capital expenditures to determine free cash flow. A cash flow growth rate is projected for the next five years and discounted by the business’ weighted average cost of capital.

Previous Sales

Another way to estimate the value of your business is by looking at recent sales of ecommerce businesses in similar markets. However, although this can provide you with an idea of what your business may be worth, it isn’t as accurate as the other methods listed above. Even similar businesses may have valuation criteria different from yours, and many other factors can affect a final acquisition price, making these numbers less reliable.

Estimating the value of your business on your own can be difficult. To make sure you have an accurate estimate of how much you can expect to receive for your ecommerce website, don't list your business for sale until you have spoken with an experienced website broker.

Still thinking: Here is a link to another Website Properties article simply titled "Website Brokerage" which may prove useful for calculating the value of your online business.

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