The Amazon FBA Business Model Explained
The Amazon FBA business has been the darling of 2015 and 2016, and will possibly continue to be so as more people find out about this business. You may have heard of it, and you may be wondering exactly what an Amazon FBA business is.
An Amazon FBA business stands for Amazon fulfilled-by-Amazon. This is how it breaks down:
- You set up an agreement with a factory/supplier to provide you a product.
- You ship that product from the factory (usually from China) to North America.
- Instead of being housed by you or another warehouse, the product sits in a warehouse owned by Amazon.
- When people buy your product off Amazon, Amazon “fulfills” the order by handling all of the logistics, including shipping and customer service.
“Fulfills” means that Amazon is basically acting as the fulfillment service. A normal fulfillment service stores and ships items on behalf of a product owner whenever a sale comes through.
In addition to fulfillment, Amazon FBA also includes some pretty awesome benefits which we will dive into here in a second.
How Does it Earn Money?
When someone comes to your Amazon FBA listing, looks at the product, and buys the product from Amazon, you make money. It is a pretty straight forward process from there. Amazon ships the product to the purchaser, and you just make sure you have enough stock to meet the demand of the market.
Examples of Amazon FBA Listings
Here is an example of how an Amazon FBA listing page would look:
If you buy anything off of Amazon, this is a page you are probably super familiar with. With an Amazon FBA business, you get the same internet real estate as other Amazon items to use as your “website” to sell your items through.
The Pros of the Amazon FBA Business Model
There are a lot of benefits to the Amazon FBA business model. Once you have an Amazon FBA business that is driving profits, the business model itself creates more passive income and lowers work intensity. Many people only spend a few hours a week on their businesses, just making sure there is plenty of stock to match the current demand.
People who love the Amazon affiliate business model often really love Amazon FBA businesses, because you now have hordes of Amazon affiliates to sell your product.
This is a fantastic benefit, as you could potentially have affiliates driving significant amounts of traffic to your Amazon listing, and providing you with customers.
Speaking of traffic, an Amazon FBA business benefits from all the traffic that Amazon already gets. Amazon is an absolute juggernaut of organic traffic, and this can drive significant sales your way. If your product starts doing really well, with a spike of sales, it can trigger the Amazon algorithm and they will promote your product to potential buyers throughout their website via “Related Products,” or by being the “Best of” in a certain category.
There is also a “People Who Bought this Product Also Bought This” category where your product could be featured depending on your sales.
Because of the variety of places where your products can be promoted, Amazon could send significant organic traffic to your product page without any work on your part. Many Amazon FBA owners rely 100% on this organic traffic to generate their revenue.
Compared to having your own website and online store, Amazon wins hands down in terms of the amount of traffic they will send to you for free.
Although that said, it is never a safe idea to bet all of your traffic on one system.
Many Amazon FBA owners also use Google organic traffic to send traffic to their products. This process is often called Parasite Search Engine Optimization (SEO). The premise behind Parasite SEO is that since Amazon already gets tens of thousands of backlinks from other websites on a daily basis, you can aggressively build backlinks towards your listing without being penalized.
You can have a keyword-rich Amazon product listing targeting keywords that get good search traffic (you can use the Google Keyword Planner as a free tool to find these keywords), and then use several different link packages to start driving good backlinks towards your listing (such as the Hoth).
This is a benefit Amazon FBA has over Adsense & Amazon affiliates (or almost any other business model), since in their cases your website will usually be too young and lack the authority to have so many links pointed towards it without Google seeing some red flags.
In addition to these special little traffic streams you can take advantage of, an Amazon FBA business tends to have much higher profit margins than if you were doing Google Adsense or Amazon affiliate websites. Just like an affiliate though, all of the logistics are handled for you every time you make a sale. Amazon ships the product and handles all the customer service through their FBA program.
If you are familiar with and love the Amazon Prime membership that Amazon offers, you might love having an Amazon FBA business as well, since you will be automatically enrolled into the product, allowing all of your customers to benefit from free shipping. This is fantastic, since online shoppers are twice as likely to respond to free shipping than they are to product discounts.
As your Amazon FBA business grows, you might want to eventually start distributing your products outside of Amazon as well. One of the nice things about the Amazon FBA program is that it allows for multi-channel distribution, meaning that if you start up your own online store, and someone comes there and buys your product, Amazon will still ship it for you.
The Cons of the Amazon FBA Model
While there are plenty of benefits that come with an Amazon FBA model, it is not all roses and sunshine. There are several flaws in the business model that you should be aware of before you build this kind of business, or should take into account if you are in the market to sell an Amazon FBA business that you have already built.
