The Amazon FBA Business Model ExplainedBy Jamie Toyne
You can’t deny the power of Amazon. Since its creation, it has become the biggest ecommerce platform in the US, meaning that it is hard for online sellers to ignore. Especially with their FBA program—Fulfilled By Amazon—an initiative in which Amazon handles the logistics and customer service for online sellers, as long as they provide the products.
So if you’d like to get involved in the world of ecommerce, but are looking for a less labor-intensive route with lower upfront costs, the Amazon FBA model could be for you. Whether you are just breaking into online business, are hoping to transition an affiliate business into an FBA one, or whether you are looking to buy or sell an FBA site, this article will tell you everything you need to know to get started.
How does the Amazon FBA business model actually work?
The Amazon FBA business model is a bit like a hybrid between a traditional ecommerce business and a drop shipping business. You provide the products, and Amazon handles the picking and packing of your orders, shipping of the product, customer service and product returns. You are also able to list and sell your product through Amazon.com.
Where do you get your products from in the first place? Well, once you have chosen a product to sell, you will need to find a supplier— these are often in China. You create an agreement with said supplier and then organize the shipment of the product to the Amazon warehouse in your home country. From this point onwards Amazon handles the rest. This means that technically you will never have to see or physically handle your product at all. You just need to make sure that there is always enough stock in the warehouse to fulfil your orders.
The way the sales work is pretty straightforward. List your product on Amazon, or another online store, wait for someone to click on your listing and buy the product, when they do, Amazon sends them the product and you make money. Simple!
How to get started
To get started with an Amazon FBA business, you can either build your own business from scratch, or purchase an existing FBA business.
If you are starting a business, you will need to create an Amazon Seller Account. Then carefully choose your product checking out popular niches, competitors prices and doing your research on your suppliers. You may need to get sent prototypes of products from suppliers to make sure you are happy with the quality.
Finally, the product you choose can either be a branded product, of which you can capitalize on the name and sell on for a profit, or you can create your own brand and build up a name for yourself.
How much does it cost?
You do need some upfront capital to start an Amazon FBA business as you will need to buy your initial stock and pay for the shipping to the Amazon warehouse. Depending on your product type and how much you buy, this can be hundreds or thousands of dollars.
Amazon also charges a fee for their fulfilment service. This includes a monthly membership fee as well as a fee per unit sold. This fee depends on the size and weight of the product but can range from around 1$ to $100.
What are the benefits?
There are loads of great upsides to running your own Amazon FBA business.
Fairly passive income
Compared to traditional ecommerce businesses, this business model is a lot more passive and less-work intensive. Once everything is up and running, with no storing, shipping or customer service to deal with, you may only need to invest a few hours a week keeping check that your stock levels are keeping up to demand.
Good profit margins
An Amazon FBA business also has the potential for high profit margins. This is especially true compared to Amazon Associates businesses or Adsense ones, which have lower margins even though they follow a similar passive system of the logistics being handled for you by Amazon. You could expect to make about one third profit on any sale, with about one third going to Amazon and the final third going on product costs.
You can benefit from Amazon’s traffic
An amazing benefit of an FBA business is that the whole world already knows about Amazon and they trust buying from the platform. This means you can capitalize on the vast amounts of organic traffic that already comes to the site. Amazon has a variety of ways to promote different products, such as a category called ‘People who bought this also bought…’.
If your product is selling well, it may also trigger the Amazon algorithms to be displayed in the categories ‘related products’ or ‘best of’. This means there are a variety of different ways Amazon could direct organic traffic to your product without you having to do a single thing! You may even be able to rely on organic traffic alone if you put work into researching and using keywords and SEO.
You can use parasite SEO
As well as making the most of Amazon’s organic traffic, you can also direct traffic to your site in other ways. Having an FBA business model allows you to use a technique called parasite SEO. Parasite SEO is one of the fastest ways you can rank highly on Google, and involves capitalizing on the power of an authority host site, by essentially ‘sucking’ out the site’s authority for yourself.
As Amazon gets countless backlinks every day, you can work on building up backlinks to your page without being penalized, helping to boost your sales. Make sure your listing is packed with keywords and check out tools like Ahrefs or The Hoth to build up backlinks to your page.
