Getting Real About Amazon FBA [Video]

Pauline Shiu

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May 13, 2020

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In this episode of our "Ask the Ecommerce Experts" YouTube series, James Thomson from Buy Box Experts talks candidly about the ins and outs of FBA. Thomson has gotten as close as it gets to the program; he was Amazon's first-ever account manager for FBA.

In this interview, Thomson answers sellers' questions about FBA. Learn tips for boosting your profitability, building your brand and strengthening your strategy as an FBA business in the video below.

Watch "Ask the Ecommerce Experts" Episode #2

The Full Transcript

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A Quick Round of Introductions (0:01)

Pauline Shiu - Director of Marketing, Zentail
All right, everyone. Hi, you're back with Pauline here at Zentail for another “Ask the Experts” interview. Today we are speaking with James Thomson. Hi, James. Nice to have you on.

James Thomson - Co-Founder, Buy Box Experts
Thanks for having me on, Pauline.

Pauline
Of course, of course. You are the man that everyone knows, every loves, and so we are excited to talk to you today about FBA. For those of you who don't know, James was actually one of the first FBA account managers. You might also know him as the co-founder of Prosper...James has written two books on Amazon, and he is currently the co-founder of Buy Box Experts based out of Washington. James, anything else that you've done in your time?

James
I'm happy to be here with you to talk about all these Amazon issues, so thanks for having me.

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The Early Days of Amazon FBA (0:48)

Pauline
Sure, for sure. So we asked our sellers and we asked the industry what questions they had for you. You know, if they could pick your brain—what would be on the top of their list? So I think we'll run down a couple things with FBA. Obviously, we are living in coronavirus times so what effects that has, and then we might have a little fun at the end. So...taking it from the top: Would love to just reflect back real quick on what FBA was like in the early days when it got started. What were you up to, and how have you really seen it change over the years?

James
Gosh, we're going back 10 years ago. I was single, I didn't have any gray hair. Life was very simple and yet I thought it was so complicated. But back in the day when we were actively selling FBA to third-party sellers, the key points that we were trying to sell were really around, “Hey, our warehouses are bigger than yours and we can scale better than you can.” 

And it wasn't really until about 2011 or so that it became apparent—the reason you should be on FBA is not because we're bigger than you, but because your products will be Prime eligible and that'll help you in organic search and customer conversion and all that kind of good stuff. I used to take sellers who were not using FBA...on tours of the fulfillment centers. And people would walk in and say, “Okay, yeah, this is bigger than my warehouse. Okay, I’ll use your warehouse.” It was a little bit of a macho thing to be able to say, “My warehouse is 3 million square feet.” 

Nowadays, you know, for new sellers joining the platform, it's hard for them to stay away from FBA. Apart from oversized and hazmat products, everybody's using FBA to some degree. And that creates problems when the FBA facilities get full, or they can't handle your non-essential products—but we’ll talk more about that I'm sure.

Pauline
Yeah, it's even an interesting thought that you had to sell FBA. Now everyone’s just like, “Sign me up. Sign me up. Sign me up.” So that is a big change. 

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The Pros and Cons of FBA (2:56)

Pauline
So you spoke to something there that actually I think parlays into one of the questions around pros and cons to FBA...even tapping into that profitability piece—so obviously Amazon defined convenience for merchants and sellers. FBA is really easy to sell through. We run into a lot of businesses that are 80, 90% FBA, if not 100%. And so for someone who is considering how to tailor their business, we'd love to hear, again, pros and cons for FBA and kind of what you're up against in terms of margin. 

James
So if you're a brand that already has distribution and other channels, whether those are online channels or offline channels, you probably already have a warehouse, whether it's your own warehouse or a 3PL...and you're asking the question, “Why should I use Amazon's warehouse if I already have my own warehouse? I already have overhead that I have to pay in my warehouse.” And so the actual mechanics of, “Can I get orders ready and out the door to Amazon customers”—yeah. Sure, you can. And even if you scale your business, you probably can physically get the boxes out the door. 

The problem is, your products aren't going to be Prime eligible (with the exception of a couple hundred sellers who are in this beta program for Seller-Fulfilled Prime). Everybody else who wants to be Prime eligible has to be using FBA. The thought here is Amazon can do better inventory balancing of your products across the whole country and create a situation where products can get shipped to customers very, very quickly at low costs and, ultimately, [can] get products to customers quickly. 

So, if you can figure out how to make the economics of using FBA work, then even if...on every order you ship, you're making a little bit less money because you're having to ship products from you to an FBA facility, and then pay the FBA cost of shipping it from that fulfillment center to the customer...even though those unit economics are not as not as good as they would be if you shipped it yourself, the reality is, now that your products are Prime eligible—

Number one: you're more likely to show up much higher in organic search results. Number two: once the customer goes to the product detail page, the conversion rate is likely to be much much higher. 

I did some research back when I was at Amazon—and we're talking seven, eight years ago—when a product was moved from being not Prime eligible to being Prime eligible, just the conversion rate itself would typically improve somewhere like 70 to 75%. That's a staggering, staggering amount. 

