What to do with inventory subject to FBA's long-term storage fee

What to do with inventory subject to FBA's long-term storage fee

Choosing the optimal strategy just got a lot easier

By Joshua Moayer | February 1st 2017, updated 7/23/17

The long term storage fee assessment date from Amazon FBA is fast approaching and only a couple weeks away (Feb. 15th). Even if it’s not your first year, you might still be wondering what you should be doing to prepare. There are many different strategies you could put into action both in advance of the assessment date and on the assessment date. This year was especially important because the single ASIN exemption was removed on media items. So we decided to get super nerdy and build an Excel model to make the best decision for us. Pay or not pay the fee? If we don’t pay the fee to keep the inventory in the fulfillment centers, what should we do with it and which is the better choice?

Greg Murphy, a very successful high volume book dealer, astutely points out that a key success factor for a book businesses is how you deal with the books that don’t sell. When it comes to making use of your “leftovers”, creativity is key. Ford Perry’s Dollar Book Exchange is a great example of a creative way to deal with your slower moving books. His storefront gives him the ability to attract book trade-ins. By trading his slower moving inventory for “fresher” books with a chance to sell for a positive payoff, he’s extracting more value from his original investment. Remember, in this situation your original investment is a sunk cost so you don’t need to consider it in the analysis. A sunk cost is a cost you’ve already paid that cannot be recovered by any action. That’s a fancy way of saying that in all scenarios you’d be considering, your original investment was the same. So if you paid $2 for a book, that is over and done with. You only need to think about the best strategy to maximize your payout on that original investment.

For many of us, the Feb. 15th decision is an important one. The more inventory you have, the more important it becomes to make optimal decisions on the Feb. 15th assessment date. But making the right decisions can seem like a daunting problem to solve, especially with a large inventory. To make things easier for you, we decided to share our exact process and the tools we use to make these decisions (including the aforementioned nerdy Excel model, which you can download for free below).  

We currently have about 10,000 items in inventory. About 1,800 units are subject to either the 6-month or 12-month long term storage fee on Feb. 15th. With that in mind, it certainly wasn’t a trivial decision regarding exactly how to act on these 1,800 items. So how do you go about tackling this? First let’s walk through exactly what we did. Then we’ll show you how to do it yourself.

Think of all your alternatives

The first step is to list out all your alternatives. Consider all the different ways to trade or sell your book, including on other selling platforms or through more informal means of trading (e.g. local networks). The idea here is to consider all possibilities. For example, here are the alternatives we considered with our FBA book business.

1. Disposal. Straight disposal will cost you 15 cents. It’s the easiest of all your alternatives and doesn’t require much work on your behalf. However, before you go place a disposal order for all your long-term storage inventory, read the rest of this guide. You might be surprised to find you have better options for some of your units.

2. Remove and do private trade-in. Many brick and mortar bookstores, both large and small, offer trade-in credit. Like most things in life, this is negotiable. Remember if you don’t ask for a deal, you’re doing yourself a disservice. Build some rapport with the management of your local used bookstores and ask them for a special deal on trading in books in high volume. When you have significant volume, they will usually acknowledge that some kind of special arrangement makes sense. This relationship alone can be your largest asset, so think about how to best stay in friendly contact without feeling like a pest. In our case, we have a private trade-in deal with another dealer that gets us an average trade in-value of about 20% of the our current selling price.

3. Remove + Amazon trade in. You can go to the Amazon trade-in page and find out how much Amazon is offering for trade-in. In our case, this alternative didn’t turn out to be too helpful this year because nearly all of our inventory subject to LT storage had very low Amazon trade-in values - about 40 cents for most. However, it totally depends on your inventory, so you should explore this option just like the rest.

4. Keep in inventory + lower price. You can pony up the LT storage fee on the assessment date and keep your inventory in the fulfillment centers for at least another 6 months. Additionally, on the assessment date you could lower the price from its current level to to make it more likely that the item will sell over the next 6 month period.

