Amazon is the 900 pound orange gorilla in the world of e-commerce.
If you sell a physical product, you’ve no doubt had customers ask if your brand is on Amazon, and if not, why not?
The reality is, Amazon can be extremely lucrative and widen your market reach considerably. But only if you know exactly what you’re getting into; your profit margins can be easily eaten up with fees, and your time taken up with learning a new system and resolving issues.
So is selling on Amazon a good fit for your business? Answer these 6 critical questions and find out.
QUESTION #1: IS YOUR EXISTING PROFIT MARGIN AT LEAST 50%?
Amazon’s fees are relatively high, especially if you use their FBA (Fulfilled By Amazon) program and have Amazon fulfill orders directly. The fee structure is more complicated the other platforms like Etsy, since it takes into account the price of the item, shipping weight, product category, and other variables.
There are 2 types of fees directly associated with selling an individual item:
- Variable fees: a 10% - 30% referral fee (15% in most categories), a variable closing fee
- Fixed fulfillment fees: order handling, pick & pack, and weight handling. These fees usually add up to at least $2.50 per item sold.
Additionally, there are other fees which aren’t directly related to the sale of each individual item such as storage fees, monthly membership, and returns.
All told, it can be complicated to know your exact fee structure for each item sold. But a good rule of thumb I’ve found is that Amazon will take 25% - 30% of your item’s retail price in fees. With this in mind, you’ll want to have at least a 50% profit margin on your products (ideally 100% or more) to ensure you don’t lose your shirt.
QUESTION #2: IS YOUR PRODUCT PRICE POINT OVER $15?
The nature of Amazon’s fixed fee structure means that lower-priced items have proportionately higher fees. Any product priced under $15 will generally be paying more than 35% in direct selling fees. The higher the price of your item, the less it will pay proportionately in fees.
Here’s an example of a 1lb product in a non-media category:Fee breakdown: 15% of item sale price (variable referral fee) + $1 (Order handling fee) + $1.04 (pick & pack fee) + $0.5 (weight handling for 1lb) + $0.5 (variable closing fee)
- $7 product = $4.09 or 58% fees
- $15 product = $5.29 or 35% fees
- $100 product = $18.04 or 18% fees
QUESTION #3: IS THERE ENOUGH DEMAND FOR YOUR PRODUCT?
If you’re investing time, money, and effort in launching products on Amazon, you’ll want to ensure there is existing demand first. One way to gauge the demand for a product is to look at the number of recent product reviews. We know that less than 10% of Amazon customers actually leave product reviews, so you can get a rough estimate of the monthly sales by multiplying the number of product reviews left in the last 30 days by 10.
This product had 11 reviews left in the past 30 days, so is potentially selling around 110 units per month.
QUESTION #4: CAN YOU SCALE PRODUCTION QUICKLY WITH YOUR EXISTING CASH FLOW?
One of the benefits of selling on Amazon is access to hundreds of thousands of customers who are ready to BUY.
Let's run a thought experiment and imagine if you met or exceeded the volume of your competitors on Amazon right now. Could you meet demand with your current operations, or would you have to change your processes/suppliers/partners to manage things?
Amazon’s payment cycles run in 2-week increments, so you may also need to consider the effect of having your cash and inventory tied up for a longer period than on other e-commerce platforms.
QUESTION #5: CAN YOU DEVOTE TIME TO LEARNING A NEW PLATFORM?
Like any selling platform, there is a learning curve required. But compared with other platforms like Etsy or your own Shopify store, Amazon has a lot more rules and processes designed to keep their shoppers happy.
Beyond the effort spent learning the rules and processes, there is up-front effort required to set up your listings and learning what makes a high-converting product listing.
QUESTION #6: Do you have a promotional budget?
The classic catch-22 of selling on Amazon is this:
Product reviews = more sales More sales = more reviews But less than 10% of customers actually leave reviews
When you’re getting started, this is a negatively-reinforcing cycle of no sales and no reviews. The solution is to kick-start sales by giving away some your product for free or at a significant discount in exchange for reviews.
You’ll need to budget for giving out sample product to start getting those juicy product reviews, and potentially some paid ads to get more traffic to your listings.
Even as someone who makes a living by helping brands sell on Amazon, it’s a love/hate relationship! Amazon as an e-commerce platform is relatively expensive, with lots of rules, and is getting more & more competitive by the minute.
But the challenges Amazon throws at you can pale in comparison to the upsides. With hundreds of millions of loyal customers—many of whom refuse to shop anywhere else—you can access buyers you would never have been able to reach before. You can utilize Amazon’s warehouses & systems to reduce your own operational, fulfillment, and customer service workload.
I got started by listening to lots of podcasts, reading blogs, watching videos, and talking tactics with other Amazon sellers. It took many months of testing and learning to really get my bearings, and another few months to discover master more advanced traffic and conversion strategies.
Be prepared for a long journey on Amazon; it’s worth it!
(Image Source: LifeHacker)
ABOUT THE AUTHOR:
Kiri Masters cut her teeth in e-commerce by launching I Like That Lamp, a company dedicated to the art of DIY lighting. Now, she consults for brand owners who want to launch and optimize their products on Amazon at bobsledmarketing.com.