What Is Amazon FBA and How Does It Work (2021)

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Today, nearly every "offline" business turns into an online business. But with so many opportunities, it's hard to decide which business model to go for.

Should you start an Amazon FBA business, or rather build your own online store?

Or should you start selling on eBay?

Even though there are so many opportunities, Amazon FBA could be your best bet if you want to build a sustainable business online.

If you want to know what Amazon FBA is and how it works, you've come to the right place.

Here's what you will learn in this post:

  • What Amazon FBA is
  • How Amazon FBA works
  • How to find products to sell on Amazon
  • Pros and Cons of Amazon FBA
  • Should you actually use FBA?

Let's start.

What Is Amazon FBA?

Third-party-sellers are responsible for 53% of all sales made on Amazon:

Thrid Party Seller share of Amazon Platform

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If you also want to sell products on Amazon, you've to choose between FBM and FBA.

While FBM stands for Fulfillment by Merchant, FBA means Fulfillment by Amazon.

If you go for Fulfillment by Merchant, you’ll have to store, pack, and ship products on your own.

On the other hand, if you opt for Fulfillment by Amazon, Amazon will handle all of this for you.

In fact, here's what Amazon can manage for your business:

  • Storage
  • Packaging
  • Shipping
  • Customer Service
  • Returns

According to Statista, 73% of the top US Amazon Sellers use Fulfillment by Amazon:

FBA Share Among Top Sellers

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If you want to use Amazon’s FBA service, you'll have to pay an extra charge to Amazon. This extra charge consists of a storage fee and a fulfillment fee.

We're going to look at these fees later in this post. So read on, because this is uber important if you want to use Fulfillment by Amazon.

What’s also great is that Amazon can fulfill orders from other marketplaces or your online store. So if you go for Fulfillment by Amazon, it'll be incredibly easy for you to scale your business as you can easily expand it to other marketplaces.

How Does Amazon FBA Work?

Do you want to know how Amazon FBA works? Here's a brief outline to help you become an Amazon seller:

1. Create an Amazon Seller Account

If you want to sell on Amazon, you'll need an Amazon seller account. 

Amazon offers two types of seller accounts that you can choose from:

  • Professional Seller Account
  • Individual Seller Account

While the Individual Seller Account is free of charge, the Professional Seller Account costs $39.99 per month.

However, if you go for the Individual Seller Account, you'll have to pay an additional fee of $0.99 for every sale you make.

I highly recommend using the Professional Account right from the start. The Individual Seller Account is only worth it if you sell less than 40 items per month.

2. Send Your Products to Amazon

Next, if you want to sell via Fulfillment by Amazon, you'll have to ship your products to an Amazon Fulfillment Center:

Amount of Amazon Fulfillment Centers

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Basically, you've two choices to send your inventory to a Fulfillment Center:

  • You can send products directly from your manufacturer to a Fulfillment Center
  • If you store products in your own company, you've to send them from your company to a Fulfillment Center

Depending on which Amazon marketplace you sell and what products you sell, Amazon tells you to which Fulfillment Center you need to ship your products.

3. Amazon Stores Your Products

As soon as your products arrive in an Amazon Fulfillment Center, Amazon adds them to their inventory.Storage

If they lose or damage your products, they'll reimburse you for the lost amount of money. 

However, this process is very time consuming and complicated.

I highly recommend using an FBA reimbursement tool like Helium 10's Refund Genie.

4. Amazon Ships Your Product

If a customer buys your product on Amazon, Amazon grabs it from storage, packs it, and sends it to the customer.Shipping Box

If you use Amazon FBA, your products will be automatically eligible for Amazon Prime, which means that customers don't have to pay for shipping.

Selling products via Amazon Prime is a great opportunity for your business.

The average Amazon Prime member spends $1,400 per year on Amazon, while the average non-Prime member only spends $700 per year.

