How Much Does it Cost to Start and Run an FBM Business on Amazon?
July 30, 2021
July 30, 2021
Amazon has seen an incredible and meteoric rise over the last two decades the like of which has rarely been seen before. The Amazon marketplace now dominates the e-commerce space, with Amazon and Amazon sellers fulfilling millions of product orders every year. Of course, Amazon is involved in a lot more than just the e-commerce business, with the company branching out into media and entertainment, cloud computing, and more.
As of this point in time, Amazon’s seller platform has more than 1.5 million active sellers. These Amazon businesses sell to individuals worldwide, including an estimated 112 million Amazon Prime subscribers in the United States and 200 million worldwide. Further, each of these subscribers spends on average $1,400 a year on the Amazon marketplace.
Naturally, thousands of small businesses across the United States have decided to get in on the action, eager to sell their products to some of Amazon’s millions of loyal customers. Indeed, if you have a unique and new product or can offer competitive pricing on a product that already exists on the site, there is a good chance Amazon can help bolster your sales and take your business to the next level.
It is important to note that there are actually two distinct ways businesses can sell their products: Fulfillment by Amazon (FBA) or Fulfillment by Merchant (FBM). Today, we’ll be covering the ins and outs of selling as an FBM Amazon business. However, be sure to check out our recent article on selling on Amazon as an FBA seller.
Before we get started, let’s quickly address the two different options sellers have for selling on Amazon.
Fulfillment by Merchant (FBM) sellers are sellers who opt to fill their own orders. This means they are responsible for storing, packing, and shipping their products. They are also responsible for covering their own shipping fees. FBM was previously known as MFN, or merchant fulfilled network.
Unlike FBA sellers, Amazon FBM sellers are also responsible for providing customer service and return processing for the Amazon customers that purchase their products. That said, FBM sellers can use third-party fulfillment services to manage their inventory, pack and ship their products, and handle customer service and returns. These outside groups are often less expensive than the Amazon FBA full-service solution, however, they do not get access to a number of the benefits Amazon FBA sellers receive.
Fulfillment by Amazon (FBA) sellers are sellers who decide to use Amazon’s full-service fulfillment solution. Using this service, sellers ship their products to Amazon fulfillment centers where their products are stores until they are purchased.
In addition to fulfilling their orders through the Amazon marketplace, Amazon is also capable of providing multi-channel fulfillment services. With this service, purchases made through other platforms, such as BigCommerce and eBay, are filled by Amazon. Amazon also provides customer service for these orders and processes any returns that come up.
These sellers get access to reduced shipping costs and their products are automatically eligible for Amazon’s 2-day Prime Shipping, a huge benefit since there are few small businesses that ship enough to get the expedited shipping rates Amazon receives (Amazon also has its own delivery service now which they use). While you will stay pay for shipping through Amazon, the rates could be highly advantageous.
FBA sellers are charged all the same fees that FBM sellers are charged as well as special FBA fees. These special FBA fees include a per-product fee (incurred whenever an item sells) as well as storage fees. There can also be additional fees depending on the circumstances.
The Amazon marketplace is not a great place to sell all types of products. As such, small businesses have to think carefully about what they want to sell through Amazon.
As noted, there are millions of sellers on the Amazon marketplace, and it can be hard to gain a competitive advantage if you are selling common products. For example, if you are selling toothbrushes, you are going to be hard-pressed to compete effectively with the larger companies (including Amazon itself) utilizing the marketplace.
However, if you have a unique product and are building your own brand, then Amazon can be a great place to sell products. For example, imagine you are a company that sells all-natural sports bars which are becoming popular. You operate your own e-commerce website where you sell your products directly, however, you also want to gain additional exposure. Amazon could be a great place to sell your item since it is 1) unique (yes there are other sports bars out there, but you’re the only company selling your exact sports bar) and 2) you think your product stands out from the pack in terms of the other all-natural sports bar offerings. This is a much better product to sell on Amazon than Oral-B toothbrushes.
Also remember really cheap products are not great for selling on Amazon, since the fees will cut into your profits rather quickly.
Indeed, products that are small and lightweight, have a considerable number of reviews (150+), are unique, easy to manufacture, retail between $15 and $75, and can be sold year-round are great candidates for Amazon’s marketplace. The key is to develop a niche that the large competitors aren’t serving.
Direct Control Over Your Inventory – One of the pros of Amazon’s FBM sellers program is that you still maintain control over your inventory. This means that you can inspect items before they go out the door to make sure they are intact, place fliers and other marketing materials inside packages before shipping, and use branded packaging materials.
The power of marketing with each shipment (i.e. dropping coupons or other offers into shipments) should not be underestimated, and it is something that is severely hampered if not made impossible when sellers use Amazon FBA services.
Reduced Inventory Costs – Storing your inventory with Amazon can be costly, with fees being assessed per cubic foot of storage used. Amazon prefers items that move quickly and they do not like when inventory sits around for prolonged periods of time. In fact, Amazon charges an additional fee for items that are in their warehouses for more than 180 days and then yet another additional fee for items in their warehouses for more than 365 days. These long-term storage fees can add up quickly. While this fee is a burden, it does make sense. Amazon’s warehouses are massive, but at the end of the day, there is still only so much room. As such, Amazon wants to keep products moving through quickly.
