Seller Success On Amazon | The True Cost Of Starting An Amazon Business
As Amazon continues to grow it’s market share and expand into new industries, the opportunities to make money seem endless for sellers. Current numbers have 55% of shoppers in the United States searching for products through the Amazon platform. This previously unheard of market share capture has many in the business world salivating to jump on the bandwagon and make their fortune, while it lasts.
Even with Ebay, Walmart, Jet, & FlipKart attempting to band together to bring the market back into balance, it still looks like there is some serious runway for third-party sellers to build a mini-empire along the way. At this point, Amazon is out to a serious advantage. As a current seller on these marketplaces, I can personally tell you that despite Walmart & Ebay’s best efforts, they are seemingly years behind due to lack of infrastructure build-out among many other issues. Their marketing efforts may say they've arrived, but until it's easier for vendors to sell, the gap will continue to grow.
Amazon consistently touts the idea that individual sellers and businesses are able to make fortunes on their platform, but is it true? Certainly. Just be ready to spend A LOT of money along the way. Seriously. You didn’t think Amazon would help you make a living without getting their cut, did you? Here is a look at most of the major ways you will pay Amazon in order to utilize that market share.
Do your products have a solid margin? I sure hope so, because you’ll be paying between 6% and 20% for every single sale you make on the platform. The average number that seems to come out is 15%, which is what most sellers work off of. Of course, this a commonality between all selling platforms. They provide the eyeballs and you pay for that attention.
Most business-minded people will also be quick to point out that your products should just about always have more margin than that to begin with. This is absolutely true and reinforces how important doing proper product and market research is.
For this example, let’s be generous and say we are starting with a 50% margin on a $100 product. Easy math for demonstrative purposes. Our profit is now down to $35 per purchase.
Fulfilled by Amazon - FBA - Storage & Shipping
Amazon has an amazing network of warehouses across the US (and globally), allowing Prime 2 day shipping to anywhere within the states. Prime is a major driving force of Amazon’s ability to sell and with over 100 million current Prime members the demand is not going away any time soon.
FBA includes a fee for the amount of space your products take up at the end of each month. They also charge you a fulfillment fee for the orders and you guessed it, a fee to receive your products in. For simplicity sake, we won’t go too deep into the math, but let’s assume that for a single product, the cost may be about 5% for the storage, receiving, and fulfillment.
Our $100 product with 50% margin is now down to $30 profit per sale. Still not too bad!
Advertising - Headline Ads, Sponsored Product Ads, Product Display Ads
Amazon has millions upon millions of products with additional items going up every minute of every day. I have personally managed thousands of ASINS across industries for multiple companies. With all of these products vying for the coveted click and conversion, you will need to utilize ad tactics within seller central to get the most out of a product.
Amazon has expanded and contracted their ad offerings over time as the platform grows and changes. Currently, there are three main ad areas. Though each has a very different tactic, each has the same goal of conversion and the same measurement of success. ACos is Amazon’s way of measuring ad success. ACos represents the cost it takes to convert a purchaser, measuring the cost of ad clicks versus the total of sales from those clicks.
For sake of illustration, I will lump these three distinct ad-types together. Amazon promotes that an ACos between 10-30% is quite good! Now being an Amazon selling expert, I disagree. I believe that between 5-10% is a much more realistic target. At 30%, most sellers would be out of business in no time.
If we take a safe, yet aggressive estimate and say 7.5% ACos, our $100 product with 50% margin is now down to $22.50 in profit.
A+ Premium Content / Enhanced Brand Content - EBC
Content is king and Amazon is constantly changing the way they present this content to the consumer. This a fantastic sign that they are willing to make changes and test along the way, always striving for the conversions we all desire.
Beyond the basic content of title, bullets and product descriptions, they usually offer some type of “advanced content”. This includes videos, infographics and more in-depth product details. This content also generally has a cost. Admittedly, this is being changed so frequently, it’s hard to keep up, but currently, EBC is free for brands only, A+ Content is free for brands only, but A+ Premium Content has a cost. Confused yet? Good.
To simplify, let’s say you really want the best content available and you have access to purchase it with the product we’re discussing. This content can drive your conversions up 1-5% but will cost you a small fee per ASIN it is added to.
This may be a very small fee if we’re only discussing one item, so let’s be generous and say it cost .5% so our $100 product with 50% margin is now down to $22.00 in profit.
When the customer is always right, does that make the vendor always wrong? Sometimes it feels that way with Amazon returns. Customers rave over their ability to send back items for any reason once the purchase arrives. No one can disagree that as a consumer, this affords an heir of protection and ease that simply isn’t available on other channels at such a high level. Who hasn’t taken a risk on a product only to be shipped a terrible product? Oh well! Send it back at no cost and try again right?
Vendors may not be as fond of this policy. You see, Amazon allows returns for essentially no validated reason, forcing vendors to lose the sale income and pay the return shipping for the product. On top of this, if your product is FBA, you can be on the hook for restocking fees. This all adds up to vendors needing to be very careful about what they are sending Amazon’s customers. Even still, careful or not, expect a certain percentage of customers to return perfect products because they were too lazy to read descriptions, decided they simply did not want it, or some other insignificant reason.
Returns can eat into profits very quickly, especially when Amazon backs the customer first and foremost at every turn. The rate of returns and the fees associated, however, vary widely based on products and industry.
For this example, let’s go very low and say you’ll lose 2% of profits on returns. This is a super conservative number. Your $100 product with 50% margin is now down to $20 profit per sale.
Lightning Deals, Coupons, and Promotions
If you’re looking to move products fast, lightning deals can be an amazing opportunity to do so. Whether it’s to get a product launched, liquidate stock, or simply convert some assets back to cash for other uses, a quality ran lightning deal can absolutely crush it. Along those lines, coupons and other types of promotions can boost sales by attracting the deal-seeking customers.
With all of these deals, there can be a large boost to sales, but you’ll have to give away a chunk of your margin to get those extra eyeballs on your products. From experience inside the industry, the interest of a consumer doesn’t start until 10% off. Anything lower doesn’t seem to create a marked interest or any scarcity. Again, this is always industry pending, but in general, to move a lot of products the average of a promotion would be 10% off or more.
So if you want to run a deal for 10% off to boost sales, your $100 product with 50% margin is now down to $10 profit per sale. How many units need to be moved before this becomes a winning formula?
Okay, okay so you may not utilize all of these margin bleeding tactics and get hit with every fee along the way. You’ll have to consistently work the numbers to make sure products are working. Depending on your volume and margins, you may need to liquidate and move on as needed.
The point is margins can be razor thin if you want to win in Amazon’s world. Knowing your numbers, products, and competition will help to forecast month to month. The crazy thing is Amazon rolls out a new way to spend money with them constantly. Pick your spots and you can win big. Fail to be diligent on analysis and you can be the captain of a sinking ship very quickly.
Thinking of starting or expanding an Amazon based business? Reach out and let’s chat. firstname.lastname@example.org