Pazzo's Blog that is on the internet

Fulfillment by Amazon (FBA) is a program wherein booksellers are encouraged (or, more recently, bribed) to send inventory to Amazon for fulfillment. The idea, apparently, is to maximize Amazon’s enormous economies of scale and efficiencies at order fulfillment while cornering the market on inventory without spending any money on it (beyond the rebates for inventory sent in from January to March 2010).

It’s pretty genius, because, for example, even though I’m fully aware that this is an insidious attempt to corner the market on bar coded (only books with an external bar code are eligible) books, we’re going to send in 1,000 or so to see how it works (we’re also excited to have a reason to clean out our increasingly unmanageable basement). What’s interesting from a pricing standpoint is that the downward pressure on prices might actually be mitigated, initially, by FBA. Because you’re able to take advantage of free shipping and Amazon’s Prime program, most book prices in the FBA will start $4 or so higher than the lowest current price. What is less clear is what happens after.

Profit – after Amazon fees – for a book priced at $4 is around $1.3 (depending on weight, it’s .83 for a 2 pound book). Narrow margins to be sure, but still considerably better than all those people selling books for .01 (who make, with luck, a tough quarter, after the shipping allowance). What’s interesting is the time factor with the program. Merchant’s are charged, by the cubic foot, for the warehouse space they consume – it’s a pittance, a penny or two a book, per month. However, as the inevitable pressures that drive normal books on Amazon down to .01 exert themselves on the FBA inventory, it will drive books (and has already driven shocking numbers) down past the break even line – approximately $2.60 for a paperback. At this point, any book that sells actually costs the merchant money. So why do it, eh? Two reasons – the first is the widespread madness that infects Amazon sellers and continues to prove difficult to measure adequately or explain, but the second is that to retrieve your inventory costs around .50 per book. Not bad, really, unless you’ve sent 50,000 units to Amazon and 20,000 of them have dropped below the break even point and it will cost you $10,000 to have your demonstrably worthless inventory returned to you – so the new break even point is .50 cents below this – maybe $2.10 – where it still makes sense to have Amazon sell it, because you’ll LOSE less than having it returned. I will be watching to see how many books with the “Fulfilled by Amazon” stamp fall below this threshold – it’s an intriguing irrationality test.