A Guide to Amazon’s FBA (Fulfillment by Amazon)
Amazon’s FBA business model has taken the spotlight in the hearts and minds of many business owners in recent years. It will likely increase in popularity the more people find out about it. But you may be wondering exactly how does Amazon FBA work? Or how to become an Amazon FBA seller?
Amazon FBA (Fulfillment by Amazon) is a great business model for small businesses. Stated in broad strokes:
You create an agreement with a factory/supplier to produce a product(s) for your business.
You ship that product from the factory to an Amazon warehouse in North America.
The product then gets stored in that Amazon warehouse as your inventory.
When someone purchases your product through Amazon, Amazon “fulfills” the order and handles the logistics. This includes shipping and customer service.
Fulfillment is the key word in this business model. Meaning that Amazon basically acts as a fulfillment service, where they store and ship the product on behalf of the store owner. When a consumer searches for a product that you carry on Amazon and they access your product page, when they go to purchase that product, Amazon will then pick and ship that product to them. An FBA store owner gets the same internet real estate as other Amazon items and effectively acts as your “website” to sell your Amazon FBA products.
The Pros of Amazon FBA
Once your FBA business is set up and your store is realizing profits, the business model is set up to create more passive income, which lowers your workload. Many FBA store owners spend only a few hours each week on the business, primarily making sure there is enough stock on hand to meet demand.
Those with an Amazon affiliate business model love the FBA model because they have scores of Amazon affiliates to sell their products. This is an amazing benefit, as affiliates have the potential to drive a lot of traffic to their Amazon listing, providing them with a steady stream of customers. Since Amazon is a juggernaut of organic traffic, this can drive significant sales your way.
And, if that traffic leads to a spike in your sales, it can trigger the Amazon algorithm to promote your product to potential buyers throughout the website via the “Related Products” or “Best of” feature in a certain category. This could send significant traffic to your Amazon product page without you having to lift a finger. That said, it is never a safe idea to bet all of your traffic on one system. A certain amount of Google SEO finesse on the business owners’ part is also needed, especially when starting out. The good news is that you can benefit from Amazon’s already stellar standing in the SEO world, and piggyback on that to aggressively build backlinks toward your product listings.
Amazon FBA also allows multi-channel distribution. This means that if you create your own online store on another website (such as your own), and someone buys from there, Amazon will still ship it for you (from the Amazon warehouse).
The Cons of Amazon FBA
As good as the FBA model is, it’s not all sunshine and rainbows. Several flaws exist that both new and experienced sellers should be aware of. The first of which is, once you create a product page on Amazon, even with carefully researched SEO keywords, don’t expect to get a lot of traffic to the page based solely on SEO. Unless the product is in high demand and you get a short spike in sales, Amazon is not going to put in a lot of promotional work.
The bottom line? You will need to do a little hustling yourself to promote the product.
Secondly, Amazon gives you no help at all in the supply chain side of the business. That responsibility rests on you, or on a manager if you choose to hire one. It makes good business sense to always have multiple suppliers in the event that a supplier changes policies on you, raises their prices, or goes out of business altogether. You don’t want to be stuck with orders and no way to fill them. The same is true with shipping that product to an Amazon warehouse. You want a sound logistics system.
Thirdly, Amazon FBA’s fee structure is such that sellers typically realize a profit of about 1/3 of the retail price of the item on every sale. That tends to be lower than if you were to sell the item on your own website.
Overall, the FBA model relies on Amazon; you as a seller are essentially playing in their ballpark. Therefore, if they change a policy, it is up to you to keep abreast of those changes and pivot your business accordingly. In not doing so, you run the risk of breaking one of their rules, which could get your account suspended.
What You as a Business Owner Need to Know
Whether you are starting your own Amazon FBA store, or buying it from someone else, keep the above points in mind at all times. Having the right suppliers and logistics partners is key to the success of your business, and this is out of Amazon’s hands.
Once you have a product in mind to sell, it is ideal to find a supplier to make that product for you exclusively, so you don’t fall victim to copycat marketers. Finding a niche product is a great way to do this. You will have little competition and can build a successful brand from just one or a handful of products.
As mentioned above, you will want to think seriously about having more than one distribution channel with which potential customers can buy your product. Selling it somewhere other than Amazon is a good idea, in the off-chance Amazon ever closes their FBA program or changes the rules drastically to the point where you can no longer sell your product.
In the end, having an Amazon FBA business is just like any other business. The main difference is that you have a ready-made, established empire with which to help take orders, ship, and handle some of the customer service issues related to any business.