The Fulfillment by Amazon (FBA) program is a great way for entrepreneurs to grow an e-commerce business while minimizing their initial investment. There is no better e-commerce partner in the world than Amazon. However, before you dive into setting up your FBA business, you need to make sure you understand how the program works and the different costs involved.
What is FBA?
FBA is a program Amazon started several years ago that lets you leverage Amazon’s shipping infrastructure. You list items for sale on the site, but instead of you getting a notice when something sells and shipping it off to the customer, you send all of your products to Amazon. They take care of the packing and shipping when one of your items sells. Amazon then deposits your revenues, minus the FBA costs, to your account.
This is a huge advantage for sellers. You get to take advantage of Amazon’s huge warehouse space, state-of-the-art product fulfillment system, and the cheaper shipping rates that Amazon has negotiated with UPS and FedEx.
Why You Should Consider FBA
There is no such thing as a business that pays you a lot of money, but doesn’t require you to put in any work. But, FBA does allow you to better leverage your time. Instead of spending time printing shipping labels, going to the post office, and managing your inventory out of your garage, you can spend your time sourcing new products, marketing, and other high value tasks.
FBA makes it easier for you to grow your business. Instead of only focusing on an arbitrage strategy where you find cheap products and sell them at a markup, you can import products wholesale from foreign manufacturers and create your own brand selling products you never even have to touch.
You should consider FBA if you are interested in starting a business that you can scale quickly and that you can operate from anywhere in the world. FBA allows you to become a partner with the largest ecommerce website in the world.
How Does Amazon FBA Work?
Selling with FBA starts with you selecting the products you want to sell. For most beginners this means they sell products they have bought and are currently in their possession. Once you gain some experience you can begin sourcing from cheaper overseas factories. But, no matter how you source your products, FBA works the same basic way.
You scan your products into your Amazon seller’s account. Amazon then has you print special tags for your products. After you tag each product, you package everything into boxes. Amazon will tell you which of its fulfillment centers to ship your products to.
After you send off your products Amazon handles everything else. Amazon will store your products in one of their massive warehouses. Your items will be listed on the site. Once something of yours sells, Amazon packages it and ships it off. If the buyer has Amazon Prime, they even get the benefit of free shipping on your products.
Amazon then credits your account with the sale. FBA costs are deducted from your account as well. Approximately every two weeks Amazon will deposit your money from the sale of your products directly into your bank account.
How Much Does it Cost to Use Amazon FBA? What are the FBA Fees?
There are two different types of seller’s accounts, an individual account and a professional seller account. There is no fee for an individual account, but there is a $0.99 fee per item fee. A professional account costs $39.99 per month, but there are no per item listing fees.
No matter what account you choose, you will also have to pay fees when you sell an item:
- Referral fees
- Variable closing fees
- Fulfillment fees
- Monthly inventory storage
If you are planning on selling 40 items or less, an individual account makes the most sense. But, if you are going to list more than 40 items a month, it makes sense to get the professional seller account because you will save the cost of monthly fee by not having to pay any per item listing fees.
For most new sellers the referral fees and the variable closing fees are the most confusing part of the FBA process. The referral is like a commission you pay Amazon when you sell an item on their platform. It comes out of the revenue from selling the item.
The referral fees vary depending on the product category. These fees range from 6% to 20% of the sale price, but are 15% for most items. Some product categories have a minimum fee of $1 or $2.
Variable Closing Fees
Currently, sellers only have to be variable closing fees on media products like books, DVDs, etc. The fees typically run between $1.25 and $1.45.
These are the fees Amazon charges you to pay for the cost of shipping out your order. Unlike most of the other FBA fees, fulfillment fees are clear and easy to find. The heavier and bigger your product the more expensive the fulfillment fees will be.
One interesting wrinkle is that the fulfillment fees go down during October, November, and December.
Monthly Inventory Storage
Sellers are charged for the items Amazon is storing for you. They charge per square foot of space you use. The rates for storage go up significantly for the months of October, November, and December.
How to Calculate Amazon FBA Fees
One of the keys to running any successful business is having a full understanding of the costs involved. You can lookup the referral fees and the variable closing fees. You can figure out the weight of your product and easily calculate the fulfillment fees. But, calculating the monthly inventory storage can be a real challenge.
It is difficult to figure out how storage space any given product will use. Amazon has a calculator that you can use to calculate your monthly storage fees. However, you have to enter the identification number for each of your products by hand.
If you have listed a substantial number of products you would have to spend a significant of time just to accurately calculate your storage fees.
Using A2X to Account for FBA Fees
There are hundreds of different FBA fees, we’re keeping track of all the new ones we find here. A2X is a powerful software package that can help you account for all of these fees properly for your Amazon account reconciliation. Instead of spending hours entering product numbers, A2X interfaces with your Amazon Seller’s account and in a matter of minutes can account for your fees. A2X allows Amazon sellers to capture the data and then monitor things like what % of margin or revenue is being spent on shipments, storage, preparation etc.
Even more impressive, A2X also interfaces with your online accounting software such as QuickBooks or Xero and enters this fee data into the correct month. With A2X you will always know where your FBA business stands financially. It allows you to spend your time on more important tasks instead of monotonous data entry.
How to Get Started with FBA Today
One of the advantages to starting an FBA business is the low barrier to entry. It is easy to get started. You can begin with just a few items until you get a feel for the process and the wants of your target market. You can then reinvest your profits to scale up your business as quickly as you are comfortable with.
To get started you first need to decide what you want to sell. The easiest way to get started is to find items selling for less at your local discount stars than they are selling for on Amazon.
Once you have an idea of what you want to sell you need to open a seller’s account. If you are starting small, you should open an individual account. You can always upgrade to a pro seller’s account later.
After you have your account it is time to get some inventory. While it is natural to want to start small, you are less likely to turn a profit if you are only selling a handful of items. You should start with at least 20 to 30 items.
Once you have your items, you need to enter them into your account. You will need to print bar codes for the items and then ship them to the fulfillment center Amazon assigns to you.
After that, you can either work on driving traffic to your items or just wait for the Amazon machine to sell for you.
Top Tips and Tricks to Increase Your Amazon FBA ROI
No business is foolproof. Partnering with Amazon using the FBA program, you have access to a lot of resources that most new businesses don’t have. But, you still have to make smart decisions. Below are three of the top tips and tricks for increasing your FBA ROI.
- You make your money when you buy, not when you sell. It is easy to think that you start making money once your item sells. But, the profits you are going to make are decided the moment you buy your inventory. The price you pay for an item will determine your listing price. This will also determine the fees you will have to pay. The better you are at sourcing low-cost inventory the better your profit margins will be.
- Keywords matter. No matter how great your products are, if people can’t find them, they can’t buy them. Amazon is more than just the world’s biggest retailer. It is also one the largest search engines. It is a search engine used almost exclusively by buyers. The key to discoverability is using the right keywords in your product title and description. Make sure your product description uses the same keywords your target market is typing into the Amazon search bar.
- Your time is your most valuable asset. Automate. There are a lot of different tasks involved in running an FBA business. Some of it you need to be involved in. You should be deciding what inventory to sell and how to price your products. But, you shouldn’t be doing data entry. Invest in your business by spending money on tools that free up your time and automate things like Amazon account reconciliation. You can use the time you save to scale up your business and increase your profits.
Amazon’s FBA program is a tremendous way to build the kind of business that you can run from a laptop. However, the people who are the most successful are the ones that treat it like a business. This includes making sure their accounting and bookkeeping are accurate and up to date. The better you understand your business’s financial information the better business decisions you can make.