5. Remove + restock after blackout period. The final option we considered was to remove the inventory and send it back to Amazon FBA after the 4.5 month “blackout” period.

The next step is to look at one alternative at a time and figure out the exact cash inflows and outflows that are required to execute that alternative. Each alternative likely has a series of steps. Consider the cost or income from each step. If you add up all the amounts associated with each step - positive and negative - you’ll get the net payoff of this alternative. In general, you want to choose the alternative with the highest net payoff.

To get a clear picture of the comparisons we did to make a decision on each item, let’s zoom in on a specific book and look at the cash flows month-by-month for each alternative.

Example book

Title: Pretzel Making At Home
Rank: 183,570
Current selling price: $11.25
Estimated time to sell: 1.5 months

In the tables that follow, Month 0 refers to the month in which a decision was made. We’re looking at the February 15th assessment date, so for this analysis Month 0 refers to February. Subsequent months are labeled as Month 1, Month 2, etc. Labeling it this way just ensures it makes sense no matter the date. For example, this template can be used again in August for the next long-term storage fee assessment.

1. Disposal

For the disposal alternative, the cash flows are very straightforward. The only cash flow is the removal fee of $0.15 and it occurs up front. Notice in the table below, we’ve laid out columns for the next 6 months and placed the disposal fee cash flow at month = 0, since it occurs up front when you make your decision.

2. Remove and do private trade-in

One of our favorite alternatives - and one that ends up being optimal in many cases - is to remove the item and do a private trade-in. This alternative nets us a payoff of $0.72.

In this scenario, we’d pay the $0.50 removal fee up front. Next, at month 1 we’d have a -$4.20 cash flow to complete the trade-in and get the item shipped back to Amazon FBA. This includes a $1 commission we pay one of our contractors to do the trade-in for us. Then we’d pay monthly storage fees until the item sells. If the item took 6 months or longer to sell, we may also pay another long-term storage fee (see month 6 below). Whether or not we’d pay another long-term storage fee in this scenario depends upon if the August or February assessment dates overlap with our timeline. Since we’re making this decision and taking action near the February assessment date, we’re assuming we’d run over the August LT storage fee assessment date for conservatism.

Finally, we’re assuming the sale of the item would occur in month 6 and give us a payoff of $5.98.

By removing the item in preparation to trade it in to acquire another book to sell, you’re committing to a whole sequence of actions that need to be accounted for. In the table below, each number is either a cash inflow or outflow and each number represents a specific action you must take. The entire series of actions comprises this particular strategy.  Thus, if you have many strategies to consider, the way to choose the optimal one is to compare the cash flows of each alternative.

3. Remove and do Amazon trade-in

This scenario is almost identical to the previous, except we’d be trading it into Amazon instead of with a private dealer, and then we’d buy another book on Amazon using our Keepa strategy for arbitrage identification. In our case, this scenario is strictly dominated by the private trade-in for all items subject to the long-term storage fee. However, be sure to consider an Amazon trade-in for your situation as the results can vary depending on the Amazon trade-in value of your book and how that compares to any private trade deals you’ve worked out. For the book we’re using in this example, Amazon only offers a trade-in credit of $0.40, so this strategy ends up costing us $2.55. This was our worst of the five alternatives.

4. Keep in inventory and lower price

Another option we considered is paying the long term storage fee to keep the inventory at the fulfillment centers but at a lower price to help it sell. To do this, we’d:

  1. Reduce the item’s price sometime on or before the assessment date. More on the timing of this later.
  2. Pay the long term storage fee of $0.18  on the Feb 15th assessment date.  
  3. Then we’d pay monthly storage fees until it sells in Month 2.
  4. Finally, we’d get a $1.04 payoff in Month 2 using a reduced selling price.  