Now, companies that use FBA...even if they look at the fulfillment cost difference of what they could do themselves versus Amazon...there are other issues to consider. Yes, Amazon will take care of all the product returns for you so that you don't have to fill out the RMAs and send it to the customers. But the problem is, return rates can often be higher for companies using FBA versus what they've experienced in the past themselves, and Amazon will say, “You know what, that's just the cost of doing business on Amazon through FBA. You're going to see higher organic search and you're going to see better customer conversion, and hence should be seeing more sales. And with more sales come more returns.”

You're going to have to factor in all those costs and say, “Is it ultimately worth my while to participate in this Prime eligible space?” When we talk to companies today that are thinking about getting onto Amazon and they have products that are not oversized [or] hazmat, the first question I ask is, “Have you looked at the FBA program?” If you're seriously thinking about selling these products and fulfilling them yourself, then I would challenge, why are you selling products on Amazon? If you're just wanting to have some kind of a presence, fine. But if you're looking to actually turn Amazon into a meaningful sales channel, you need to be Prime eligible.

Pauline
I can't remember the last time I bought from Amazon and it wasn't Prime. So absolutely, yep. In terms of the search bar and the way items are showing up, I agree that Prime is a big priority there. 

James
So something I want to mention for companies that are seriously thinking about not using FBA, it's important to understand that when a Prime customer signs into Amazon and they start searching for products, Amazon will default showing them Prime eligible offers well before they'll show them non-Prime eligible offers. 

So customers may not even realize that they're being manipulated in terms of what considerations [are being used to decide what] products are being presented to them. But at the end of the day, [there are] 100 plus million customers that are Prime eligible that go in and search products. If they don't see your products because it's not Prime eligible, you're not part of the consideration set. You're basically irrelevant. 

And at the end of the day, Amazon doesn't actually have infinite shelf space. It only has one page of first page search results. So if you want to have relevant shelf space, you need to be on the first page. To be on the first page—unless you're in a category where nobody's Prime eligible—chances are, there's a bunch of competitors who are Prime eligible. You need to be Prime eligible too. 

Now to make things even worse, if you're in a category that has a whole bunch of first-party selection, by definition, if Amazon is buying products from other people...that product is going to be Prime eligible right away. Whether the economics are good or bad for Amazon, the fact that Amazon sells it and fulfills it themselves [means] all that stuff is Prime eligible, so you're now in a category competing against competitors like Amazon who, by default, are automatically Prime eligible. 

So, you've got to ask yourself, “Why am I selling on Amazon?” If it's to actually generate noticeable levels of sales, I need to be Prime eligible. I need to figure out how to make the economics work. If the economics don't work right now, you have to ask yourself the question, “What would I need to do to change the dimensions of my product, [like] the pack size of my product, so that I could make the economics work?” 

We've seen companies that sell one packs of low-priced products, and we basically say, “Listen, you can't sell a $7 pair of socks. But what if you sold a three pack?” All of a sudden, the economics become a whole lot better for you to be able to sell on Amazon using FBA. Likewise, you could be selling a product that's just slightly oversized in package dimensions. You can figure out how to repackage the product and get it to a point where you meet the minimum criteria to avoid being oversized, and you can make the economics work really, really well.

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How to Make Sure You’re Not Overpaying in FBA Fees (9:30)

Pauline
That’s a really good point. And it does kind of dovetail into another question that our sellers had around some of those dimensions, fees and things like that. It’s more of a how-to than a solution, but, are there ways to avoid FBA fees from human errors and wrong dimensions? It sounds like the team just kind of put in an arbitrary number...and now they kind of want to get the money back [from FBA].

James
So, let's talk about how dimensions get entered into the Amazon catalog. Before a product is ever seen in a warehouse, whether that’s through first-party selection or through FBA selection, the only dimensions Amazon is going to have are whatever dimensions somebody puts in the system. In theory, the first time a SKU hits an Amazon warehouse...it’s supposed to be scanned with a machine called the Cubiscan. They take the product, and they can very, very quickly determine the actual dimensions and weight of the product. If that information is different from what’s already in the catalog, the Amazon catalog gets updated with that information.  

Here’s the rub. The rub is, let's say you have SKU ABC and that product has dimensions of 10 inches by 6 inches by 4 inches, and one pound in weight. Amazon has seen that product come through with those dimensions, but the manufacturer slightly changes the packaging at some point or puts a product insert inside and changes the weight. Or...there was a product insert, and [the manufacturer] takes it out, and now the product is slightly lighter. Amazon won’t know to update the product dimensions or weight unless they’re told “Hey, wait a minute. There’s been a change.” 

[We often encounter situations in which] manufacturers will create a product package, but then a retailer will create a slightly different package. For example, let’s say I’m selling earphones for different types of audio equipment. I may be buying those products—not in retailer packaging, but in wholesale packaging. So, I buy one hundred sets of earphones with wholesale packaging. I then turn around and create a package in which those products will be sold. Now you can end up with different retailers putting different packaging on the same product. There’s different packaging, there’s different dimensions. There may even be different weights. So, Amazon’s going to see whatever they saw the first time unless they're told to update. 

