The Time and Money You Need to Start an Amazon Business
The ecommerce business is booming, and everyone wants to be part of it. And supposedly, market entry to Amazon is easy. You simply sign up and start selling your product…right?
Unfortunately, the reality is that it’s not quite that easy – or cheap. There are considerable time and financial investments you need to consider. But having said that, selling on Amazon – if done right – is and remains a lucrative business opportunity.
1. The Preliminaries of Calculating Your Costs on Amazon
Let’s start with a disclaimer: It is impossible to provide a one-size-fits all calculation of the costs on Amazon. They vary greatly and depend on a few different factors.
What we do in this post is give you all the necessary cost information to ensure that you include them in your business plan, choose the right prices for your products, and are able to decide whether or not your product idea is profitable.
Please also keep in mind that some of the investments will be averages and estimations. To truly understand the costs of selling on Amazon, you need to plug in your own numbers into the equation we provide.
Why Costs Differ From Case To Case
There are a few things that will be different for each seller – which is why it is impossible to give you one exact number for the cost to sell on Amazon. The basic parameters that will affect your costs are:
- Your location (this post is tailored to the US market)
- Your production costs
- You landed costs (this includes production, packaging, shipping to Amazon)
- The size of your product
- The weight of your product
- The category of your product
- The initial number of units (inventory)
- If you use a tool to help you get started
- If you are registered as a brand
- Your promotional budget
On top of these financial costs, you also need to account for the time and effort it takes to build an Amazon business. At the end of the post, we provide three scenarios and calculate the financial cost and time investment for each.
2. Getting Started as an Amazon Seller
|Product Research Tool||Doing Product Research|
|Amazon Seller Account||Signing Up|
|Amazon Fees||Profit Calculations|
|FBM vs FBA|
2.1 Product Research: Finding Products that Sell
Before even signing up as an Amazon Seller, you should have a pretty good idea of your product offer. This doesn’t only serve the purpose of being able to provide the information to Amazon when you sign up, but is the very basis of your business model – and profitability.
The right product is the make-it or break-it factor of a successful Amazon business. So you should get it right from the very start by doing in-depth product research.
The Ultra-Budget Way of Finding Products on Amazon
If you are strapped for cash and have a lot of time on your hands, you can do Amazon product research the old-school way. This involves manual research on prices, number of sellers, ranking and categories for each ASIN (unique product number). Provided with a spreadsheet and this data, you can make some estimations regarding the profitability of products and niches.
The Quick (and Safe) Way of Finding Products on Amazon
Not many of us have hours to spend on Amazon product research. And not many of us want to base an important business decision on estimations and gut feeling. That’s why most sellers use a product research tool to discover top sellers on Amazon. They allow you to search through products and categories based on filters such as sales, weight, ranking and number of reviews. And often you can find products that sell within no time.
We’ll go over the costs of sourcing products a little later in the post.
2.2 Signing up with Amazon
Once you know what you want to sell, you can sign up with Amazon. When signing up as a seller, Amazon gives you two options: the Individual Seller account and the Professional Seller Account.
2.3 Calculating Amazon Fees
On top of paying your monthly dues as an Amazon Seller, the platform charges a variety of different fees.
2.3.1 Amazon Referral Fees
The Amazon Referral Fee is charged for each active listing and depends on the product category. The amount of the fee is between 6-45% of the product price, and usually averages at 15%. There is also a minimum referral fee of $1 or $2, depending on product category. This minimum applies when the percentage calculation of the referral fee is lower than the respective minimum referral fee.
If you are selling media products (including books, DVD, music, video games etc.), Amazon will also charge you a Variable Closing Fee. This is a $1.80 flat fee charged on top of the Referral Fee.
The Amazon Referral Fee per category is as follows:
2.3.2 Order Fulfillment: FBM vs. FBA
When it comes to order management, you can decide if you want to fulfill all your orders yourself (FBM – Fulfilled by Merchant), or have Amazon do it for you (FBA – Fulfilled by Amazon).
Fulfilling your orders yourself does not cost you any extra, just the normal packaging, shipping and customer service expenditures.
If you choose to take advantage of FBA (and Amazon highly rewards this method with, for example, better chances of winning the Buy Box), there are a few fees you need to take into account:
- Pick & Pack: packing at the warehouse
- Weight Handling: weight-dependent shipping costs
- Monthly Storage: charged per cubic volume with extra charges for long term storage
- Unplanned Service Fee: applied if your product packaging doesn’t comply with Amazon standards
- Return Order Fee: applicable to apparel, watches, jewelry, shoes, handbags, sunglasses and luggage, amounts to the equivalent of the fulfillment fee for an individual unit
- Removal Order Fee: remove items from the warehouse by return, disposal or liquidation
Here’s a summary of the most important FBA fees:
3. Setting Up the Backend of Your Amazon Business
|Product Samples||Supplier Research|
|Inventory||Waiting for Samples|
|UPC Barcode||Barcode Registry|
|Trademark Registry||Brand Registry|
|Branding||Branding (Making a logo, packaging etc.)|
3.1 Sourcing Your Products
Alibaba is probably your best bet for finding a supplier, but might take some time, trial and error and patience to find the right one. Things you need to look out for include reasonable costs, good communications and willingness to cooperate and build a partnership.