Amazon also charges more for inventory storage during the holiday season, increasing rates from October to December of each year.
Choosing to store your own inventory can lead to significant cost savings, especially if your inventory does not move especially fast.
Control Over Returns and Customer Service – Using FBA services almost always leads to an increase in returns, since Amazon shoppers know how consumer-friendly Amazon’s return policy is. As an FBA seller using Amazon’s Prime shipping and customer service team, you’ll almost certainly see an increase in returns.
Additionally, your customer support team might work really hard to go the extra mile. This is not to say anything against Amazon’s customer service team, but the truth of the matter is that they aren’t working for your company specifically. This means they won’t know much about your product outside of its site description and listed specifications. If customers are confused or need help, they won’t have anyone to turn to unless you still operate your own internal customer service team for them to contact. As such, you may prefer to handle customer support yourself, in which case Amazon FBM is the way to go.
By dealing with your own returns and providing your own customer service, you can also identify aspects of your products or services that need to be improved. Your customer service team will be able to speak with customers and learn why they are returning the product or why they are unsatisfied with their purchase. They can also offer ways to make amends to the customer that Amazon’s team cannot, such as offering to send out a new product for free or offering to send out some samples. This can be critical in building a loyal customer base.
Less Amazon Fees – If your company is really good with customer service, processing returns, shipping, etc., then you can probably save quite a bit of money by handling your own logistics. Increasing your margins can be a huge deal, especially for growing businesses, and Amazon FBA can have all sorts of fees associated with it. By going the FBM route, you can dodge Amazon’s fulfillment fees and use your own fulfillment methods. You can also use a third-party fulfillment service, which will most likely lower your fulfillment costs.
Additionally, some Amazon product categories incur additional fees under their FBA service.
Customer Service and Returns – Just as having control over your customer support and returns can be a pro, it can also be a con depending on the circumstances. Handling and processing take time and effort. You have to send out return labels, ensure the product is received, and then refund the customer. Depending on your business’s needs and staffing capabilities, it might be advantageous to have Amazon handle this.
Getting the Prime Badge is Difficult – The Prime 2-day shipping badge which gives Amazon Prime subscribers free two-day shipping is a huge sales advantage. There are over a hundred million Amazon Prime subscribers in the United States alone, and they tend to prefer Prime items. However, as an FBM seller, it is extremely hard to get the Prime badge. For starters, you have to be able to ship out items and have them delivered in just two days’ time for no additional fee. Not an easy thing to do, and something that can be quite expensive.
Limited Buy Box Competitiveness – If you are selling a product that other vendors are selling, you will be competing for the Amazon buy box. The buy box consists of the “Add to Cart” and “Buy Now” options that appear to the right on the screen when looking at a product. If you do not have the buy box, then in order for customers to buy from you they will have to choose to view “Other Sellers on Amazon”. Whoever has the buy box will be the one selling their items when a customer selects “Add to Cart” or “Buy Now.” There are many factors that go into winning the buy box, however, Prime shipping is one of the most important aspects. While Amazon FBM sellers can get the Prime badge by fulfilling the SFP requirements (we will discuss these later on), FBA sellers are always given a slight advantage in securing the buy box, since Amazon has control over managing the order then.
The buy box is extremely important for making sales and driving revenues if you are selling a product that other vendors are offering. As such, it can make sense to go the FBA seller route if you feel like you will need to be competitive for the buy box.
Of course, the biggest question on the mind of new sellers is: how much is it going to cost to sell products on the Amazon store? In this section, we’ll break down the selling fees that FBM sellers can expect (please note that FBA sellers are subject to a number of additional fees, so please see our post on Amazon FBA selling to learn more about Amazon FBA fees).
Amazon fees can be monitored through the Amazon seller central hub of your Amazon seller account. They are taken out of your Amazon sales revenue before Amazon pays you. If your fees exceed what Amazon owes you for the month, they will charge the credit card on your account.
Referral fees are the commission that Amazon charges to sellers on their platform. Referral fees are charged for each item you sell at the time the item is sold.
Amazon referral fees vary based on the product category of the items you are selling, with some product categories being more expensive than others. Amazon seller fees are typically a flat percentage (usually 15% or less) of the product price.
Be sure to look into how these seller fees will impact your margins before you start selling on Amazon, as the seller fees can be significant, especially if you are selling in particular product categories.
As a quick note, the Amazon seller fees tend to decrease as you sell more products. So, the more you sell, the higher your profit margins will be!
Amazon charges sellers an additional fee depending on the seller plan they choose to use. There are two plan options for sellers to choose from: the professional seller plan and the individual seller plan.
â€‹With the individual seller plan, sellers pay a fee of $0.99 for every product they sell (another fee you should use to project your margins).