Pauline
That sounds like it gets a little messy.

James
It gets a little messy, and quite frankly, the seller has to take responsibility for what it's products actually are measuring in it at. So if the information they're seeing in the Amazon catalog is not correct for what they're sending in, they can file a ticket and say, “Please rescan my product. The dimensions you have are not correct.”

I have seen situations where sellers will go years and years of overpaying for FBA fees, only to discover that, “Oops, I've been overcharged all this time.” And Amazon has changed the rules many times around how far back they're willing to let sellers go back in order to reexamine the cost that they paid. Quite frankly, if you're selling a lot of volume, you may be overpaying by thousands and thousands of dollars. So one of the things I like to encourage sellers to do in running any type of Amazon business is [to create] a checklist of things you do daily, and weekly, and monthly, and quarterly and so on. 

Rechecking your dimensions of your products and making sure that Amazon has the right dimensions—that's something that's pretty darn important to do at least on a quarterly basis.  Because you may not have changed it, but a competitor on a competitive listing may have changed the dimensions. And now, you may actually be selling the same product in different packaging, at different weights and you're subject to whatever someone else might have submitted to the Amazon catalog. 

Pauline
Interesting.

James
There is a report in Amazon called a Category Listing report. It is a report that you have to ask Amazon to turn on, and they'll turn it on for seven days at a time. 

If you file a ticket and get the Category Listing report provided to you, you can download all of the information that Amazon actually has in the catalog for your SKUs, including dimensional information. So you can quickly scan and see that “I've got 100 SKUs. Here's the length, the width, the height, the weight. How does that compare with what I believe I'm actually sending in?” If it doesn't match up in some meaningful way, file a ticket and ask Amazon to rescan your product. If they find that the weights or the dimensions in some way have changed, they will make the modifications and you won't be overcharged.

Pauline 
Amazing. That's great, and that was a lot of great background, so thank you. Do you find that [Amazon responds] to those changes and inquiries pretty often in a timely manner? 

James

We don't have a problem filing tickets showing Amazon that there's a discrepancy. [But] it's a harder ticket to file to say, “Hey it's been wrong for six months and I sold 1,000 units overpaid by $1. Can I have $1,000 back?” That's a much harder situation to have. 

So, if you've got the discipline of checking that information at least once a quarter and making sure that you weren't overcharged for the past quarter...it's a lot easier to say, “Oops, at some point somebody changed the dimensional information. We need to file that ticket.” 

Don't expect Amazon to go back to the beginning of time and reimburse you because...they may have well received the same product in a slightly different package at some point, and they didn't have the wrong information forever going back.

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Are Branded Materials Allowed in FBA Packages? (15:10)

Pauline
Okay, cool. Another thing you tapped on there were pamphlets. So we hear this a lot from our brands...they want to get their brand out there. So, what is the “Amazon approved” or a good way for them to be able to include pamphlets or some kind of information about their company in those FBA packages?

James
So, this is very much stuff right on the edge and open to interpretation by Amazon. What I have seen work successfully is, number one, what you do with your Amazon product is supposed to be the same as what you do with all channels. So, you don't create pamphlets that are only for the units that you sell on Amazon. If you have a consistent experience across all channels, it's a little bit easier to explain to Amazon if they challenge you. 

You cannot create an incentive for people to go and shop somewhere off of Amazon to buy your product sometime in the future. So, I can't say, “Here's 10% off for you to come to my online site and buy directly from me.” You can, however, say, “Listen, here's a link to my YouTube channel so you can watch useful videos on how better to get the full value of my product. If you want to follow us on social media, here are our links.” All that stuff is fine. 

You can't create any incentive for someone to leave a review or to buy product from you again at some other site. (And in fact, I have seen sellers get in trouble [by offering] an incentive for a customer to come back to Amazon to buy that product again)...stay out of the incentive business. Just try to help the customer get the full value of the product right now. 

Maybe you've got a newsletter and you say, “Want to learn more about great new products we're launching...or how to get the most value out of your product? Follow us here.” that's all great. And you know what, it's frustrating for brands because chances are, the adoption rate of customers is going to be really low. But, if you don't do these things and you don't slowly build up followers over time, then every transaction on Amazon is just that: a standalone transaction that will never lead to any kind of interaction between the brand and the customer.

Pauline
That was creative feedback, I like the YouTube link for sure. You know we talked to other folks who say that Amazon is a great customer acquisition strategy and I think being creative like this is one of those ways that we see that happen, so that's great.

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When You Know You’re Focusing Too Much on Amazon (17:38)

James
So let's talk about that for all the private label sellers who are listening today. If they're born on Amazon brands and they focus all of their attention on creating products that are supposed to meet Amazon customer needs, but in the end, they have no other way of selling their products or they've chosen not to sell elsewhere…then there's this kind of absurd situation where you don't really have any assets that you're building long term. You're just generating sales, but they're one-time sales. 