3.2 Sampling and Production
The best way to decide on the right supplier is through sampling. And not just that – samples are also important for checking product quality. Once you’ve done your research on, you can determine the top three suppliers, and order a product sample from each of them. This will show you who is able to give you the best price, service and quality.
Usually $100 is a reasonable sample cost for a unique product that takes $5 to produce and includes materials, production cost and door-to-door shipping.
3.3 Building Inventory
Once you have found the right supplier, you can start investing into inventory. Inventory costs depend on how much your product costs, and how many units you want to start out with. Sometimes suppliers require a Minimum Order Value, it is worth checking beforehand so you don’t have to – we would recommend to start with 200-300 units.
3.2 Getting the Barcodes
Each of the products you sell on Amazon must be identifiable by two barcodes: the UPC Code and the FNSKU Label.
3.2.1 The UPC Code
Every product sold anywhere – online and offline – needs to have a UPC code. According to Amazon’s Terms of Service, every seller needs to comply with the industry standard, meaning that you need to register your products with the GS1 US. Once you register, you obtain a unique company identification number, the GS1 Company Prefix. Together with a unique number attached to each of your products, your UPC barcode then creates a GTIN (Global Trade Item Number) that clearly identifies your company and product.
The official GS1 UPC service costs approximately $250 for 10 barcodes and requires an annual renewal fee of $50. Since there is no strict enforcement of using GS1, many sellers opt for cheaper alternatives, paying as little as $15 for 10 barcodes. However, as Amazon might crack down on this in the future (and just to be on the safe side in general), we highly recommend registering with the GS1.
3.2.2 The FNSKU Label
The FNSKU Label is Amazon specific, and helps the platform match products to sellers. This label is necessary for you to receive credit once your product has been purchased.
You can get the FNSKU Label for each of your products through the inventory management tab on your Amazon Seller Central account. Downloading the labels is free, but you will need to make sure that it is applied to each and every single one of your products.
Here you have the option to either send the code to your manufacturer and have them apply it on your product (often this is included in the production service), do it yourself, or get Amazon to do it for you, for which they charge a fee of $0.20 per item.
3.3 Brand Development and Trademark
3.3.1 Trademark and Brand Registry on Amazon
As a Private Label seller, it makes sense to trademark your brand and register with Amazon’s Brand Registry. This not only helps you in protecting your products, but also opens up additional benefits such as listing editing.
In order to take advantage of Amazon’s Brand Registry you will need the following:
- active registered trademark
- packaging and product photos that show the trademarked brand
- official email address
One trademark application costs you about $350 and takes up to 10 weeks. If you don’t want to wait that long, you can start selling immediately and work towards Brand Registry once you have validated your product and know it is going to sell. Also keep in mind to first look through trademark databases to make sure you are not choosing a brand that already exists.
In order to be able to register as a brand with Amazon, you need to develop a brand identity including a logo, packaging design and website.
If you are just starting out and simply want to test if your product sells on Amazon, it might seem like a lot of time and effort. That’s why we would recommend to simply start selling first and validating demand, before investing into brand development. Once you know that your product generates solid sales, you should invest into your branding.
The budget option includes doing everything yourself, using free services such as Canva to create designs. If you have a knack for design, this is definitely a viable option.
If you know exactly what you want your brand to look like but can’t design it yourself, you will find freelance designers on websites like Fiverr, Upwork or Freeeup. Here you can hire a designer for as little as $5 to design your logo. To have everything included you should allow for $200.
4. Start Selling on Amazon
|Keyword Research Tool||Keyword Research|
|Product Images||Listing Optimization|
|Promotions and Marketing||Photography|
|Shipping Costs||Setting up Marketing Campaigns|
|Packaging and Shipping|
4.1 The Relationship between Sales and Ranking
There is one thing Amazon cares about: more sales. That’s why the Amazon A9 algorithm ranks search results according to purchasing likelihood. There are two factors you need to consider:
- Performance: Products that have sold in the past, are likely to sell again and therefore rank higher
- Relevance: how well the keywords included in the product listing match the search query
Sales and ranking reinforce each other. The more sales you make, the better your products rank. The better a product ranks, the greater the likelihood of a sale.
When you start out selling on Amazon, you won’t have a strong sales history yet. That’s why it’s imperative that you optimize your keywords and product listings.
