Being an FBA seller has its perks. No individual mailing hassles, low shipping costs, Prime eligibility, and help with refunds and returns are just some of the benefits sellers love.
But intertwining your business with a major marketplace like Amazon means any changes to its processes and guidelines can have a big impact on your bottom line.
Case in point? Amazon announced that on March 1, 2023, it would activate a new system for determining inventory capacity limits for FBA sellers.
There’s already quite a bit of buzz about what this could mean for growing sellers. But how does the new system really work?
Amazon FBA capacity limits restrict the amount of inventory FBA sellers can keep in an Amazon fulfillment center. Amazon limits the number of orders your account can process based on your inventory levels. These guardrails prevent sellers from overusing or mismanaging Amazon’s fulfillment service.
Currently, the amount of warehouse storage space available to FBA sellers is based on their Inventory Performance Index (IPI) score. While Amazon hasn’t shared the exact calculation, we know there are four main factors that affect a seller’s IPI score:
Amazon carefully tracks these metrics to avoid having extra inventory sitting around and ensure warehouse space is going to the most successful sellers. Sellers with excess inventory face higher storage fees and even penalty fees for long-term storage (six months or more).
While Amazon’s motivation is its bottom line, having stagnant inventory doesn’t do sellers any favors, either.
Using up your storage capacity with slow-moving products means less space for your top sellers. If sales start to fall for your most popular products — or worse, you go out of stock on a best-seller, your product pages will start getting less attention from Amazon’s search algorithm and you could lose your hard-earned rankings.
But if you’ve been selling on Amazon for any significant amount of time, you know this already.
Since inventory considerations are at the forefront of every FBA seller’s mind, this latest announcement about changes to Amazon’s capacity limits has the FBA community buzzing.
In the latest update, FBA sellers learned that Amazon would add a new element to its inventory storage capacity — a bidding system.
According to Amazon, the new capacity management system has four stand-out features.
In the announcement, Amazon VP Dharmesh Mehta shared that the goal of the new system is to support growing sellers. “Our teams have been hard at work to create a streamlined system that offers new capacity management tools and resources to better empower sellers and help them grow,” Mehta stated.
But many sellers are still unclear on the details. Here’s a closer look at what we know so far.
While the updated system includes some big changes, the IPI score isn’t going anywhere. This critical metric is still the main factor Amazon uses to determine a seller’s capacity limit.
Other factors that impact capacity limits are:
The biggest change that has Amazon sellers buzzing is the new opportunity to bid for more storage capacity — effectively turning FBA into an auction.
With the new system, sellers can request more capacity up to 20% of their initial storage limit or 2,000 cubic feet (whichever is greater).
You can also request more storage for monthly periods in advance, as long as you’ve already gotten an estimated inventory limit for that period.
When requesting more capacity, sellers must specify the highest reservation fee they’re willing to pay per cubic foot. You can create a new request from within your FBA Inventory Capacity Manager.
Amazon will start with the highest bidder when allocating extra capacity.
But how will sellers know how much to bid? And what happens to those who don’t bid high enough? These are just some of the questions that sellers have voiced since the recent announcement.
Getting additional capacity is going to cost sellers. But there is some good news.
If you get extra capacity, Amazon will award performance credits for sales generated by the extra inventory.
With some strategic planning, sellers can offset the extra capacity they pay for with this performance credit, which is $0.15 per $1 in sales.
At the end of the day, Amazon has designed the process to discourage sellers from using storage space when they’re not selling products and to make it worth the while for sellers who use the space well.
But that’s not the only important implication for FBA sellers. Here are a few other potential impacts based on what we know (and are hearing) so far.
Reservation fees for increased capacity aren’t the only hit to sellers’ wallets with the new system. The overage fees familiar to seasoned FBA sellers will remain.
You will continue to pay overage fees if your on-hand inventory exceeds your capacity limit.
According to Amazon, these fees typically don’t impact sellers who maintain healthy inventory levels.
FBA sellers have had mixed reactions to Amazon’s announcement.
The new process provides clarity on several long-time headaches for FBA sellers which may be alleviated or exacerbated by this change depending on where you stand.
LinkedIn user and Amazon pro Joshua Rawe shared the news with his thoughts, “I do like the idea. It should reward savvy businesses.”
The new system does seem to reward sellers who are thriving and have previously been limited by the old method of granting capacity.
Reddit user GStanski is one such seller. “I, for one, am happy with this change,” writes GStanski. “These limits have made the lives of most of us very difficult and in my case have slowed down my growth quite a bit, as I stop launching new products when my limits shrink.”
They continued, “I’ll be happy to pay extra for storage whenever I need it.”
Some FBA sellers are more cynical about the latest news from Amazon.
They see the requirement to pay for additional storage as the beginning of a slippery slope that furthers the “pay to play” environment for third-party sellers.
In response to Rawe’s LinkedIn post, South Beach Bubbles Co-Founder Shooki Grasiani remarked that “In the next 2-3 years, Amazon will keep reducing the ‘standard’ capacity allowance, and it will be unheard of to sell on Amazon without consuming ‘Extra’ storage.”
“Given the limited growth possibility through Amazon consumers (as about half of the e-commerce is already conducted on Amazon), some of the next targets on Amazon’s list are the sellers and competitors (such as Shopify – re: Buy with Prime),” writes Grasiani. “It’s just another source of income for Amazon to show continuous growth.”
Another concern sellers have voiced is that the new system may double-charge those who request more capacity and don’t properly use it.
For example, a seller may receive additional capacity and pay the corresponding reservation fees. Since they have more capacity, they send in more inventory. The next month, that additional inventory may put them over their limit — resulting in an overage fee.
“What I’m curious about is if this disproportionately rewards sellers with larger pocketbooks vs smaller sellers,” said Rawe.
This possibility will be especially concerning during the first few months of the new system as sellers try to get a handle on how much to bid and the likelihood of receiving extra capacity.
Factors outside sellers’ control, like warehouse space and seasonality, can influence limits and estimates. For this reason, some sellers are understandably on edge.
Whether you’re for or against Amazon’s latest change, one thing we can all agree on is that the new FBA inventory capacity guidelines will have different implications for different sellers.
Growth-focused sellers already successfully moving products may find that the system opens new doors. With the ability to bid for increased capacity, they can introduce new products without worrying about what will happen to the inventory they already have.
Still, FBA sellers should take note that requesting additional capacity and not using it properly could be costly. No matter how you choose to approach Amazon’s new FBA capacity limits, you’ll want to do it with a clear plan and the right amount of working capital to draw from.
If you’re planning to take advantage of the new capacity request feature, SellersFunding can help. With Working Capital funding or the Amazon Revenue Advance, you’ll have plenty of cash on hand when you need it.
Learn more about how our flexible e-commerce funding solutions can help keep you in stock on Amazon when you register for a free, no-commitment account.