So, when you look at some of the very best private-label brands on Amazon...they didn't start off being big, but they invested in social media. They invested in having active engagement with those few customers that did follow them, and being in a position where ultimately, the brand is creating cheap traffic. They can leverage that [traffic] the next time they launch a new product on Amazon…As we all know, unless you drive traffic to the listing yourself, no one's going to see it and no one's going to care that it's somehow better. 

Rather than spending all your money on Amazon advertising to get people to pay attention, if you build this long-term asset where you've got social following and you keep people engaged, you can say, “Hey guys we just launched a new XYZ product. Come and check us out here on Amazon.” Bam, you can get 100 sales in the first week, and all of a sudden, your product is relevant in organic search. All of a sudden, it’s a self-fulfilling prophecy where you're gonna see more and more sales on what is otherwise a brand new product that wouldn’t have had anybody looking at it.

Pauline
Yeah, I agree. Gone are the days [of] if you build it they will come. In terms of a brand, private label, what have you—it's a brand, it's not just a product. It's a brand. And so people need to buy into the larger concept and buy into what you're doing, why you're doing it, why they should buy your brand over another brand.

James
So when I look at companies that do invest in making a YouTube channel that lays out videos on, “Here's how to unpack the product,” “Here's how to use the product,” “Here's how to clean the product,” “Here's how store the product,” “Here's how to know when it's time to replace the product”...those types of videos. They seemed kind of silly at one level. But on the other hand, how else are customers going to learn about a private-label brand they've never heard of and otherwise aren't heavily invested in buying? It doesn't matter if you sell a product that you just use a couple times and then toss away, or if you sell a product that becomes a mainstay in your home in your life. You've got to get customers caring about, “Why did I pick this brand versus another brand?” and “Why do I want to go back and potentially buy this brand again?”

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Predicting the Right Amount of Inventory (20:27)

Pauline
Bingo. Okay, awesome….changing gears just a little bit…[sellers] are wondering if there is an example of a formula [for predicting] the right amount of inventory recommended for FBA SKUs.

James
So, how do you do inventory forecasting with limited information? There's an art to this and there's a science to this, and no, it doesn't matter how many statistics courses you took in college... 

Pauline
One.

James
It's all right, it’s all right. At the end of the day, let's look at what information is available, and what kind of pressures you're having to balance in order to get that number sort of right. 

Step number one: Before you launch a product on Amazon, go and figure out how big the category is on Amazon that you're selling in. Let's say you sell Bluetooth speakers and your speaker is $25. Well, let's go and use a tool like Jungle Scout or Helium 10 and figure out, “What is the past month’s sales for if you're selling $25 Bluetooth speakers? What's the sales of $20 to $40 bluetooth speakers on Amazon, right now?” So, you'll be able to find how big the pie is…[and determine] okay, the pie is this big, and I want 5% of market share. Okay now, how big is 5%? Is it big enough to go after? 

If it is big enough to go after, okay, now at least we know that at a minimum, I'm going to need to have X number of units. It's not a matter of I'm going to sell or send in one or two units at a time. I need to make an investment and say, “I'm going after 5% market share and I'm willing to invest in advertising to make that traffic happen. Five percent of a month's worth of inventory—that's x number of units.”

Okay, that's sort of your bottom end. And then on the higher end, if you know how big the full market is for the kind of product you're selling, chances are, most of us are not selling any types of products that are going to set the world on fire or are going to completely redefine how Amazon customers think about products...

Pauline
Unless you've done a really good job with your brand.

James
I'm talking short term as you're getting started. As you're trying to think about what you're doing—even if you are a brand that's set yourself on fire and everyone loves your brand, the reality is, when you launch a new product, you're still having to fight your way in to get share that's already there. 

I don't like to work with brands that are selling products that the category has no sales on Amazon. I don't want to be the guy that has to define the category. Because quite frankly, I'm going to do all the heavy lifting and have all of my new competitors show up and enjoy the benefit. So, step number one is to figure out how big the market is and to be realistic in assuming you're going to get a very small share initially. If you say, “I want to 5%,” how many units is that? That's where you start. 

The flip side is, you have minimum order quantities that you're going to need to order from whoever's supplying you the products. If those minimum order quantities are really big, then you're gonna have to store that inventory somewhere other than FBA because the last thing you want to do is send in 1,000 units and discover you sold three [on Amazon, then] be stuck having to pull back 997 units. So, do you have the cash available to meet the minimum order quantities that your supplier is going to require of you? And do you have somewhere to store that inventory while you wait to see if you can build up demand on Amazon for your products?

So, that's sort of the at-launch part of the discussion. When we start to get into a more mature situation [in which] your products have been on Amazon for a while, there are various forecasting tools that are out there. I'm not going to name any of them specifically, but there are a few out there and some of the inventory management tools have forecasting integrated into them. 

It's important to understand, A: Did you have a major stockout position at some point last year? And B: have you properly accounted for seasonality that you know is already happening in your category? Many of these forecasting tools don't do a good job of addressing either of those two issues.

