3 Ways the Ecommerce Model is Driving Profitability

With "Fulfillment by Amazon" changing the face of ecommerce, here's how you can capitalize on the new business model.

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By Jay Lagarde

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Opinions expressed by Entrepreneur contributors are their own.

The Fulfillment by Amazon (FBA) service is changing ecommerce. Why? As has been well documented here and elsewhere, entrepreneurs can bypass many of the pain points of selling online. Order-management, fulfillment, return-requests, and other aspects become less of a headache by leveraging the platform.

Given the obvious advantages to this fulfilment model, an increasing number of business owners are considering it as a viable option. Could it be profitable for your business? This post presents three ways to answer that question.

Riding the growth engine.

For many merchants, the allure of FBA derives from its ability to reach a greater -- and more motivated -- audience of customers. With merchandise in the FBA program eligible for Amazon Prime, merchants can reach a membership that analysts estimate at more than 40 million subscribers, many of whom are drawn to the program's free two-day shipping. Amazon itself is bullish.

"It's never been easier for sellers to grow their businesses on Amazon," says Mark Mitchke, VP for Fulfillment by Amazon. "With access to Amazon's fulfillment and customer service expertise through FBA, businesses of all sizes can harness the power of Amazon Prime and instantly reach millions of customers around the world. In fact, sellers on Amazon last year shipped more than 1 billion items to customers from more than 185 countries using the FBA service."

Related: Fulfillment by Amazon Poses a Great Option for Those Looking to Break Into Ecommerce

Fulfillment as a service

The software-as-a-service (SaaS) model has gained great popularity over the past decade. Compared to a fixed-, upfront-cost of acquisition, SaaS platforms allow business owners to spread a cost over the life of use. This frees up free cash flow, but it also offers more scalable and nimble back-office operations. Amazon sees the model clearly driving merchant growth.

"With FBA, we take care of the order fulfillment, customer service and product returns, so that sellers can focus on growing their businesses and sourcing products that delight customers," says Mr. Mitchke. "In 2015, sellers worldwide adopting the FBA service grew more than 50 percent year-over-year. We are getting a tremendous response from sellers and we will continue to listen to their feedback to make the FBA service even better."

In essence, the FBA program makes it possible to grow faster and leaner. Instead of investing in fixed assets, such as property and equipment or full-time staff, a merchant can outsource the entire process. For a relatively modest per-unit fee, sellers can boost economies of scale, while redirecting resources and attention toward buying inventory. From a balance-sheet perspective, this approach will likely lead to a greater allocation of short-term (vs. long-term) assets, often an engine to sustainable revenue growth.

Related: 6 Leaders Share the Secrets to SaaS Startup Success

Leveraging the trading platform.

The advent of online stock-trading platforms has empowered the average investor to approach the market like a pro. With a few clicks, merchants can view historical stock and commodity data, financial ratios, and trend data.

The FBA dashboard offers merchants a similar opportunity. Instead of dealing with securities, the entrepreneur is able to view his own inventory in context of the ecommerce marketplace. Which SKUs have been on a downward or upward trend? Are such trends seasonal, or are they an indicator of a broader shift in demand? Is there a direct correlation between volume and profitability? Will bundling products drive additional profits?

Keep in mind that high buying and selling velocity do not always correlate with profits. The right strategic information and perspective can provide powerful leverage, reducing risk and increasing profitability. It is therefore incumbent on the entrepreneur to use the data he is presented to make informed sourcing, restocking and pricing decisions. Some merchants prefer to do the advanced number crunching in a spreadsheet, while others use third-party applications (such as our RestockPro platform). Either way, routinely synthesizing the data can lead to greater value from the "trading platform," and in turn, a more productive return on investment.

Maintain a profit-focused perspective.

Entrepreneurial-minded sellers looking into the FBA program should take care to understand the fee structure, the advantages of keeping your inventory "stickered" and the potential impact on certain categories (for example, oversized and very low-priced) of products. There's no question, however, that participation can boost revenue and operational efficiency for many merchants. By maintaining a profit-focused perspective and tapping the right tools, entrepreneurs can extract the most value from what has become a game-changing service.

Related: To Succeed as an Entrepreneur, Focus on the 5 Golden Priorities

Jay Lagarde

Founder and President at eComEngine.com

Jay Lagarde is founder and president at eComEngine.com. Since 2006, he has been helping online retailers succeed in a competitive global marketplace. eComEngine’s products include FeedbackFive, the first reputation-management tool for Amazon sellers worldwide, RestockPro, a supply chain and profitability management tool for FBA sellers, and Connectrio, a cloud-integration platform connecting sellers with suppliers, warehouses and marketing channels.

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