5. Amazon Handles Customer Service and Returns

After the order, Amazon manages customer service and returns for you. Yet, they don't care whether customers leave a positive review or not.Telephone

For this reason, they integrated the "Request a Review Button" into the Seller Central. You can use this button to ask your customers for feedback.

Though, if you really want to get more reviews than your competitors and beat them in the long run, you'll need to do more. I highly recommend checking out this post on how to get reviews on Amazon.

6. Amazon Charges a Fee

Last but not least, you've to pay a fee to Amazon. This fee mainly depends on product size and category.Hold Money in Hands

Here's a quick outline of the fees you've to pay:

Referral Fees

You've to pay this fee because Amazon "refers" a customer to you. Referral fees vary between ~ 8% and 15%.

Fees for Amazon Seller Account

You've to pay these fees for your Amazon seller account. There's an Individual Seller Account for $0 per month and a Professional Seller Account for $39.99 per month.

However, if you go for the Individual Seller Account, you've to pay a $0.99 fee for every sale you make on Amazon.

FBA Fees

Fees for packaging, shipping, returns, and customer service.

Amazon Storage Fees

You've to pay storage fees to Amazon because they store your products in their Fulfillment Centers.

Thus, at the end of the day, you’ve to examine whether Amazon FBA is worthwhile for your business or not.

To do so, here's what you need to do:

1. Sign up for a free Helium 10 account

2. Download Helium 10's Chrome Extension here

3. Head over to Amazon and choose a product that's similar to yours. For example, let's say you want to sell drinking bottles:

Amazon Dashboard

4. You can change values such as Unit Manufacturing Cost or Est. Freight Cost and check whether the product is profitable or not.

Profitability Calculator
5. As a general recommendation, make sure that the profit margin is higher than 10%.

Keep in mind that you need to consider opportunity costs when calculating your costs to start an Amazon FBA business. 

In fact, opportunity costs represent the benefits you miss out on when choosing one alternative over another. 

So if you’re going to ship your products yourself, you need to consider the time it takes to pack and ship products.

Let’s say you need 30 minutes to make one order ready for shipment. If your hourly wage is $20, that would be an additional cost of $10 per order.

In this case, FBA is probably the better choice for you.

How to Find Products to Sell via Amazon FBA

We recently published this post about the 5 best strategies to find products to sell on Amazon.

In fact, you need to find a product with high demand and low competition.

If you find a product that everybody wants to buy, but no one sells it, it could be your private goldmine, couldn't it?

Unfortunately, it’s not easy to find such a product.

On Amazon, there're over 2 million sellers which makes it hard to find great products just by scratching the surface. Instead, you'll need to do extensive research to be successful. Here's a product research strategy that actually works:

Get Helium 10

Use this 50% discount on Helium 10 to try it for one month or sign up for free, but you'll then have limited uses.

Start Black Box

Start Helium 10's Black Box and open “Keywords”:

Black box Keywords

Now, open the advanced filters:

Keywords Advanced Filters

You should now see a bunch of options to scan the whole Amazon marketplace for keywords with exactly those parameters you're looking for.

Set parameters

What you need to do now is to set the parameters. I use some recommended values to demonstrate the whole process. If you're new to Amazon, you can also use them.

Since we're looking for products with high demand and low competition, I'm going to use filters that indicate high demand and low competition.

For example, a high search volume indicates a high demand and a low review count indicates low competition:

Helium 10 Keyword Search

Here's what I typed in:

  • Search Volume: 200 - Max
  • Monthly Revenue: $5000 - Max
  • Price: $15 to $50
  • Review Count: 0 - 100
  • Variation Count: 0 - 1
  • Fulfillment: FBA
  • Age: 1 Month
  • Competing Products: 0 - 200

You may wonder how to filter keywords by revenue or reviews. But in fact, you don't filter keywords, you set these parameters for the top-ranking products for a given keyword.

PRESS SEARCH

Sort the results

Go through all results and sort keywords out that refers to a big brand since you don't want to enter niches dominated by these big guys.

The first keyword I saw when I went through the list was this one:

Locker Set

It seems like top-ranking products for this keyword only have an average of 41 reviews and an average rating of 4.1.