So, what I encourage people to do when they decide they're going to get into a particular category—at a minimum, once a month, once every two weeks—go and pull information on how big the category is for the past 30 days. Use something like Jungle Scout or Helium 10 to figure out how big the opportunity is, and just track that over time. That'll allow you to understand the seasonality of Amazon customer demand for that category. 

So even if you don't know that [information] going back a year, at least you can start collecting, and over time, you'll get better and better and better. If you're getting onto Amazon just to be there for six months and be gone, then everything we're talking about doesn't really matter. 

But, if you're actually trying to build something where you're going to still be there in a year selling these types of products, you want to start to build up your own history of sales for whatever the relevant competitive set is going to be...

You can definitely use inventory forecasting tools that are out there. Just be aware that some of the sudden changes that happen with a short purchase cycle [aren’t] always captured. Certainly you know that if you're out of stock for two to three weeks, and [your tool] looks at last year's data and says, “Oh, well in the month of April, you only sold this many units,” and doesn't necessarily say, “And you sold that few because you were out of stock for three weeks,” you've got to make some modifications to that. 

Quite frankly, I don't think there's any statistical model that you can use that's going to fully capture some of this nuance. I'm a big fan of “Let's just use Excel  and let's just make sure we capture historical data over time. Let's just make sure that we are realistic about what is the trade-off between opportunity cost of lost sales because I didn't have enough inventory, versus the cost of having to pay long-term storage fees or potentially pulling inventory back.” That's really what you're trying to balance. In the end, you know your margins. You may be quite happy to pay long-term storage fees because the minimum order quantities and the discount you got for buying larger quantities more than offset those storage costs. That's all stuff that you're going to have to figure out. No inventory software is gonna be able to figure all that out for you.

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Being Disciplined as a Seller (27:10)

Pauline
Agree. Great. So again, love it. There's always a research component, like know what you're getting into and do your due diligence. James, I'm pegging you for an-early-and-often kind of guy. Like, you gotta maintain your business, you gotta know what you're getting into, check in on your business, know your stats, keep going back to it.

James
So, I'm not a stats hound, but I am a process hound. My whole team has a checklist of stuff that needs to be done daily, needs to be done weekly, needs to be done monthly, needs to be done quarterly, needs to be done at very specific days of the year. 

Figure out, what are those things that you need to do as a company? And hold yourself to them. There are always long-term things that you want to check, but unless you actually put them on your checklist of things to do and hold yourself to do them, they'll never get done.

So if you never look at, for example, “Do I have long-term storage fees that are coming up?” If you never look at what's coming up, then lo and behold, a year and a half from now, you’ll say, “Why am I paying so much for FBA storage? Oh gosh, you know, I've had 500 units sitting there for months and months and months. Well, why is that the case? Well, I haven't bothered checking it.” 

I look at selling on Amazon as a difficult enough task in terms of just keeping ahead of competitors. But one of the best ways to stay ahead of competitors is to be very disciplined. If you yourself are not disciplined, hire somebody who will do those tasks, because it's very mechanical. So much of selling on Amazon is very mechanical: checking your competitor’s pricing, checking your competitor’s inventory, checking your inventory, checking your listings to make sure they have the right stuff, checking to make sure that your advertising isn't going outside of whatever boundaries you've decided to set for it. It's very mechanical. There is an art to how you interpret some of the data you look at, but it's pure science in terms of what you need to do on a regular basis to make sure that the boat stays afloat.

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Reconciling Your FBA Shipments with What Amazon Has on Record (29:04)

Pauline
Awesome. Yeah, we are big process fans so definitely respect there. Next question: you've got your inventory settled, great! What's the best way to reconcile your FBA inventory and the shipments?

James
So are we talking about reconciling FBA inventory that you actually sell? Or, are you reconciling, “I sent in 20 units—let's make sure Amazon still has 20 units”?

Pauline
I think the latter.

James
So, there are definitely a lot of third-party tools out that will help to keep track of the plus one, minus one, plus 10, minus 10, two lost units, versus five lost units. 

If you want to drive yourself crazy, you can do it manually, but you'll never figure it out. Amazon transfers inventory across warehouses. Sometimes they’ll refund the unit, but the unit is never returned by the customer. So, I'm fine with using some of these third-party tools. Again, there are many FBA replenishment tools—or excuse me—FBA reimbursement tools out there. A lot of them are similar to one another. A lot of them have special nuances that are important to a particular type of seller. So, those are all useful tools to look at. 

The reality is, if you don't reconcile carefully, you're leaving money on the table. Amazon has a horrendous task of receiving FBA inventory from millions of shipments from millions of sellers and returns from millions of customers. In the end, units get misplaced. Units don't necessarily get received...Sometimes sellers will send things in, and they think they're sending two packs in [but for some reason, Amazon] receives them all in one pack. That kind of stuff happens a lot. 

So, again, part of the discipline of running your business is…[going] back and [checking] to see, “Okay I sent it in 100 units. How many did Amazon receive?” If they received too many, I want to know why. If they received not enough, I want to know why. Those are important tasks that need to be looked at regularly, versus waiting till the end of the year or when my accountant tells me to reconcile. No, no, no, no. This is all part of the discipline of running an Amazon business.