First of all, don’t expect to throw up a product and think Amazon is just going to send you organic traffic. Unless your product is something that people are showing an active interest in (i.e. you have spikes in sales in a very short period of time), Amazon is not going to put in a lot of promotional work.
They only promote products that are objective winners in their marketplace, so if you want to reap the rewards of that organic traffic, you will have to hustle a little bit when your product first goes live.
Another downside with Amazon FBA is a dilemma in dealing with suppliers. This negative is something that is actually shared by dropshippers and e-commerce business models as well. In many ways, your supplier is the life of the business. If demand for your product becomes very high, your supplier might not be able to produce the item for you fast enough.
Or they could change their policies on you, in a way that could significantly cut into your profit margins. At the end of the day, suppliers are businesses as well, which means they can go out of business, leaving you with a bunch orders to fulfill and no supplier to build your product. Because of this, we always suggest you look into multiple suppliers, so you have back-up channels in case an emergency like this happens.
In addition to all of this, it can be a hassle finding the right supplier. You need to have the supplier send you a prototype of the product you will be listing on Amazon to make sure it is a quality item. After you set yourself up with the right factory, you then need to research whether the product should be shipped via air or via ocean cargo ships.
Usually transferring product via cargo ships to an Amazon FBA warehouse is going to be the cheaper route. Either way, figuring out the logistics is important as it can seriously decrease your profit margin if you choose a poor shipping solution.
As far as the revenue earned from an Amazon FBA business goes, you can break it down using this rule of thumb:
- ⅓ Product costs
- ⅓ Amazon costs
- ⅓ Profit
So while your profit margin is actually higher with an Amazon FBA business than if you were selling similar products as an Amazon affiliate, your total earnings is actually much less than if you had your own online store (of course, that’s assuming the sales of the store were equal to the sales coming from the Amazon product listing).
Overall, the entire business model relies on Amazon. You are essentially playing in their ballpark. If they change a policy, such as not making your products available for Amazon Prime anymore, it could seriously impact your business. Since you have no control over what Amazon does, if they do something that hurts your business it is completely out of your hands.
What Buyers Need to Know
Before buying an Amazon FBA business, you need to know a few things.
The product is extremely important. If the product requires electronics, you are going to face some uphill battles of potential technical difficulties. You might get an entire batch of faulty electronics shipped out to your customers without even knowing it, until the one-star reviews start flooding in and kill all the momentum of your listing page!
Another product concern is with digestibles. As much as you want to sell an awesome protein shake and get in on the meal replacement wellness industry, you have to be careful. It is better if these products come from American factories held to American standards. And even if this is the case, if someone gets sick from your product you may be facing more than just one-star reviews from consumers that could become sue-happy towards your company.
The best Amazon FBA products are simple, typically costing $15-40. These are usually smaller products. If you decide you really want to get into an Amazon FBA business selling bigger products — such as foosball tables for example — realize you will be paying much higher storage fees from Amazon to keep your product in their warehouse.
As we mentioned earlier, suppliers are incredibly important to the success of this business. You need to make sure that the seller of an Amazon FBA business will introduce you to the supplier and the shipping company that they are currently using. In a best-case scenario, they will also have a few other suppliers you can reach out to in case of emergency, or if you need to switch suppliers for any other reason.
It is always a great deal if you can get the supplier to make that product exclusively only for you, since it will cut down on copycat marketers significantly.
Before you pull the trigger to buy the business, make sure you also check that the seller has enough supplies to match current demand till the next shipment comes in. The last thing you want is to buy a business with a supply chain issue!
Keep all of these points in mind and it will help you to successfully buy a potentially very lucrative Amazon FBA business.
What Sellers Need to Know
When selling your Amazon FBA business, there are a few points to keep in mind to help maximize the profit you earn from the sale, and make the whole process go as smoothly as possible.
First things first: have a solid proof of earnings and a successful track record using the same supplier. While three months is a minimum, the longer you have a track record of success, the more you can ask for your website.
Track all of your expenses meticulously. Amazon FBAs are notoriously capital intensive businesses, as people are often shelling out tens of thousands of dollars a month to keep Amazon warehouses topped up with enough product to meet market demand.
A good practice to start is to pull all of the reports from your Amazon Seller Central account every single month since Amazon won’t let you go back farther than three months for most of these reports. Some important reports that potential buyers will be looking at are the reports filtered by SKU, inventory, ACOS and your PPC stats. While some buyers might not be interested in this data, having more data to share is always the better move to make the business more attractive.