5. Remove and restock after blackout period

The final option we considered is removing the item and sending it back into FBA on July 1st, 2017, the earliest date removals can be sent back in. In this scenario, we’d pay the $0.50 removal fee up front. Then we’d incur the inbound shipping fee when we send it back in about 4 ½ months later. Finally we’d pay monthly storage until the item sells a couple months later in month 6. In the end, we’d net a payoff of about $0.12 in this approach.

So for our example item, here’s how our alternatives shake out from best-to-worst.

  1. Keep in inventory and lower price: $0.79
  2. Trade in at bookstore: $0.72
  3. Remove and restock after blackout period:  $0.12
  4. Disposal: -$0.15
  5. Trade-in to Amazon: -$2.55

For our example item, it looks like the “Keep in inventory and lower price” strategy is the optimal choice. It nets us $0.79, slightly better than the next best option, “Remove and do private trade in”. For simplicity, we ignored the “time value of money” concept in this calculation. Nevertheless, for this particular item we get the same answer when factoring in time value of money, so it was just easier to share it in this simplified form. If you’re confused by “time value of money”, don’t worry about it for now - we’ll be covering more pressing time value of money issues in a future article!  

How to automate all this fanciness

Whew, that was fun! Now we just need to make these five tables 1,800 more times for the rest of our inventory subject to the long term storage, right? Um, no. That would be nuts, and there’s a much easier way to do it. In the Excel file below, we created a fancy tool that allows you to:

  1. Import your inventory from the Seller Central “Inventory Age” report
  2. Plug in your own custom assumptions for each of your alternatives
  3. Automatically determine the optimal inventory choice for each of your units!

Pretty cool, right? Just click the button below to download this FREE tool now so you can get a head-start on making the optimal inventory decisions for February 15th.

Other assumptions

While perusing the cash flow schedules above, you may have noticed a few other assumptions we made:

  • Time to sell. For all strategies except disposal, we must make an assumption for how long the existing item in our inventory will take to sell. To make things easy but still keep it realistic, we’ve assumed a different time to sell depending on the item’s sales rank. The worse the sales rank, the longer we’ll assume the item will take to sell.
  • Time to sell the item we traded for. In the case where we obtain a new item from a trade, we’ve conservatively assumed a 6-month time to sell. Based on historical data, about 75% of our items sell within the 1st 6 months, so this feels safe.
  • Time to complete a trade-in. If you do a private trade-in or a trade-in to Amazon, it doesn’t happen instantaneously so we’ve assumed a 1 month cycle time for both a private trade-in and an Amazon trade-in.
  • Cost of your time. For the trade-in alternatives, some of your time will be required to complete the transaction. In our case, a private trade-in consumes more of our time than an Amazon trade-in because it involves driving, meeting with a dealer and negotiating, whereas an Amazon trade-in can be done in your pajamas. We’ve assumed a $1.50 budget for our time for a private trade-in and $0.50 for an Amazon trade-in. To put that into context, if you were paying yourself $35 per hour, that equates to about 2.5 minutes and 1 minute of your time, respectively.

Thankfully, all of these assumptions can be customized to your liking in the Excel model. The rank assumptions specifying the time it takes to sell will also drive any additional monthly or long-term storage fees that may be incurred depending on the alternative.

Our results

Are you wondering what our decisions looked like? We ate our own dog food and ran our inventory through our Excel tool using the 5 alternatives we just reviewed. Here’s what we came up with.

 
pieChart.png
 

For us, the best choice for about 58% (1,041 items) of our inventory subject to long-term storage was to pay the $0.15 disposal fee and say goodbye to these units. Interestingly, for about 36% (647 items) the optimal choice was to exercise our private-trade in deal. We find this compelling because it is an easy alternative for sellers to overlook or neglect to prepare for in advance. For the remaining 6% (102 items), the optimal choice was to keep the items in inventory and lower the price. The items left in this 6% bucket tended to be higher-priced books. And while the average rank of these 102 items is about 1.75 million, our Excel model uses a longer time-to-sell assumption the worse the item’s rank. It also factors in any additional long-term storage fees that will be assessed before these items sell. Given we’re factoring in these considerations, we were totally fine keeping these 102 items in the inventory and plan to pay the long-term storage fee for any of these items that still remain on the assessment date.