You can benefit from Amazon Prime
Another great pro of selling through the Amazon platform is that you are automatically included in the Amazon Prime program. You have probably heard of Amazon Prime, a program Amazon customers can sign up for to receive free shipping on orders. Becoming an FBA seller means these members will be offered free shipping on your products too. This is a huge plus as free shipping is known to be one of the most effective ways to encourage a sale.
You can benefit from Amazon Affiliates
As soon as you become an Amazon FBA business, Amazon affiliates can now start promoting your product and driving people to your listing, without you having to do anything at all. A huge potential benefit for you, and for them. Win win!
You are not limited to listing on Amazon
FInally, another positive of selling through Amazon FBA means you don’t ONLY have to sell through the Amazon platform. Amazon is happy for you to sell your product through multiple channels, meaning that down the line you can build your own online store and Amazon will still ship the product for you. If you have sales coming in from more than one place this also protects you from any unforeseen changes to the Amazon FBA program down the line.
What are the downsides?
So although there are a high number of positives, the Amazon FBA business model is not all roses. Check out some of these downsides to make sure you are prepared.
Before jumping into an FBA business, you should be aware that you will need some capital upfront. You will need to fork out for some initial stock before you make any sales, as well as getting it shipped over to the warehouse before you launch your listing. You will consistently need to reinvest some of your profits into new stock.
Dealing with suppliers
One other downside can be having to deal with your supplier, a problem shared by those with ecommerce or dropshipping businesses. If you see any sudden surges in demand, it is your supplier who has to keep up with fulfilling the products. You never know when they might come into problems with supply, and you have little control over these types of issues.
There is also a chance that your supplier could suddenly change its policies, or perhaps even go out of business, leaving you with angry customers waiting on unfulfilled orders. It is always best to have some backup suppliers in mind in case something like this happens.
Choosing a supplier
Finding the right supplier to begin with can also take a while to get right. As suppliers are often in China or abroad, you have to rely on remote communication, and waiting on prototypes of products to check their quality before you begin selling. This can take some trial and error. You will also need to establish whether the products will be shipped by air or by boat, and the differences in cost, and how these will affect your profit margins.
And a product
Think carefully about the product you go for as this can also make a big difference to the success of your business. Smaller packages are cheaper to ship and a sensible price bracket ranges from around $10 to $50 so that your business will be profitable but you can afford losing the money on a damaged return or something similar.
Some profitable product niches can be:
- Baby items
- Exercise Gear
Amazon only promotes successful products
Although Amazon has multiple ways they might promote your product, they will only promote products they see as objectively good. This means you are unlikely to benefit from the Amazon algorithms unless your product is already selling well, and people are showing an interest in it. Therefore you will need to put in some work to get the ball rolling with traffic when you first publish your listing in order to benefit from Amazon’s organic traffic.
Reliant on Amazon
Another negative of an Amazon FBA business is that you are the mercy of Amazon. If one day Amazon decides to cut the FBA program, stops your products being available to people on Prime, or anything else, your business could be hugely impacted and it would be completely out of your hands.
Your own online store could be more profitable
Although the profit margins for an Amazon FBA business are higher than many other business models, running your own online store could actually be more so. That is if you were to sell an equal number of products on each. Creating a very successful online store however, and building up brand reputation takes hard work, but can unlock those higher profit margins in the long run.
Am I well suited to an Amazon FBA business?
So you might be considering starting or buying an Amazon FBA business, but how do you know it is well suited to you? Ask yourself the following questions to see if your profile is an FBA match!
Are you looking for a low maintenance business model?
If you answered yes, you could be in the right place. Once your business is successfully running and turning a profit, then running an FBA business does not take much work.This could be good for you if you have a portfolio of sites and are looking for another passive income.
Are you looking to level-up your Amazon Affiliate business?
Perhaps you already own an Amazon Affiliate business and have had success selling a particular product. Why not scale up into an FBA business by supplying this product yourself? There is little risk as you have already proven you can drive sales so maybe it’s time to take the leap and increase your profit margins.
Do you know how to improve a site?
If you love digging into websites, making savings, increasing profit margins and driving sales, this could be the perfect business model for you. There are loads of ways to boost your profitability like working on SEO or leveraging paid advertising. If you are a whizz with these things, perhaps you might also consider ‘flipping’ Amazon FBA websites for money by purchasing them, improving them and then selling them on.
How to grow an Amazon FBA business?
Once your Amazon FBA business is up and running, how can you start to scale it? There are various different methods and tricks you can try to boost sales and revenue.