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The Truth About Returns and Getting Your Money Back (31:27)

Pauline
Okay, great. You talked a little bit about the returns and reimbursements, things like that. So from a tracking perspective, how can you go about that and [understanding] if you're eligible for the reimbursements on FBA orders?

James
By definition, if you're using FBA and a customer buys something and they decide they don't want it, they're supposed to return it within a 30-day period…at the end of the day, using FBA means that you are holding yourself to the seemingly rather generous return policy that Amazon puts on all FBA. You've got to know that from day one, because the reality is, you're going to have to accept it whether you like it or not. So, if you can't accept the higher return rates that FBA is likely to generate—if you haven't factored that into your financials to figure out what kind of profit you make from FBA—then you're likely going to be rather surprised. 

You should also accept the fact that, for better or worse, there are Amazon customers that cheat and will straight-out defraud you by way of products they buy and then choose to return to FBA. I used to be an FBA seller many years ago and I used to get returned shipments, and I would get products that I never sold. I would get products that aren't even products that are sellable; I just get hunks of stone and stuff...and while you can contest to Amazon and say, “Excuse me, what?” the return process at Amazon basically says, “We'll take back whatever, and in fact, even if the box is empty that the customer returned, it's a cost of doing business. Suck it up, Mr. Seller, and move on to the next sale.”

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Important Metrics to Track as an FBM or FBA Seller (33:05)

Pauline
Yea, that’s right. They are customer-centric almost to a fault, but I mean that's how they built their business and I can see why they stand behind it. 

All right, let's switch gears a little bit. So talking FBA versus FBM. For someone who is a numbers guy, in your opinion, what are the most important metrics sellers should watch to optimize their sales performance, and does it differ between FBA and FBM?

James
Well, if you're using FBA and you're only selling through FBA, a lot of performance metrics automatically become irrelevant. In the sense that [Amazon] will only sell units if they have possession of the units in the warehouse and know they're available for sale. So, it's very unlikely for orders to be canceled. 

If there's a late shipment coming out of FBA inventory, Amazon takes responsibility for that and it won't be held against the customer. So, you know, those two types of performance criteria (order cancelations and late shipments)...those are issues that typically FBM sellers can get themselves in trouble doing themselves, where, “Oops, I sold the unit I don't actually have available” or, “Oops, the box didn't go out on time, and Amazon noticed that I didn't confirm the order going out on time.” So, those types of issues for an FBA seller...you can be really sloppy on lots of things. But, if you send it into FBA, it's not my problem anymore. It's Amazon's problem. So, that's a good sign. 

On the other hand, there are lots of third-party sellers who use FBM that are very, very disciplined. [They] don't have a problem scaling up or increasing the number of orders. They don't have a problem making sure that orders are properly built and shipped out and confirmed on time. So for those types of sellers, you know, they may say, “Why do I need Amazon to do my shipping because I'm actually pretty good at running a warehouse?” Well, it really has nothing to do with how good you are at the warehouse. It goes back to, do you want to be Prime eligible and get the organic search and customer conversion benefits of being so?

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Impact of COVID-19 on Customer Reviews (35:00)

Pauline
Absolutely, agreed. So what's interesting is that as everything COVID was scaling up, we saw more and more...reviews taking a hit at the start of FBA slowdowns and things like that. You saw more and more of Amazon's message saying, “Amazon was responsible” and nothing about the seller. So, it would be interesting to see how that goes back to being five-star reviews across the board for FBA sellers.

James
And you know, customers have reason to be upset. Not everybody is necessarily aware that, gosh, this COVID crisis has created an insane situation for everybody. So, to what extent are we choosing to be patient with our retailer  versus demanding that I need my designer jeans delivered in one day?...So, it's an interesting trade-off. There will likely be some Prime customers that decide to cancel their Prime membership and Amazon will say, “You know what? That's fine because in the end we have bigger issues to worry about.”

Unfortunately, some of these sellers are going to have complaints filed for their FBA-shipped products. [They] can contest it with Amazon, but if Amazon doesn't strike it..unfortunately, the whole review-striking process on Amazon has gotten extremely difficult. It's harder than ever to file a complaint and say [that you shouldn’t be held accountable for this negative feedback]. That is something that's happened in the last eight or nine months. It's making life hard for certain types of sellers. 

Pauline
Agreed. Amazon I feel like started the whole like “live and die by your product reviews” and things like that alongside Yelp. Now, it's something that we just can't walk away from.

James
And sellers are getting sophisticated and how to undermine each other by filing fake reviews—that whole nastiness. That's terrible, but that's not the discussion I want to have.

Pauline
Yeah, we’re going to keep this light!

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The Importance of Diversification (37:03)

Pauline
We have a couple minutes left. I wanted to see if we can get into coronavirus a little bit, talk about off-Amazon and then we have some fun 10 questions here. 

James
So I've been sitting here, you know flagrantly touching my face at different points ‘cause I'm sitting in the comfort of my home safe, away from disease. 