As is the case for buyers, as a seller you too should make sure your supply chain is working perfectly. Work out any hiccups before listing your business for sale. There should be plenty of product in the warehouse and product on the way for the buyer, so that they have ample time to get up to speed on running the business.
You will want to introduce the buyer to the supplier and shipping company that you use. Offer training and support in handing off the business. If you can, also have a small rolodex of backup suppliers that the buyer can use in case the current supplier changes their policies, or in the worst case scenario goes out of business and can no longer create the product.
Do all of these things and you will stand a strong chance of selling your business much quicker and likely for a much higher listing price.
What Buyer Persona Best Fits the Amazon FBA Business Model?
Amazon FBA businesses that are set up and already producing a profit are fairly hands-off businesses. This appeals to someone like Portfolio Paul, who wants to have several income-producing assets. Also, as it is not an affiliate business model, income streams can be diversified to protect them if an affiliate account or offer gets closed down.
This is a great business model for someone wanting to take a deep dive into the details. There are lots of tricks and strategies to decrease supplier and shipping costs that can increase your margins. Not to mention there are many diverse growth sectors for an Amazon FBA business, such as adding new keywords to the listing page, or utilizing paid advertising to send traffic to the listing.
Amazon FBA businesses are great for someone looking to buy a business, improve its revenues, then sell it for a higher list price than what they bought it for. Since people are currently rushing to get their hands on Amazon FBA businesses, it is a good time for a Flipper Fred to come in and buy one of these businesses to turn around and sell.
Someone looking to expand their business into related businesses might find a good fit with an Amazon FBA business. For example, if someone is an Amazon affiliate website owner that is producing good revenue, their product might be a worthwhile Amazon FBA product. Instead of using their website to sell someone else’s product on Amazon, they can use the proven buyer traffic to send their product instead, while still using their Amazon affiliate link.
As mentioned throughout this article, there are tons of growth opportunity for Amazon FBA businesses. Since most of them rely on Amazon organic traffic, the paths listed below are the best route for taking a profitable Amazon FBA business and growing it even more.
This is the easiest option for sending new targeted customers to your Amazon listing. Many e-commerce stores make their entire revenue using facebook ads. The nice thing about paid traffic is that there is no waiting around. It is like turning on a water faucet. That said, you want to test this and monitor paid campaigns closely, so you do not take a wash in losing a bunch of money.
Build a Brand
This is one of my favorite strategies. Instead of having a ton of unrelated Amazon products, why not create a true brand for your products? By creating a brand, it will become easier to market in other channels. Instead of having “Random Red BBQ Brush” you might have “Extreme Chef Red BBQ Brush,” and once you have a brand you could introduce other Extreme Chef products to an audience that will recognize the brand and buy your products based off that alone.
Build an Email List
This is not always a viable strategy. However, if you are focused on building a brand with a suite of relevant products, this can be very effective. You are turning your Amazon presence from a niche product listing into an authority by doing this.
You will need to share good content with your email subscribers outside of just promoting your product launches, but this is a great channel to let people know when you have special deals going on or to email out during high buyer season like Black Friday and Christmas.
This marketing method will be easier if you decide to go the brand route, obviously. Organic traffic from places like Instagram, Twitter, and Pinterest can be insanely lucrative. The best part about this traffic is that it is usually free, and in the case of Instagram and Pinterest it can be somewhat passive as people keep rediscovering your pictures.
Open a New Distribution Channel
Instead of relying 100% on the Amazon platform to sell your goods, you should eventually expand into starting your own e-commerce store selling the same products. Since Amazon FBA will still fulfil the shipping of your product to your customers even if they bought it on a different website than Amazon, this should be something you seriously take advantage of, as it protects you too.
If Amazon ever closed down their FBA program or changed the rules, it will be a simpler matter to transfer your product over to a new fulfillment service, as you already have a second web presence to sell your products through.
Resources to Learn More
While there are a ton of blogs out there right now detailing their journeys with Amazon FBA, the best resource is actually a paid membership over at FBAMastermind.com.
FBA Mastermind deals with advance strategies and techniques with this business model. So it can be a great place for someone who really wants to hone their skills or learn completely new skill sets in growing their Amazon FBA business.
Interested in buying an Amazon FBA business? Check our current marketplace listings for one today.
Or maybe you are ready for a big payday and want to sell your Amazon FBA business? You can sell your online business through us by clicking here.
Want to Know the Most Popular Online Business Models? Click Here