Originally published on November 14, 2019, updated November 14, 2019
Millions of third-party sellers use the Fulfillment By Amazon (FBA) program to manage part or all of their order fulfillment needs. After all, it's a convenient, speedy and reliable way to ensure that customers receive their orders in a timely fashion. However, it's important to account for all costs (including FBA fees) to ensure accurate margin data.
While the FBA program provides numerous benefits for sellers, it isn’t free. Amazon fees change frequently, and having a smart inventory management strategy is key. Let's explore what you need to know about how to avoid additional storage fees, how to know if you qualify for referral fee discounts and how the Inventory Performance Index (IPI) score affects your Amazon account.
Amazon has grown by leaps and bounds in the last 25 years. New third-party sellers are listing their products every day. In fact, in his most recent annual Letter to Shareholders Amazon CEO Jeff Bezos pointed out that 58% of Amazon sales are made by third-party sellers.
What does this mean for you? The FBA program has grown alongside the number of third-party merchants, and space comes at a premium. Selling products through the FBA program is a smart move for many sellers, because it means that items are Prime-eligible and Amazon does most of the legwork for picking, packing, shipping and customer service. However, as the program has grown, FBA fees have also increased. Fulfillment centers simply can’t become a repository for unwanted inventory, because space is limited and storing inventory that isn’t moving costs money. The Inventory Performance Index (IPI) score and increased FBA fees are designed to encourage sellers to keep their inventory moving steadily.
Amazon varies its FBA storage fees according to time of year, estimated volume and item size (standard or oversize). In order to calculate unit dimensions to determine estimated volume, a unit must be packaged and ready to ship according to the FBA program’s policies. Only then can it be measured by length, width and height.
Amazon charges an additional fee if units are not packaged as outlined by the FBA program policies. Calculating these fees manually requires careful math, since there are several variables to include; a small mistake could add up to major costs for an FBA seller. You can use the FBA Revenue Calculator to see cost comparisons between fulfilling orders yourself and via FBA.
If you’re looking for an easier way to manage FBA fee calculations, consider RestockPro. FBA storage fee data is automatically calculated and accessible within the Estimated Margin calculator of the Restock Suggestions grid. Up-to-date data is synced from Amazon several times per day to include FBA fees, commissions, monthly storage fees and variable closing fees.
Amazon's inventory storage fees vary by month, with higher fees during the busy Q4 selling season. For 2019, the FBA monthly inventory storage fees are as follows:
Fees are higher for items that are sold through the FBA Dangerous Goods (Hazmat) program. These items require special handling and storage. You can learn more dangerous goods here. For 2019, the monthly FBA inventory storage fees for items sold through the Dangerous Goods program are:
In September 2018, the way that long-term storage fees are assessed changed. Instead of being assessed semi-annually, the fees are now assessed monthly. Inventory cleanup dates are on the 15th of each month.
In 2019, Amazon eliminated long-term storage fees for items that are in a fulfillment center for 181-365 days. Long-term storage fees will continue to be charged for items that are stored for over 365 days.
Because of potentially high costs, many sellers will want to avoid long term storage fees, especially for larger items, since fees are based on volume. The challenge increases with the new policy of charging fees for items in stock for six months. How can sellers avoid these charges?
Avoid FBA for listings with poor sales rank. Of course, the right sales rank to target will depend on the category. Some categories sell better than others. For example, a rank of 20,000 in Toys & Games will be much better than the same rank in Sports & Outdoors. It can also be helpful to look at the number and quality of reviews the item has received.
Use smart inventory restocking. Calculate how much you can expect to sell over the next month and order limited inventory at a time to avoid being stuck with slow-moving items. RestockPro is extremely helpful for these particular tasks because it streamlines a restock process that allows merchants to only order as much as they need for the next month. This greatly decreases the likelihood of having any significant quantities of inventory in the Amazon fulfillment center for more than six months.