But seriously, there's been a lot of frustration for a lot of sellers. What is so frustrating to me in managing companies that are on Amazon is that there are sellers that woke up one day and found themselves selling essential products, and there are sellers that woke up one day and found themselves selling non-essentials. It has nothing to do with whether a seller runs its business better or worse than the other seller. It has to do with massive shifts and customer preference. 

So, you could wake up and find yourself in a very awkward situation where you have no demand for your products. Even if Amazon has decided to extend the FBA ship dates for your non-essential products, it doesn't really matter because customers aren't naturally flocking to that type of product right now. 

As we move out of the initial settling into we're working from home and not going anywhere, some of us have disposable income. We may be starting to buy some of these non-essential products. We get frustrated (“What do you mean I have to wait two weeks for this item?”) But, Amazon has responded extremely aggressively by hiring 175,000 people to increase capacity in the warehouse, to increase last-mile delivery and to be able to address this unexpected spike in demand. 

At the end of the day, there will be sellers that go out of business because they happen to wake up on the non-essential side of the bed. And again, it's no fault of their own. Well, I shouldn't say that. A lot of the fault is absolutely not theirs—we can't manage external factors that we can't manage. 

Where I'm frustrated by what's happened is, this whole situation has revealed that so many sellers get all their products made in China. All their products are sold on Amazon.com. All their products are fulfilled by FBA. So, as the China tariffs were put in place last year, as the production delays were starting to become obvious in January. As FBA started to say, “I can't ship your product quickly,” sellers got hit multiple times. They have lots of reasons to complain. But I do want to remind sellers that you made the choice to source everything out of one country. You made the choice to sell everything on one channel, and you made the choice to have only one company do fulfillment. So, if there's variance in any of those different systems, it creates a big problem. 

If you layer on top of that also that “Oops, customer preferences have shifted wildly in a very short period of time,” then it's very very difficult to respond and say, “I can still stay afloat and generate enough cash to keep the lights on.” 

Unfortunately, there are going to be thousands of third-party sellers that go out of business. Even if they had diversified into other channels, they probably would still be in a major cash crunch. Even if they had a third-party logistics facility that was doing MFN shipping, they probably still would find that there's not a lot of demand because customer preferences are shifted away from their products. 

This is a time where I ask the question, how many sellers are going to look at potentially diversifying outside of one type of product that's made in one country, and potentially making products in multiple countries [and diversifying] so that customer preferences that change in one category aren’t going to affect all parts of the business?

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Feedback on FBA Competitors like WFS (40:47)

Pauline
I like that feedback a lot. We speak to multichannel, but I think multi-product, multi-vendor, multi-sourcing—I mean there's a lot to be said for the benefits there. That's great. 

On that note, actually. So obviously FBA all day long. What are your thoughts on fulfilled by Walmart, Shopify and even now, Target? Target just announced that they're going to launch their own version of that. What do you think of this industry shift? What do you think it means for Amazon business overall?

James
I think it's great that somebody else wants to take on your fulfillment. If Walmart and Target want to do that in a marketplace setting, that's interesting. On the Shopify side, the challenge I have with Shopify right now is that there's no easy way for a customer to go and search all the Shopify stores and find everything that might be available in terms of whatever I'm looking for. Yes, I can go to thousands of individual Shopify sites, but the beauty of the Amazon Marketplace is that I can aggregate all these different products in one place, and as a consumer I can go look for the needles in the haystack that are relevant to me right now. 

Shopify doesn't have that. Walmart doesn't have the selection. Target doesn't have the selection. So, it's good that they are enabling people to be able to sell and not have to worry about the logistics. But, you still need to make the shopping experience exciting for consumers, where they can have large amounts of selection, quickly available for delivery, at reasonably low prices. And all those different pieces of the equation have to be working together in order to pull customers away from Amazon and move them to go and shop at some other destination.

Pauline
Exactly. Yeah, I think that's a good point. Last year, I think, was the turning point at which Amazon officially overtook product searches from Google. It had always been “Oh, I'm gonna go to something—let me just google it,” but now it's like you just skip that altogether and you go to Amazon. So, it makes sense.

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When’s the Right Time to Go Multichannel?(42:50)

Pauline
Let's see, let's go into some other topics here. So you talked about multichannel. How does someone do that? What are your thoughts around it? What makes sense? What's a good time for them to do so?

James
Well, right now, it’s hard to do multichannel if you don't have the cash available to buy enough inventory, to be able to sell in another channel. If you've got extra inventory sitting somewhere other than FBA, you can certainly look at “Should I sign up to sell in a different marketplace? Should I think about building my own BigCommerce or Magento or Shopify site?” I know those are questions you can certainly have. 

The challenge here is that to launch a new channel, to launch my own website, these things take money to do so and ramping up expertise to be able to make things work. On the one hand, some of us may have more time than we're used to having to work on our business. On the other hand, we may not have the cash to invest in more inventory or getting a specialized consultant to help us understand how some of these more other marketplaces work. So, quite frankly, we should have been doing the diversification discussion six months ago, 12 months ago, rather than having the discussion now. 

