Amazon Introduces Auction-Based Storage System for FBA

Starting March 1st, 2023, Amazon will roll out an auction-based system for extending storage capacity within its Fulfillment by Amazon (FBA) program. This new feature allows sellers to bid for additional storage space, similar to Amazon PPC campaigns. Sellers can compete by bidding for extra capacity, and the highest bidder will secure the additional space.

How the Auction System Works

If you bid $50 for an extra 50 cubic feet of storage but another seller bids $60, the winning seller pays $51. Amazon will evaluate sellers’ performance based on their Inventory Performance Index (IPI) scores and sales, determining their maximum storage capacity accordingly.

The Importance of FBA for Sellers

The FBA program is a crucial advantage for brands selling on Amazon, with over 90% of top sellers using it. In recent years, sellers have struggled with the need for more space, predictability, and control over their inventory. Amazon’s new auction system addresses these challenges, offering more flexibility and opportunities for sellers.

Planning Ahead with Estimated Storage Limits

With this update, Amazon will provide estimated storage limits for the upcoming two months, allowing sellers to plan ahead. Dharmesh Mehta, Vice President of Amazon Worldwide Selling Partner Services, emphasized this in a recent blog post, stating, “We will forecast how much space and labor we expect to have to provide these estimates, but these estimates may vary up or down based on how efficiently sellers are using their capacity, as measured by their IPI score.”

Capacity Manager: Requesting More Storage

The new Capacity Manager feature allows sellers to request an increase in their capacity limits for products that are popular with customers, based on a reservation fee. Requests are granted objectively, starting with the highest reservation fee per cubic foot until all available capacity has been allocated.

Offset Reservation Fees with Performance Credits

Sellers who receive additional capacity can offset their reservation fees by earning performance credits from sales generated using the extra space. These credits can offset up to 100% of the reservation fee, meaning sellers may not have to pay for the additional capacity if their products sell well.

Objective Criteria for Granting Requests

Amazon’s criteria for granting requests are entirely objective. The company starts with the highest reservation fee and continues in this order until all allocated capacity has been granted. The additional capacity will be available to the seller for the entire period specified and may even be available up to a month before the requested period, allowing sellers to send inventory to Amazon’s fulfillment centers in advance.

Reimbursing Storage Fees Through Productive Use

One of the benefits of this new system is that sellers can potentially recoup their reservation fees through productive use of the additional capacity. If the extra inventory leads to higher sales, sellers can earn performance credits, which can fully offset the reservation fee.

Advantages of the New Auction-Based System

This new auction-based system offers significant advantages, especially for sellers with larger products. By implementing a single, month-long storage capacity limit, Amazon aims to streamline inventory management and resolve previous challenges with predicting and controlling inventory levels. The new system also allows sellers to plan up to three months in advance, with estimated capacity limits varying based on how efficiently they use their space, as measured by their IPI score.

Potential Downsides

However, some sellers may find that the new system could lead to increased fees, potentially impacting their margins. Despite this, Amazon has noted that most sellers who have participated in the pilot program have successfully recouped their reservation fees.

A Move Toward Dynamic Pricing

Overall, the new FBA capacity system represents a shift towards dynamic pricing, similar to what has been adopted by industries such as airlines and companies like Google and Disney. Amazon’s move to cubic foot-measured storage limits is expected to help many sellers maintain healthier inventory levels. At the same time, small sellers may benefit from the opportunity to bid on smaller amounts of space and store more products than before. This initiative is a clear effort by Amazon to encourage small businesses on its platform and provide them with the tools to succeed in an increasingly competitive marketplace.