4.2 Keyword Research and Listing Optimization
Your product listing will only show up in search results if your keywords exactly match the search term. You therefore need to include all relevant keywords that customers might be looking for. Moreover, optimized listings are likely to have a higher CTR and Conversion Rate – two things that will positively affect ranking.
Finding these keywords is tricky. There are two things you can do to kick-off your keyword research:
- Look at the autocomplete suggestions on Amazon. Start typing your product’s name into the search bar on Amazon and have a look at what suggestions come up.
- Check out your competitors and try to identify the keywords they are using.
Whilst this is a great start, it is very rudimentary research, and will take up a lot of your time. That’s where a keyword research tool comes in. There are free versions of keyword research tools available, but if you are serious about your listing optimization and want to rank high, you should consider a paid plan.
4.3 Product Images
Next to written content, visuals play a significant role in driving clicks and conversions. A product listing with high-quality images is also more frequently clicked on and purchased – thereby improving ranking.
If you are just starting out on Amazon and want to keep down your costs, you can do your own product shots. Just make sure that you are adding optimized images that truly depict your product.
For a more professional look, you can opt to hire an experienced photographer to take and edit shots for you. Assuming that you take advantage of all 8 possible product images per listing and get them done professionally, you should allow for $200-$400.
4.4 Promotions and PPC Campaigns
Amazon marketing is an effective way to jump start sales for a new product and thereby increase visibility. One of the major hurdles to selling on Amazon is the highly saturated market environment. There are thousands of products in the marketplace, so how do you make sure that customers find and buy yours?
Discounts to Encourage Early Sales
The first few sales are the hardest. Discounts are a great way to incentivise early sales and thereby improve ranking. However, you have to make sure that all your discounts and promotions are compliant with Amazon’s Terms of Service. You can find more details in your Seller Central Account searching for Promotions.
How much this costs you depends on how much discount you want to give. Looking at your profitability calculations and checking how much lean way you have (without lowering the price below break-even point) can give you a good idea how much of a discount is feasible.
The Early Reviewer Program
Reviews are a significant factor in the buying decision of customers. If a product has reviews, people are much more likely to make the purchase.
In the past, new sellers used to offer giveaways that were linked to generating reviews in exchange of heavy discounts or even free products. However, Amazon has cracked down on fake and incentivised reviews in order to keep the review process transparent and reliable.
With the Early Reviewer Program, Amazon is trying to overcome this hurdle of generating early reviews. Products priced $15 and above are eligible for the program. Amazon charges $60 per SKU and sends an email asking for a review in exchange for a $1-3 Amazon voucher (included in your sign-up fee of $60) to a buyer. This improves the incentive of giving a review, whilst only generating reviews from real buyers and based on only small incentives.
Pay Per Click (PPC) Advertising
PPC campaigns (pay per click) can help in making the first crucial sales. There are a few different ad options, but the general idea is that your product ad pops up if a customer searches for a term that you are bidding for. Your ad expenditure is determined by how many people click on the ad. When you set up your campaign you can choose how much you want to spend per day, for example, $10 per day is a good starting point.
Whilst this is not a must-have item on your shopping list for starting to sell on Amazon, it will definitely make the job easier.
4.5 Shipping Costs
Now – we’ve covered everything from setting up your business, to finding the right product, sourcing that product, setting up a brand, optimizing your listing and paying your dues to Amazon. There is only one more cost left: Shipping.
There are two ways you can handle shipping:
- Do it yourself (FBM)
- Let Amazon do it for you (FBA)
Costs for Fulfillment by Amazon are explained above in the section ‘Amazon fees’.
Do it Yourself (FBM)
If you want to handle shipping yourself, you need to do it according to Amazon’s rules. These depend on product categories.
You can decide between two different fee rates:
- Weight-based shipping fees: set a charge for either per-pound or per-item handling
- Price-based shipping fees: set a charge for price bands (e.g. $0-$20, $20.01-$50)
Once you decided on the shipping model, you can adjust shipping charges for different regions. The default charge for standard shipping within mainland US is $4.49 and $0.50 per lb. If you have a Professional Seller Account, you can change these settings in your Seller Central Interface. Adn we recommend doing so, as your actual shipping costs are likely to be higher than the default settings.
In the past, the shipping rates for BMVD (books, music, videos, DVDs) items were set by Amazon and could not be changed. Now, sellers with a Professional Account are able to migrate to a new shipping settings and activate seller-set shipping rates.
So no matter if you are selling media or non-media items, you need to make sure that you know your shipping rates to different destinations so that you can set them up appropriately on your Amazon Seller Central. Amazon will then automatically charge your set amount by adding it to a cusomter’s order.
4.6 Price and Profitability
After understanding all these different parts of your Amazon business, it is time to calculate the appropriate price of your product. Whilst there is no financial costs involved, you should invest some time into competitor and price analysis.