Download the Inventory Health report to see which SKUs could be charged if you don’t sell out of or remove the aged inventory. This report has columns specifically to show the age of your sellable inventory, estimated long-term storage fees and more.
Based on your aged inventory and concentrating on those with the highest fees, strategize about how to sell as much as possible before the next cleanup date, which is on the 15th of each month. Use more aggressive pricing to capture the Buy Box and consider using advertisements and other tactics to bring more traffic to listings with poor sales rank. For instance, think about if the title or other listing data has been changed to make the product less appealing. If so, update the data as soon as possible. Open a case with Amazon support if you don’t have the needed “ASIN authority.”
Based on your most recent download of the Inventory Health report, decide if you would like to leave some aged inventory at the Fulfillment Center because the fee is minimal. This could be an especially good option for very small items. When you decide what to keep, create removal orders for the remaining aged inventory.
Some inventory is still likely to make a profit and should be sent back into FBA. Some inventory will likely never sell because of fierce competition or because the sales rank is so low. Some suggestions about what can be done with this “unwanted” inventory include:
With careful inventory management, your goal should be to minimize the number of items flagged for long-term storage fees. But, as any retailer knows, sometimes you will have inventory that does not move as expected. When that happens, we advocate proactive management so that your investments in inventory and storage are as productive as possible.
A minimum charge of $0.50 per unit per month was introduced in 2018 for items that are in Amazon fulfillment centers for 365 days or more. The fee was reduced to $0.15 per unit in 2019. You can learn more about Minimum Long-Term Storage Fees here.
Amazon uses the Inventory Performance Index to establish a baseline for inventory performance. Amazon sellers can track this metric on the Inventory Performance Dashboard, which also provides customized recommendations for FBA sales growth and cost reduction. This score is updated weekly based on a merchant’s ongoing inventory management.
Starting January 1, 2020, Amazon may limit access to storage for those with an Inventory Performance Index below 400. Sellers who keep their score at 400 or above will have unlimited FBA storage for standard and oversize items. (Note that monthly storage fees and long-term storage fees will still apply.) IPI scores are evaluated on a quarterly basis. If your IPI is below 400, you will receive a notification from Amazon and you will have six weeks to attempt to get your IPI score above 400. If you are unable to get your score to 400 or above in that time, Amazon will limit your FBA storage for the following quarter.
With the FBA inventory storage limits policy, sellers cannot create new shipments to Amazon until their current inventory level drops below their storage limits. If existing inventory exceeds those storage limits for a given month, merchants will be charged an Inventory Storage Overage Fee for the inventory that exceeds storage limits. This fee will be based on cubic foot of storage; Amazon is updating their tools to reflect this change as it is currently based on number of units.
Hazmat storage limits are handled separately from this policy. You can learn more about hazmat storage here.
Do you fulfill some or all of your Amazon orders through the Seller Fulfilled Prime program? If so, you may qualify for referral fee discounts. Amazon sometimes offers discounts to merchants who fulfill orders through the Seller Fulfilled Prime program. To find out if your items can be included in the referral fee discount, go to the Manage Inventory page in your Seller Central dashboard. Filter your products by Status (Active) and Fulfilled by (Merchant). The referral fee discount will be displayed in the Fee Preview column if your SKUs qualify. Sellers who are currently enrolled in the Seller Fulfilled Prime trial are not eligible for the referral fee discount until they have successfully completed the trial.
Depending on your product category, you may be eligible for other Amazon fee promotions. Check the Fee Discounts page to see if any of your items qualify. Referral fee discounts are applied when an order is placed for qualified products during a fee promotion. These promotions are only available for a limited time.
Whether you're a new seller or a seasoned merchant, having a clear understanding of what to expect regarding Amazon fees can help you protect your profit margin and inform your overall pricing strategy. For example, if you do qualify for a referral fee discount, you may be able to sell your product at a lower price, which could boost your order volume.
Originally published on November 14, 2019, updated November 14, 2019
This post is accurate as of the date of publication. Some features and information may have changed due to product updates or Amazon policy changes.