Remember that your optimal outcomes are likely to be completely different than ours because they’re totally reliant on your available alternatives. But, one key takeaway from this analysis is that is certainly worthwhile to get out there and start negotiating with other books dealers and (both brick and mortar and otherwise) to lock-in a trade-in deal you can capitalize on when its long-term storage fee time.

How much does having strong alternatives (e.g. a trade in deal) and making the optimal decision matter? The chart below shows our respective payoffs of each strategy we considered.

This chart definitely screams one thing loud and clear: don’t take this decision lightly. Look at the spread between the worst choice and the optimal choice. This amount - about $11.3k, represents our execution risk. In other words, it’s our estimate for how much we could possibly lose if we don’t make the best decisions.

We could have gone the lazy route and just disposed all of our inventory subject to the long-term storage fee. That would have cost us $269. Instead, by having good alternatives and making the optimal choice, we estimate we will net a payoff from these items of $1,561. So, in just a few minutes we managed to save about $1,800 - not bad.

Let’s look a little closer at what the chart above says. Earlier we reviewed five different alternatives for what to do with our inventory as the assessment date approaches. But this chart shows seven different bars. Why the difference? Recall that the five strategies we reviewed were done with respect to a single example item - Pretzel Making At Home. But in practice we have to (or at least should) make a separate decision for each item in our inventory. The first bar in the summary chart above shows us the net payout if we make the optimal choice for each item. Similarly, the last bar shows the net payout if we make the worst choice for each item. The five bars in the middle show what our payout would be if we chose one of the five specific strategies for all items in our inventory.

LOWER YOUR PRICE before the assessment date

Surely something can and should be done in advance of the assessment date to help move the inventory so as to not deal with the long-term storage decision in the first place, correct? Indeed that is true. The most obvious thing to do is to lower your price. If you use a repricer, you can set up a special pricing rule to move the inventory that will be subject to long-term storage fees.

How much should you lower your price, you say? Well, theoretically you should be willing to lower your price to the point which will produce the same payout as your optimal strategy for dealing with long-term storage fees. So for the example item we reviewed earlier, we should be willing to lower our price all the way down to a level that would produce a payout of $0.79 since our optimal strategy “Keep in inventory and lower price” produces a payoff of $0.79. Conveniently, our super awesome Excel model includes a column called “Price equivalent to optimal choice payoff” that automatically calculates this value for you!

There are other strategies as well, including running a PPC campaign to increase exposure of your products. However, this type of strategy makes more sense if your old inventory is a private label product or a wholesale product you purchased in bulk and either you’re the only one on the listing or there’s only a few other sellers on the listing. The reason being is that when you run a PPC campaign, you’re promoting the listing - not just your offer, so if there’s other sellers on the listing you’re basically giving them free advertising. But if you’re the only seller on the listing, a PPC campaign has many other benefits and is thus likely the more optimal strategy as compared to simply lowering the price.

Save tons of time with removal order template

If you end up doing any removals or disposals, make sure you’re using the Amazon flat file upload template and not submitting removals manually one at a time! We’ve included a link to the Amazon upload template along with our free Excel tool so you can easily paste in your removals. Remember to create a separate upload file for removals and disposals and enter RETURN or DISPOSAL in the “RemovalDisposition” field. When you’re ready to upload, just save your template as a tab-delimited file and upload it to the removal order screen on Amazon Seller Central.

Click the screenshot above to download Amazon's removal order template

Click the screenshot above to download Amazon's removal order template


Well, what are you waiting for? Download the FREE inventory evaluation template below to instantly uncover your optimal inventory decisions before it's too late!