Monday, January 18, 2016

Inventory Placement Service (IPS) - Convenient but can get very Expensive

I've wrote before about using Inventory Lab to track your profit and loss.  I have found that the most significant benefit for myself was that Inventory Lab showed me how significant some of the Amazon fees can be.

Inventory Lab has pushed me to go for much higher margins to combat those fees.  I should be going for as high a margin as possible anyways but when you see how much the fees really eat into your profit, you begin to realize that something has to change.

In fact, in 3 out of my first 4 months reselling after accounting for all fees I made a whopping $117.35 on $34,813 of sales!  That's a rockign .3% profit margin :( .  Obviously that's not very good.  I probably should revise my 20k challenge numbers way down.

If you went to my excel spreadsheet, it would have looked much different.  For the most part, that is because of returns.  I wasn't tracking returns carefully enough.  But that's the point for me.  Returns do matter and if you don't account for them you may think you are making a lot more than you are truly making.  Not only are you fooling yourself and your bank account but you would end up paying higher taxes for no reason!

Inventory Placement Service is a great example of a fee I was paying that got real expensive on me quickly and I didn't even know it.  I didn't account for it in excel but it showed up in Inventory Lab and I was floored with much I was paying.

Inventory Placement Service

Inventory Placement Service (IPS) is a service that allows you to group your items into fewer shipments.

Amazon chooses which fulfillment center to send your inventory to based on the existing inventory levels of each center and where they anticipate need.  That means that if you want to send 10 iPads and you live in New York but the FCs (fulfillment centers) in NJ have 1,000 iPads already and the ones in Texas and California only have 500, you can bet that your iPads will probably be split up between California and Texas.  This is a simplistic form of Amazon's algorithm but that's the basic idea.

The problem is that the first pound is the most expensive pound to send.  If you send one iPad it might cost $4.  If you send 2 iPads it might cost $4.50.  Minimizing the price of shipments is a big priority for me.  That's where IPS comes in.

When you turn on IPS, Amazon guarantees that all items in the same SKU are sent to one FC.  Usually that FC is close by to you as well but not always.  In addition, most of the time your entire shipment will go to the one FC minimizing shipment fees.  That's the great part about it.  The problem is that IPS can get really expensive when you are sending in a lot of items.

IPS fees

The only problem with IPS, and it is a big problem, is that IPS is not free.  Here is the fee structure:

It's a minimum of $.30 per item for regular size and a minimum of $1.30 per item for oversize items.  That fees gets more expensive with increased weight.

If you are only selling iPads, keep IPS on and make your life easier.  They don't weigh much and the fee is a relatively insignificant portion of your overall return on investment.  However, if you are selling cheaper items like toys or very heavy oversized items like TVs, IPS fees can add up quickly.

If you are sending in 300 toys that you bought for $8-$10, you are going to pay $90 in IPS fees!  $90!  $90 on 300 iPads no big deal, $90 on 300 toys = no beauno.

I sold a ton during quarter four, I was selling anything and everything.  However, I was still using IPS then and it really cut into my profits.  I ended up paying almost $2,200 during November and December alone in IPS fees.  I spent $2,200 in shipping fees so I paid double shipping because of IPS.  That's $2,200 of profit that could have been in my hands but instead went to Amazon.  That does not make Oren happy.

In addition, once the item gets to the FC, Amazon will then send it to the FC it wants the item to be in.  How does Amazon pay for that?  Most likely your IPS fees.  In the meantime, until the items get to the next FC, your inventory is on backorder.

Avoiding IPS Fees

Take a look at this video, they have an interesting approach that significantly lowers the IPS fee.

The other way to avoid IPS is to turn IPS off.  You may have to send more shipments but all you need to do is wait until you have a lot of inventory to send.  Your shipping costs won't be affected much if Amazon splits everything into 4 shipments if you have 300 items to send.  You are still sending 75 in each shipment.

The annoying part is that you really have to keep track of how many items of each SKU go in each box.  I end up using more packing materials this way but I think it is well worth it if you ship a ton.

Premium Placement Service 

It's worth it to mention that there is a third option called the Premium Placement Service.  In this option every single item of yours is sent to only one FC.

Fee Structure
  • Standard Sized Items (per unit received at our fulfillment centers)
  • Fulfillment Center Location*
  • Northeast Midwest West
  • 0 to 1-pound items $0.50 $0.50 $0.75
  • 1 to 2-pound items $0.75 $0.75 $1.25
  • Over 2 pounds $0.75 + $0.20/lb $0.75 + $0.20/lb $1.25 + $0.30/lb
Oversized Items (per unit received at our fulfillment centers)
  • Northeast Midwest West
  • 0 to 1-pound items $1.00 $1.00 $2.00
  • 1 to 2-pound items $1.35 $1.35 $2.50
  • Over 2 pounds $1.35 + $0.25/lb $1.35 + $0.25/lb $2.50 + $0.38/lb

This is even more expensive and I don't personally recommend doing this option.  Some do advocate for it though.  The only way I can see being better is if you get a FC which is very close to you and is very quick and getting your inventory on sale.

In conclusion, if you send a ton of smaller and cheaper items to Amazon, turn IPS off, it can save you a ton of money.  That's straight profit