The professional seller plan, on the other hand, is a monthly subscription. Under this plan, sellers pay a monthly subscription fee of $39.99. This fee is the same regardless of how many sales the seller makes during the month. Using some simple math, if you think you will make more than 40 sales a month on Amazon then the professional seller plan is the more cost-effective option.
However, even if you are not going to make 40 sales a month on Amazon, professional seller accounts get some extra features that might be worthwhile for your business.
The biggest extra feature professional sellers get is that they are able to sell products in 10 additional product categories that businesses using an individual seller plan cannot (professional sellers are also able to sell in all of the product categories that individual sellers can).
These 10 extra product categories include the following: Automotive Parts & Accessories; Business to Business (B2B); Fashion Jewelry; Fine Jewelry; Collectible Coins; Fine Art, Grocery, Food & Gourmet; Industrial & Scientific; Sports Collectibles; Professional Services; Video, DVD, Blu-Ray; Watches.
Professional sellers are also eligible to win the Amazon buy box, whereas individual sellers cannot. This alone could be worth the $40.
Obviously, if you are serious about using the Amazon platform for the long term and building a strong presence on their marketplace, then you will most likely want to choose a professional seller account.
Everyone likes Prime products. You order them and two days later they are on your doorstep. While FBA sellers are automatically enrolled for Prime shipping (since Amazon is packing and shipping their products), FBM sellers are not. In fact, most FBM sellers do not offer products that have the Prime badge (a badge that greatly boosts product sales).
However, that doesn’t mean that FBM sellers are ineligible for the Prime badge. FBM sellers can participate in what is called the Seller Fulfilled Prime (SFP) program. In order to be a part of this program – which gives your items the Prime badge – your business must commit to a series of requirements, including fulfilling all your orders with 2-day delivery at no additional cost for Prime subscribers.
The SFP requirements include the following:
It goes without saying that these are not easy requirements to meet. However, if you can do it, it will provide a huge advantage to your business, especially if you are competing for an Amazon Buy Box. If you do decide to attempt this, your business will be given a trial period between 5 and 90 days during which you have to prove you can actually maintain the given standards.
Getting started with an Amazon FBM seller account is incredibly simple and straightforward. First, you’ll set up an Amazon seller account. In the process, you will have to select from Amazon’s over two dozen global marketplaces (these include the United States, Canada, the United Kingdom, France, Germany, Japan, Mexico, and more). You are able to sell in any marketplace Amazon offers, however, if you are a United States-based business, you will want to select the US marketplace.
Next, you will select your business model. Amazon has five different business models to choose from:
Next, you will select your fulfillment method. As noted, there are two kinds of fulfillment options, FBM and FBA.
Then, you will finalize your account by filling in all the relevant information about your business (you will need both a federal and state business tax ID for this step). During this process, you will have to select whether you are going to be a professional seller or an individual seller.
Once that is all done, you should be all set (assuming you are an FBM seller and don’t have to ship any products to Amazon’s warehouses). You can now begin listing products!
Outside of the fees detailed above, there are no other startup costs associated with starting a business on Amazon.
Of course, you will still have to pay the traditional startup costs associated with opening any small business (i.e. paying for inventory, hiring and paying employees, storing inventory, etc.) However, with the exception of special circumstances, you shouldn’t receive any other charges or fees from Amazon outside of the ones already covered (assuming you are an FBM seller, as FBA sellers are subject to additional fees).
Many businesses operate the online portion of their business exclusively on Amazon, and this can be a lucrative business model. However, if you are looking to build out a brand with a unique and exclusive product line, then you should consider Amazon as just one sales avenue in your overarching business model.
Amazon can indeed be a great way for businesses that already operate e-commerce websites to drive brand exposure and increase sales. However, that does not mean it should replace operating your own website through a platform like Shopify or BigCommerce. Having multiple sales avenues is not a bad thing by any means (you could even have a retail store if it makes sense).
Given this, even if Amazon sounds like an appealing sales avenue for your business, you should still consider selling via other avenues and channels as well!
Selling on Amazon can be a great way to get a new business started and an even better way for existing businesses to diversify their selling avenues and raise brand awareness. For small businesses across the country, Amazon is one of the most effective ways to operate an e-commerce component of their business or supplement existing eCommerce avenues. After all, no e-commerce platform gets the kind of traffic that Amazon’s marketplace does.
Of course, Amazon’s fees are not inexpensive, so before moving forward with Amazon, you should be sure to look carefully at how their fees will impact your margins. Whether that means using your own financial background to examine the numbers of working with a CPA, you should make sure you know exactly what you are getting into in terms of fees by selling on Amazon’s marketplace.
With the proper due diligence, selling on Amazon could help take your small business and brand to the next level!
At Biz2Credit, our mission is to help small businesses across the United States navigate the intricacies of financing and operating a successful company. Whether that’s through connecting small businesses with lenders or providing them with the latest industry news, we are constantly looking for ways to lighten the heavy load small business owners are constantly burdened with. As always, please keep checking back here at our Biz2Credit Blog for the latest information pertaining to small business happenings across the nation!
July 1, 2022
June 30, 2022
June 28, 2022