Offer more products
Perhaps the most straightforward tactic, if you want to grow, start diversifying the types of products you sell and sell more products. If you can earn the same again with every new product, think how quickly you could scale your business.
Use paid traffic
Organic traffic is great, but it can take time to build and can often feel like a slow trickle. Paid traffic methods, such as Facebook ads on the other hand, can instantly send a river of brand new customers straight to your listing. Getting paid ads right can take a little trial and error, so be careful of how much you are paying in, but once you find the sweet spot they are your FBA business’ best friend.
Build your brand
Start making a name for yourself and build a brand reputation. Flogging a random selection of products is ok, but it can be a lot smarter to choose products that complement each other and then create a powerful brand story that your customers will remember. Down the line this can help you grow and become an authority in your niche.
Experiment with creating profiles on social media to connect with your target audience. Instagram, Twitter and Pinterest can be great ways to help concrete your brand reputation as well as direct organic traffic straight to your products.
Open an ecommerce store
As we mentioned above, diversifying your distribution channels can help expand your sales as well as protect your business. Create your own online store where you can sell the same products you list on Amazon. Amazon will still fulfil your orders and so it is not too much extra work. Another website to sell through can help you bring in more sales, but more importantly, it helps you not rely so heavily on Amazon.
Should the FBA program suddenly close down one day, you will still have a place to sell, and finding another fulfilment system will be easier if you already have a store set up. Building your brand and social media will also help with promoting sales in your own store.
Create an email list
Creating an email list can take you from an amateur to an authority within your niche. It will work best for people who have built a solid brand as you can target a specific target audience and offer them content and promotions. How to capture leads for your email list? Try giving away some useful free content in exchange for an email address.
Buying an Amazon FBA business
For anyone thinking about purchasing an Amazon FBA business, there are a few things you might want to consider before diving in.
‘Meet’ your supplier
As the supplier can be considered the backbone of an FBA business, make sure you are introduced to the supplier and shipping company of the website. Ask if they they have any alternative suppliers incase you come into difficulties down the line and need a backup.
Scrutinize the products
The products you choose to sell are also important, as a bad product will mean bad reviews. It can be best to avoid products that can easily have technical difficulties such as electronics products, as this will avoid hours of time and effort on customer service. Also make sure to ask for a sample from the supplier before you buy so that you can corroborate that the quality is good.
Make sure that cosmetics and edible food products meet any industry standards to avoid low quality as well as any legal issues in the future. If the products are manufactured and tested in the US or your home country, it is often easier to ensure they will meet the right standards. Finally, consider the size of your product and how easy or expensive it might be to ship.
Check the seller has enough stock
There’s a chance that on selling the business, the seller will be reluctant to top up his stocks. Make sure there is enough stock in the warehouses to keep up with expected demand until the next shipment. It is also good to get a feel for the supply chain and make sure it seems like the business is set up to run smoothly and keep up with demand.
Selling an Amazon FBA business
Alternatively, if you are looking to sell your FBA business, what do you need to know to get the best multiple for your business?
Can you prove your earnings?
One of the first things any potential buyer will want to know before investing in a business, is how profitable really is it? They will want to see proof of a solid and stable income so make sure you have at least 3 months of earnings documented. They may also feel comforted to see that you have a proven track record with the same supplier.
Have you tracked your expenditures?
As well as hoping for high earnings, most buyers will also want to minimize their monthly outgoings. FBA businesses usually involve a regular investment into acquiring and transporting new stock. There might also be costs on maintaining the site, creating content or running paid ads. A buyer will appreciate seeing exactly what they will spend each month, and making sure every penny is being well spent.
Ensure a smooth supply chain handover
Making sure there is always stock to match demands, anticipating spikes in sales and having backup procedures in place to deal with any hiccups can be a bit of a balancing act. Especially when you first begin. Therefore, make this handover as easy as possible, by establishing and documenting the whole procedure and ironing out any kinks before you sell. An online business broker can help a lot with this process.
Go through everything with your new buyer and train them in how to run the business and deal with any issues. Introduce them to the supplier and any backup suppliers. People are much more likely to invest bigger bucks into a business if they feel like they can successfully jump right in and take over with ease.
An Amazon FBA business is a business model with huge potential. It is super scalable, highly profitable and fairly hands-off. It is a lifestyle business model allowing you flexibility to work fewer hours for more income. The online market is certainly not slowing so there is real longevity for this model too. What are you waiting for?