Looks interesting so let's take a closer look at this product on Amazon.

What To Sell On Amazon competing products

You can see that there are only 36 competing products for this keyword and it still has a search volume of 621

Let's go one step further and check this niche with Helium 10's XRay.

XRay is an Amazon Chrome Extension with which you can check sales data of any Amazon product. If you've never heard of it, I highly recommend checking out this article here.

You can see that nearly all products have a low review count and still a high revenue:

Check With XRAY What To Sell On Amazon

Since in most cases, a product makes its sales through lots of keywords (not only one), you've to check whether other keywords are competitive or not.

What you need to do next is to run all products in this niche through Helium 10 Cerebro.

Helium 10 Cerebro shows you all the products that this product is ranking for on Amazon with great metrics that show you whether a keyword is competitive or not.

Here's what you will see:

What To Sell On Amazon Competing Products 1

As you can see, there are lots of not so competitive keywords with solid search volume.

For example, lock picks kit has a total search volume of 354 and 353 competing products.

Furthermore, according to CPR 8-Day Giveaways you only have to give away 8 products a day for 8 days to rank on the first page of Amazon search results. 

If you want to launch your first product on Amazon, make sure that this metric is below 10. If you don't know what Helium 10 CPR 8-Day Giveaways is about, a highly recommend checking out this guide here.

Pros and Cons of Amazon FBA

As always, there're advantages and disadvantages. At the end of the day, you've to decide whether FBA is worthwhile for your business or not.

If you want to start as a private label seller, chances are good that FBA is your best bet. If you run an eCommerce company, you first have to check whether you should use FBA or ship products on your own.

However, expanding your business to Amazon is always a good choice, no matter if you use FBA or FBM. If you want to increase your sales, start selling on Amazon.

I've created this comprehensive list to give you a better overview of the pros and cons of FBA:

Benefits of Amazon FBA

Outsourced Storage and Shipping

The main advantage of Amazon FBA is that you can outsource storage, packaging, and shipping.

This enables you to focus your entire business activities on marketing and growth.

According to a recent survey from Feedvisor, 51% of sellers want to improve their strategic advertising and see it as one of the most important activities:

Business Areas Amazon Sellers Want to Improve

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However, if you run an eCommerce company, you've to evaluate whether FBA or FBM is better for your business.

In fact, you need to determine whether your expenses for self-fulfillment are higher or lower than the gap between FBA and FBM fees:

Amazon FBA & FBM Fees

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Low Shipping Rates

Amazon ships over 2 Mio. items a year. It's obvious that they've special contracts with their shipping partners.

In fact, if you buy a set of 10 boxes instead of a set of 3 boxes for international shipping at DHL, you will save up to 10%:

DHL International Shipment costs

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Just imagine what this means for Amazon. Obviously, they get massive discounts from their service providers.

The real benefit for you is that you also take advantage of these discounts if you use Amazon's FBA service.

Outsourced Customer Management and Returns

Outsourcing customer management and returns go hand in hand with outsourcing logistics and shipping.

In the end, you have more time to focus on marketing and growing your business.

Let's say you run a small eCommerce business and want to handle customer service on your own.

In this case, you need to hire a full-time employee. The average hourly wage in the US is $7.25. Finally, it will cost you about $1000 to $1500 a month.

However, I don't think that you'll find a person for this hourly wage. You may have to pay $12 per hour as it's the minimum hourly wage in California.

Finally, you've to decide whether FBA or hiring is more lucrative for your company.

Storage

Another important point is the storage costs. Here's what you've to pay when using Amazon FBA:

Amazon FBA Storage Fees

Here're the storage fees for "dangerous goods": 

Amazon FBA Storage Fees 2

Now it is up to you to calculate whether it costs you more to store products yourself or use Amazon FBA.

According to this article here from Sumo, the average cost per square foot per month is $4 to $7.

But keep in mind that Amazon does more than just store your products for you when using the FBA service.

