I’m an entrepreneur at heart, and so it was no surprise to my Wife when I started an Amazon FBA business several years ago.
What is an “Amazon FBA” Business?
FBA is short for “fulfilled by Amazon”. What this means is that you purchase or “source” physical products, send them into an Amazon warehouse, and Amazon sells them for you. Amazon also ships the products, manages returns and refunds, takes payment, etc.
All you have to do is promote your products and receive a deposit from Amazon every two weeks.
This is a GROSS oversimplification of the process, but you get the idea. Assuming you can source your products at the right price, when they are eventually sold by Amazon you will receive a nice profit.
Before I get into what I learned, let me explain to you the two primary ways that you can run an Amazon FBA business. There are two primary Amazon FBA business models that you need to be aware of.
The first, and honestly, the easiest to learn and implement is called “retail arbitrage”. This is where you find a product selling really cheap somewhere, buy it up, and then sell it on Amazon for 2-3 times what you paid for it.
The second model is where you “white label” a product and then sell it on Amazon. This is how most traditional brands are built. They find a product that is already selling well, purchase a bunch of units from the manufacturer, label the product as if it is their own, and then send those products to Amazon for fulfillment. This model is a whole lot more scalable, as you could source thousands of units at one time rather than spending your days scouring Costco for cheap products to send into Amazon.
The main benefit to both of these models is that Amazon is managing the entire process on the backend, so you don’t need to bother yourself with the product fulfillment process, nor do you need to have a garage full of inventory on hand that you need to ship out every time an order (or 10) comes in.
5 Things I Learned From Starting an Amazon FBA Business
So now that you have an overview of what an Amazon FBA business is, let me share my experience starting and running an Amazon FBA business for the past several years. And first things first, remember that I am a lawyer by day – so this is a business that I ran as a “side hustle” to earn extra income to help pay the bills.
Don’t Go Into Debt to Start an Amazon FBA Business
First things first, I did not go into debt when I originally started my FBA business. But I did pull money from my retirement account, which was a huge mistake. Looking back, I very much regret doing this. (And eventually, I did take out a loan to pay back my retirement, but I was only allowed to do that once, something I didn’t realize at the time).
If I had to do this over, knowing what I know now, I would have started the business doing retail arbitrage with a very small investment (like $100). It is easy to turn $100 into $200, you just need to follow some basic rules.
The first rule is to not overpay for your inventory. When you sell your inventory on Amazon FBA, the costs to ship the product to Amazon, as well as Amazon’s commission will add up to around 30% of your ultimate sales price. It stands to reason that if you paid 70% of what the product sells for on Amazon, then you are just breaking even.
The top sellers are sourcing their products for 40% or less of what they sell the product for on Amazon. When you are just getting started, I recommend that you be very careful about your initial sales price.
The second rule is to make sure the product is selling well on Amazon. What’s cool is that Amazon will give you this information! It’s called the BSR, which stands for “best sellers rank” and tells you how well a product is selling on Amazon. The lower the number, the more sales volume for a product.
If you decide to go the retail arbitrage route, there are lots of Apps available that will give you pricing and “BSR” information. So you can walk through a store scanning items and find the ones that are likely to yield you the best profit if you were to sell them on Amazon.
Be Careful of the “Income Numbers” that the Gurus Share
As you can imagine, there are a bunch of courses that have popped up to show people how to sell on Amazon. They typically cost from several hundred bucks to $5,000 or more.
And one of the ways that these experts will sucker you in is by showing you their income numbers from their seller dashboard. Here’s what I’m talking about:
Looks great right? This is a snapshot from my sales dashboard. But here’s the thing, you don’t know what time period I sold these items for (it is YTD 2017), what my cost per item is, what other business expenses I might have had, etc.
In other words, this is gross revenue. But without my expense numbers, you have no idea how well my business was doing.
So if you see someone telling you that they made $100,000 this month selling on Amazon, you need to find out what their actual profit numbers are. Chances are they are a lot less than that.
It’s Getting Harder and Harder to Pick the Right Niche
If you are going to sell on Amazon FBA, and you decide to white label your products, it is vitally important that you choose the right niche.
If you pick the wrong niche, you will be spinning your wheels.
But here’s the problem. There are SO MANY people who have flooded to Amazon, and almost everyone knows that the best-selling niches are supplements (low-cost, high margins, repeat customers, easy to source in USA, etc.) that there are a gazillion people selling various supplements on Amazon right now.
So what do you do? You have to try to find another product that is selling really well, with very low competition. This is what the “courses” teach you how to do. But what they don’t tell you is that after their launch, you have hundreds or thousands more Amazon sellers coming online that are flooding every remaining profitable niche within a few months. So that great niche you found today is saturated tomorrow.
The Most Successful Sellers Reinvest All of Their Profits for At Least a Year
Here’s one that may take you some time to find out. I want to save you a year.
If you want to build a successful business on Amazon without going into debt, you will need to reinvest all your profits for at least a year while you grow.
And if you don’t have the patience to do this, or if you will be tempted to “pull just a little out” this month, then this may not be the business for you.
Once you start selling on Amazon, your brand will eventually climb in the search rankings. Amazon rewards the best sellers by putting their products on page one for the best search terms. Once you hit page one, you better have inventory to sell, because it will go fast. And if you sell out with nothing coming back to Amazon to sell, then your rankings will plummet and you will need to start over from square one.
This is why it is so important to reinvest your profits each month, especially if you are building a brand through white-labeling products.
Hijackers Will Steal Your Sales
One of the biggest problems that the successful sellers face on Amazon is how to deal with hijackers. What is a hijacker? It’s someone who sees that your product is selling great, so they source an inferior/counterfeit product and sell it on your product page for 1/2 the price of what you are selling for.
All of a sudden, your sales dry up and your brand quality starts to diminish as counterfeit products are being sold as your brand.
Not only that, but Amazon is HORRIBLE at protecting its sellers. In other words, they won’t take down the fraudulent listing. How do I know? Because when I started to meet other Amazon FBA sellers, they started asking me to help them with the legal aspects of their business and this was the #1 issue, by far, that I was being asked to handle for clients.
This is a dirty little secret that Amazon doesn’t want you to know about (and is one of the reasons I wouldn’t invest in Amazon as a company, but that’s a discussion for another day and another post). It’s a ticking time bomb that Amazon either needs to do something about, or the market will eventually punish them for it.
There are ways to prevent this, but they are expensive, time-consuming, and outside the scope of this post.
But just be aware, that if you decide to try white-label selling on Amazon, there are risks to becoming successful.
Should You Start a Side Hustle on Amazon FBA?
Honestly, if I had to do it all over again I probably wouldn’t. But that doesn’t mean it’s not the right business model for you. If I did decide to do it over I would start small with retail arbitrage. It won’t take a lot of your time or money but could give you an immediate return on your investment.
Have you started an Amazon FBA business? How was your experience? Please leave a comment below and let me know!