Anecdotally, I'd rather build the pipes into these different marketplaces and know that even if I'm selling just a small amount of volume through each of those pipes, the pipes are connected. For most companies, those pipes don't even exist. And so even if you say “Well gosh, I should run to Walmart and start selling there.” Okay, well there's a process. There's a process to get started, there's a process to figure out how am I going to do my fulfillment? How am I going to get my listing set up properly?  Do I do advertising? If so, how does that work? 

So, it's kind of like saying, “I want to be able to do emergency open heart surgery whenever the time comes along that I need to do that.” Okay, if you want to do that, you have to have started the training to get to the point that when you need to do open heart surgery, you're ready to go, you have the skills, you have the tools, you're ready to rock n’ roll. 

Pauline
Exactly, yeah. So it's great that Zentail helps sellers with pipes, but you're right, it's the fulfillment piece that draws a lot of people off. 

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10 Rapid-Fire Questions (44:57)

Pauline
James, I know we're running a little long. Do you have one minute for 10 questions?

James
Yeah, let's do one minute. 

Pauline
Okay, here we go. We're gonna take it from the top: this morning you woke up, what was your morning routine?

James
My morning routine is exactly the same every day of the week right now. Get up, get my kids breakfast and then go check my emails.

Pauline
Very good. What is your go-to coffee source?

James
I don't drink coffee.

Pauline
Ooooh, you’re high on life. 

James
I live in Seattle and I don't drink coffee.

Pauline
It’s a surprise they haven't kicked you out. What show are you watching now that you're excited about?

James
Show? TV show?

Pauline
Yes.

James
I actually enjoy Marvelous Mrs. Maisel on Amazon Prime. One of the few shows I can watch with my wife and we both enjoy it equally.

Pauline
Bingo, that's a really good one. Let's see, to avoid Amazon blind spots, how do you stay on top of your industry news? Where do you go for the best insights?

James
So I set up some Google alerts on all sorts of different ecommerce topics, and every day I get dozens of articles and I scan them to look for stuff. Quite frankly, information comes from all different sources. Not from Amazon—it comes from every other source other than Amazon, but I look at all sorts of different publications through my Google alerts.

Pauline
Yeah, and I'm sure you see a lot just kind of being on the front lines with your sellers too, so nice. Let's see, for a small team in this big ecommerce world, what is your advice to help them grow quickly?

James
Well, you need to understand what are the basic skills you need to run an Amazon business? You need somebody who knows how to do listing optimization. You need someone who knows how to do advertising. You need someone who can be accountable for doing customer service 24/7/365. Those types of skills, in most corporate settings, [that] don't have the best person doing each one of those. So, either hire an outside consultant or decide which parts of those equations you're going to bring in-house and get serious about doing really, really well. 

What is so frustrating for me working with brands is many of them will hire one guy or one gal who's going to be the Amazon person, and they're supposed to know everything about all aspects of the business. And guess what? They don't know much of anything about any parts of the business. So, the Amazon sandbox requires a set of skills that most brands simply don't have, and if they want to fill them, they're going to have to hire four or five different subject matter experts, or they're going to have to outsource parts of that to people who do know those skills particularly well.

Pauline
Agreed, it's a totally separate world. What is an item on your bucket list?

James
My bucket list? To get back on a plane and be able to fly. I earned the top-level travel status on one of the airlines, and I’ve been fortunate enough that in January and February, I got upgraded on every flight. I like those small, small, little privileges of being able to be able to have my beverage in a glass rather than a paper cup,

Pauline
Beautiful, very good. That's another question. So what's the first thing you're going to do after COVID?

James
I'm going to think about how I can take my kids on a holiday. 

Pauline
Beautiful, love that a lot. Do you have any COVID goals? People are picking up hobbies, trying to learn a language, something like that. Do you have anything specific to COVID?

James
My kids want to build a treehouse but we don't have any appropriate trees or any equipment to build the treehouse. We might just get a cardboard box and put it in the backyard.

Pauline
Good. That sounds like a fun time. Can you give us a skinny on anything going on with Prosper Show this fall, next year, anything?

James
So, the Prosper Show is still scheduled to happen August 31st to September 2nd. Obviously, we need Las Vegas to reopen. Plus, we need to have appropriate health circumstances in place where, if the building is open, everybody feels safe getting together and at least fist bumping with each other. So, lots still needs to be worked out externally that has nothing to do with what we can control. But even if the show doesn't happen this year, we'll be back as soon as we can be back in a safe way. I love the opportunity to meet with so many sellers and solution providers and speakers and to be able to learn.

Pauline
It's a great show, it's really the best networking show for Amazon. It's phenomenal, and we love Prosper. Last thing, last question: how can folks get in touch with you if they have questions about working with you through Buy Box Experts?

James
Buyboxexperts.com and I'm james@buyboxexperts.com. Pretty easy.

Pauline
Beautiful. Thanks for making it easy. Thanks for your time. This was a great conversation. Fun to flip the script a little bit and interview you. 

James
Thanks for having me on today, Pauline. Take care. 

Pauline
Take care, bye.

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