Scale Your Business

The most important thing is probably that you can scale your business as you want. Amazon does not only fulfill orders that you get through Amazon, but they can also handle orders that you get from other marketplaces.

Here's a chart showing other preferred marketplaces by Amazon sellers:

Marketplaces beside Amazon

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So if you've established your business on Amazon, you can easily expand to other marketplaces with ZERO effort.

The only thing you've to do is to list your products on these marketplaces, which should only take you 30 mins.

Cons of Amazon FBA

Amazon Fees

As already mentioned, if Amazon FBA costs you more than fulfill orders on your own, you shouldn't use the FBA service.

Here's a graphic showing average profit margins of Amazon Sellers:

Amazon Sellers Profit Margin

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Most Amazon sellers have a margin between 11% and 50%. In General, your profit margin shouldn't be below 10%.

When you calculate FBA costs, try to consider opportunity costs and use this Profitability Calculator.

More Returns

It's no secret that Amazon values customers extremely.

On the one hand, this is good for you because people trust Amazon and do much more online shopping with Amazon than with other marketplaces.

In fact, 59% of 16-36 Year-Olds head to Amazon before to any other eCommerce website.

But on the other hand, if a customer returns a product, they don't care about you as a seller.

They take the product back and charge you the full selling price plus extra fees.

Furthermore, if they decide that your product isn't sellable anymore, they scrap it and you lose everything.

I highly recommend checking out this article from ShipBob here since they explain why Amazon FBA returns can be a problem.

Customers are Amazon Customers

I think this is the most important point to mention. Since customers shop on Amazon, they're Amazon's customers.

Customers don't know anything about your brand, especially in the beginning.

Thus, make sure to set up your own online store and start building other sales channels once you established your business on Amazon.

This is definitely the best way to work against this unfair scenario.

However, Amazon takes care that this remains as it is. For example, they've strict policies on how to contact your customers:

Amazon Guidelines

Amazon has strict guidelines on how to contact your buyers.

You're not allowed to contact them because of promotional stuff.

They have their Buyer-Seller-Messaging System that you can use to communicate with buyers.

However, you're not allowed to use this system for promotional purposes. You can only use it to complete orders or to respond to customer questions.

There is a lot of discussion about Amazon's Guidelines. For example, some people say that Jungle Scout's new Launch feature is against Amazon's TOS.

Check out this video from Paul J. Savage:

Yet, Jungle Scout explains that it's allowed to promote products through promotional marketplaces since you don't give away 100 products a day.

Even so, I highly recommend checking Amazon's policies before you start selling on Amazon.

After all, you don't want to get banned.

Amazon Doesn’t Care

Sure, Amazon fulfills your orders and it's a great opportunity to sell on Amazon.

In fact, 86% of Amazon sellers say that they make substantial profits by selling on Amazon. (Source)

However, Amazon doesn't provide the FBA service because they want you to make money.

Actually, they provide it because they want to make money.

In the end, they don't really care whether you're going to make or lose a lot of money.

Feedvisors report The State of the Amazon Marketplace 2019 confirms this.

55% of sellers agree - Amazon doesn't care about their business:

Amazon Cares About my Business

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Competition With Amazon

After all, Amazon decides who sells products and who doesn't.

And if they're going to launch an in-house product in your niche, chances are good that your sales will dramatically decrease.

I don't think that you can stand a chance against Amazon since they control the whole marketplace.

In fact, 44% of Amazon sellers say that their greatest concern is competition with Amazon. (Source)

That's the deal. If you want to sell on Amazon, you need to be aware that you will probably have to compete with Amazon.

In Conclusion

Here are the most important takeaways from this article:

  • FBA means Fulfillment by Amazon
  • Amazon doesn't sell your product, they only fulfill your order
  • Amazon FBA is a great opportunity for individuals to start an online business
  • It's also great for businesses that want to increase their revenue
  • You need to consider all the pros and cons
  • Amazon FBM could be more lucrative for your business

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