Finding the right price is not only important to make the maximum amount of sales, but determines whether your business is profitable – or not.
Different categories are associated with different margins. Profit margins are also highly dependent on niche competitiveness. For example, pet products are often assumed to have a high margin, whereas electronic devices are seen as low margin products.
This is where the product research you did at the beginning becomes important. The results should paint a vivid picture of the competitive landscape of your product of choice, and also indicate price and sales numbers of competitors. As mentioned before,to be entirely sure that your product is profitable, you can invest into a product research and niche analysis tool.
Once you decide that your business model is profitable you are ready to start selling!
Summary and Scenarios: How much does it cost to sell on Amazon?
As mentioned at the very start of the post, there are two types of costs involved in selling on Amazon: financial costs and time investments.
|Financial Costs||Time Investments|
3 Budget Scenarios for Amazon Sellers
There is no one-price-fits-all cost calculation for selling on Amazon. But now that you have a better idea about what’s involved, we can go through some examples. In the equation above we have already marked The Essentials, and the Luxury Items you need to start selling. Based on these, we have developed three Amazon Seller Personas for which we can calculate costs.
Whilst each seller type is assumed to sell the same product (let’s assume a kitchenware product that costs $5 to produce) at the same price, each of them has a different attitude towards spending money:
Before getting into the nitty-gritty calculations, another disclaimer. The figures below are to be enjoyed as examples only – and are calculated for the first month. Some of the money and time costs are estimated, and will be highly variable depending on your location, the product you sell and your general business-savviness. And also keep in mind that there will be running costs in the future, that can change over the course of the financial year.
So look at the examples below, exchange the numbers and then calculate the costs for your specific situation.
|Product Research||Manual||$0||2 days||Tool||$47/month||2 hours||Tool||$47/month||2 hours|
|Finding a Supplier||2 hour research on Alibaba|
|Samples||Non||$0||–||3 different samples||$300||5 days||5 different samples||$500||5 days|
|Inventory||200 units at $5 unit price = $1000|
|Amazon Account*||Professional||$40||2 hours||Professional||$40||2 hours||Professional||$40||2 hours|
|UPC Barcodes||10 barcodes from a Dodgy Website||$15||30 minutes||10 barcodes from GS1||$250||1 hour||10 barcodes from GS1||$250||1 hour|
|Applying FNSKU Label||Manual||$0||3 hours||Manual||$0||3 hours||Amazon||$100||–|
|Trademark||No||$0||–||Not yet, but later||$0||–||Registered||$350||2 hours|
|Branding||Manual||$0||8 hours||Designer from online platform||$200||1 hour||Professional Designer||$400||1 hour|
|Amazon Fees||200 units with $1.50 Referral Fee = $300|
|Keyword Research||Manual||$0||8 hours||Tool (same as Product Research)||$0||1 hour||Tool (same as Product Research)||$0||1 hour|
|Listing Optimization||Manual||$0||4 hours||Tool (same as Product Research)||$0||2 hours||Tool (same as Product Research)||$0||2 hours|
|Product Shots||Manual||$0||8 hours||Professional (lower cost)||$200||–||Professional (higher cost)||$400||–|
|Amazon Early Review Program||No||$0||–||No||$0||–||Yes||$60||–|
|PPC Campaign Budget||No||$0||–||$10 per day for one month||$300||–||$15 per day for one month||$450||–|
|PPC Management||No||$0||–||Tool (same as Product Research)||$0||4 hours||Tool (same as Product Research)||$0||4 hours|
|Shipping Costs for 100 products sold||FBM packaging||$50||2 hours||FBA (standard at $2.41 per item)||$241||–||FBA (standard at $2.41 per item)||$241||–|
|FBM shipping costs ($1.50)**||$150||2 hours||Sending items to Amazon (estimated)||$100||2 hours||Sending items to Amazon (estimated)||$100||2 hours|
|FBA storage***||$13||–||FBA storage***||$13||–|
|TOTAL||Economy||$1555||7 working days||Business||$2991||2.5 working days****||First Class||$4251||2 working days****|
*We rounded up the amount from $39.99 to $40 And seeing that you are probably thinking of taking your Amazon business seriously, we assume that you are going for a professional seller account which gives you lots of benefits and expansion possibilities.
**In general, Amazon rolls over the shipping cost to the customer and refunds the amount to your Seller account. However, this is often an average and doesn’t always reflect the true cost of shipping. We estimated that, on average, the shipping cost calculated by Amazon will be $1.50 less than the true shipping cost – just to be on the safe side.
*** This calculation is based on the assumption that the product will take up 20 cubic foot in the warehouse We rounded the amount up from $12.80.
****This doesn’t include the 5 days of samples, as you can work on your business set-up whilst waiting for the samples.
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January 10, 2018
November 27, 2017