When’s the last time you heard of a big corporation supporting small businesses?
Amazon is the king of ecommerce – and while sometimes it feels good to hate big corporations – in this case you can actually hitch a ride with them, and take a portion of the big dollars going through their system. Let me tell you about private labeling on Amazon.
This post is part of a series called Businesses for Beginners.
Private Labeling on Amazon – Fulfilled By Amazon (FBA)
Amazon has this cool program where if you want to sell your products on their website, they will warehouse them for you and ship them out someone buys them (fulfillment), for a cut of your revenue. They deal with any customer service or returns – you just send them products.
Awesome, right? Well, yes, it is actually.
Sound familiar? I talked about using FBA in a previous post, but this is an entirely different business model.
You could use FBA for any product you might want to sell, but it doesn’t make a lot of sense for all types of products. Since they take a heavy portion of your sales revenue, it needs to be a product with high margins. (I’m too lazy to look up their fees, but from memory it’s somewhere around 25-35%.)
That basically means anything I’d be selling on my drop shipping stores, wouldn’t make sense with FBA, since a drop shipping store’s margin is usually 10-30%.
What comes to mind when I say the term “generic product”? Probably Safeway Select soda, Target brand medicine, fake Cheerios, or something like that, right?
We usually think of slightly less tasty versions of a popular brand.
But, you might not know that many of the things you buy are generic, not just store brands – even though they have quality packaging and a fancy looking logo. So what’s the deal?
A surprising number of things we buy are identical to competing products under a different brand – literally exactly the same.
This is not just a store’s version of Lucky Charms. There are factories that make hundreds of thousands of can openers, for example, that have no brand labels on them.
Then lots of companies buy those same, exact can openers, print their labels on them, put them in their own packaging, and then put them on store shelves right next to the competition.
There is absolutely no physical difference between the brands of these can openers, even if one sells for $5 and the other sells for $20.
The Business Model
It’s not very difficult actually. You just decide on a product you want to sell, find a supplier (factory), buy a whole bunch, send them to Amazon and wait for people to start buying them.
Of course, it’s a little more complicated than that – a running theme of this series.
You need to make sure you’re choosing a product that will sell. It should sell at a price that will generate a profit after all costs are accounted for, including:
- Cost of buying the product in bulk
- Shipping from the factory to Amazon
- Amazon fees
Benefits of Private Labeling on Amazon Versus Other Business Models
The top two benefits I see with FBA are:
1 Buyers. Tapping into Amazon’s customer base – their volume is just incredible.
There are millions of people shopping on Amazon, and they’re ready to buy. In most businesses, customer acquisition is difficult, but that’s not a problem here, as long as you have a product that people are already buying.
2 Scale. It’s very easy to scale this business model.
That means you can grow your business without drastically increasing complexity and expenses. You have no website (at least at first), no customer service calls, no customer leads to wrangle, no warehousing/fulfillment challenges, no returns to deal with, etc.
All you have to do is keep Amazon’s fulfillment centers stocked with your product, make sure your product page is excellent, keep track of your advertising (on Amazon), and set up systems so that you’ll get lots of reviews.
That’s far simpler than my drop shipping stores.
The only factors limiting the number of products you can sell are how many people are buying, and how many you can keep in stock.
There’s basically no cap to the amount of money you can make with FBA. From what I’ve heard, I’d say it’s quite realistic to expect $2-7k profit per product per month with this model. $5-10k is probably a good average if I had to guess, once you have a bit of experience and know what you’re doing. However, I have heard of people who are making far more than that (over $10k) on a single product.
If you start learning about FBA, though, you’ll discover that you don’t want to just put up a bunch of random cheapo copycat products. You want to build a brand.
Rather than selling a can opener, a yoga mat, a laptop stand, and a toy, you should create a brand with a target market and a unique (and consistent) identity across all your products. I won’t get into strategy here, but you want multiple products that a single person would want to buy, and you can cross-promote.
For example, if you’re selling yoga mats, you can insert a little flyer in your packaging that promotes your brand of jump ropes and pull-up bars. This will have a major positive impact on your sales of each additional product.
The other important thing is to differentiate your product by having better packaging and improving the product over your competitors. If you read negative reviews on a competiting product, see if you can fix the problem for your version. Suppliers are often happy to make tweaks and customizations to their products that will set you apart from your competition.
The Downsides of FBA
I know several people who feel that the big upsides don’t outweigh the downsides, which are:
1. You are at the mercy of Amazon. Your entire business depends on Amazon continuing to allow you to sell freely. They could simply decide one day to raise their fees or stop allowing you to sell at all – completely ruining your business overnight.
Whether this would actually happen, however, in my opinion is pretty unlikely. Amazon likes money, and allowing you to sell your products on their platform makes them more of it.
On the other hand, you – a single seller – are not going to affect their bottom line very much, so they might not be too sad about losing you.
2. Risk. You need an investment of $2-5k at the start to buy products and get them to Amazon. That’s a lot of money, and what if your product flopped?
As with all businesses, there’s a pretty good chance some of your products won’t work out. In that case you’re out a bunch of cash. However, you could just drop your price to the point where you just break even, undercutting your competition, getting rid of all that stock, and getting your money back.
Still, it is a risk.
3. Competition. Since this is such a great business model, people are flocking to Amazon and critics are saying it’s going to be saturated pretty soon. That would make it much harder to start new FBA businesses.
In my opinion, this is the biggest and most serious criticism of the business model. Yes, it will probably happen at some point. When that will be is anyone’s guess; some said it would happen this year, some said it would be last year.
It’s something to consider, but if you think about how many products are in the world that you could sell, and that Amazon is breaking into new countries – opening the doors to new customers – I think we have a while.
Either way though, the sooner you get in, the better.
Who Should Start an FBA business?
While I’m including this in the Businesses for Beginners series, it is a little more complex than some of the other models, though still much easier than starting a coffee shop.
It takes more upfront work, at least a few months, before you can start selling. It also takes a big investment start, and many people don’t have that kind of cash laying around.
I also think it’s better if you’re doing this full time, though I do know people who are doing it on the side while working full-time jobs.
If you’re okay with the time and capital requirements, this could be a good model for you. However, I still think drop shipping on eBay is the best place to start if you’re totally new to online business – see this post for why.
I am planning on starting an FBA business this year, just as soon as I can ramp up and automate my current drop shipping store.
Where to Learn More
If this is something you think you’d like to do, there are plenty of resources out there for you.
You can start with a couple podcasts – The Amazing Seller (start at episode 1 – perfect for beginners) and Freedom Fast Lane (good high level discussion). You could also listen to this episode of Travel Like A Boss to get a good overview.
When you’re ready to actually make the leap there are a lot of courses out there to learn from.
You could dive in with the Amazing Selling Machine (not related to The Amazing Seller Podcast), which is probably the best known but expensive course ($5k).
The only other one I will recommend is FBA Empire ($1k), created by my friends Nathan Richer and Michael Coghlan, who I met through the Drop Ship Lifestyle course. They both had success with drop shipping stores and transitioned into FBA, where they’ve had even more success. I bought the course a while back knowing I would get into it this year.
I also know several people who are having success without joining any courses, but if you’ve been following this series at all, you know I believe in paying for quality information.
If you’ve done some FBA I’d love to hear your experience. Let me know down below!