PodcastSelling on Amazon

Cost of FBA Amazon – Branded by Amazing EP #1

By August 21, 2021 August 27th, 2021 No Comments
 

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Cost of FBA Amazon

Today we’re going to talk about how much does it cost to start an e-commerce business on Amazon? So, first off I am Matt Clark. I am the CEO of amazing.com. I’ve been basically a full-time entrepreneur in e-commerce since 2009. Originally created the amazing selling machine program was the only person years ago. And, you know, we’ve been able to help tens of thousands of people.

I still do e-commerce so I own a brand with a business partner. We were in the top 300 of Inc magazine’s fastest growing companies in America last year. Keep growing that. So I love doing this stuff. I love helping people do this. And that’s why we’re here today. And I’m Mike Mcclary. I’m the chief product officer@amazing.com actually got my start in e-commerce back in 2013, learning from a program, amazing selling machine that Matt had started back then and was able to quit my own job just within one year. And since then worked more and more with amazing, and finally came on board full time a few years ago, and I’ve trained over 30,000 people on how to build their own successful eCommerce businesses.

Yeah. So this is our first episode. So want to give a little bit of explanation about, you know, what we’re doing here, why we’re doing this a big reason is, you know, we want to be able to help as many people as possible build e-commerce businesses. And so there’s always new things happening in this space.

There’s some things that we may not have a space to go into as deep as we can here. And we also want to be taking questions from you. So if there’s any topics you want to learn about that you feel like you’re not getting that information. Other places we’ll give you a link at the end of the show at the end of the episode, to be able to ask us questions. So, first thing is we wanted to talk about a little bit of recent news.

So one thing just happened, which is pretty incredible is a company called perch, which I believe has been around for only about 18 months. And they’re calling them a startup, which is kind of crazy, cause they just raised $775 million to acquire third party, Amazon brands. And those are people basically building the same kind of businesses that we’re teaching you here and other places how to build. And so that’s a, that’s pretty crazy. And I know you’ve been talking to Casio a lot. Who’s in the same situation.

Purchase one of many that have popped up over the previous few years, Thrasher has raised already well over a billion dollars to acquire third-party sellers. And there’s another company razor group as well. And I’ve gotten, you know, even before I knew the three SEO people, I’ve gotten emails from both of them because you know, we’re pretty successful on Amazon and they’re looking for businesses that are doing well primarily and Amazon so that they can acquire them and then roll them up.

That’s their entire business model and purchase just the latest come out there and get some crazy amount. Long-Term, there’s so much money going into it. So much money being devoted to acquiring these kinds of businesses that it’s definitely going to change the space one way or another, but no clue what exactly is going to happen at this point. But we’re going to keep watching it either way. It’s a good sign for people who want to sell these kinds of businesses for now.

So now I want to get into today’s topic, which is, you know, a question we get asked a lot, which is why we wanted to cover it is how much does it cost to start an e-commerce business on Amazon? Because it’s sometimes not a super simple answer because of there’s a lot of factors. And so, you know, Mike and I, we’ve both built multiple brands on Amazon, off Amazon.

How Much Does it Cost to Start an ecommerce Business on Amazon?

We’ve helped lots of people do this. And so we kind of want to give you a general idea of what it’s going to take. So we’ll start running through a few of these things. So first off is your seller central fee. So we recommend everyone, even if, you know, you’re at the very beginning to start with a professional account you know, it’s a $39 and 99 cents a month, which I feel like it hasn’t changed in 10 years for whatever reason. They have a plan that’s a cheaper monthly fee or maybe no one’s with you.

No monthly fee, but you pay a dollar per transaction and you don’t have access to a lot of the really neat features that you will, I need to be successful. Yeah. So you need extra features, which is why we use the professional account. And basically once you reach 40 sales, then you’re covering your $40 a month anyway. So we just say bite the bullet, go ahead and start with the professional plans.

The next phase goes to Amazon as well. And it’s called the Amazon referral fee. I like to think of it as their commission. So every time you make a sale on Amazon, they take typically 15% of that sale. Some can be a little less it’s gonna be 12%. I think like automotive might still be 12%, but most categories in general, 15% kind of like the cost of the business on Amazon, which you know, is absolutely well worth it because they’re bringing in a couple hundred million buyers every single month to look for your products.

And you know, some people are like, oh, that’s too expensive. But I mean, in my experience, cause you know, my first e-commerce business was selling on my own website and I was paying Google, you know, through AdWords a ton of money to get clicks, going to my own website, being able to put products on Amazon and for the referral fee component anyways, only having to pay whenever you actually make a sale is amazing, which is why, you know, and almost every business that I’m involved in.

Whether it’s amazing, whether my e-commerce stuff, I love using affiliates because it’s this kind of, same kind of structure is like, if they make a sale, you pay them. Otherwise you don’t have to pay him. That’s the great part about Amazon. So I think 15% is a complete steal to be able to access everything they give you. So next one we have is the FBA fees. These are basically, you know, for using Amazon’s fulfillment network are called fulfillment by Amazon. You know, they basically charge you for inventory storage. They charge you for picking and packing and a few other related costs there, right?

Like yeah. In order to take the returns back for you as well, which is great. You don’t want to be handling customers returning products to you at your house or wherever you had, especially if you don’t live in the marketplace, you’re selling it. So Amazon does pretty much everything they pick and pack, strip the boxes out, take care of customer service returns.

And in general for kind of think, trying to think like, what does that cost? It’s about 15 to 20% of your sale as well. So if you add together Amazon’s referral fee of 15% and then add together their FBA fee of 15 to 20%, you’re talking about 30, 35% going to Amazon for every single sale. And then you’re done with the fees Amazon. And again, it may sound like a lot. It’s not considered doing all the fulfillment for you.

Yeah. And you’re basically gonna have to pay somebody to do that. If you’re selling a physical product, somebody needs to be storing that packaging up orders, shipping that out to customers, handling returns, just the nature of selling physical products. Somebody has to be doing that. And so if you’re selling on Amazon, you might as well at Amazon do all that because of there’s tons of benefits of doing that. And also the cost is, is reasonably cheap.

So next one we have is your product inventory. So this is the biggest one by far, if you’re selling physical products, building an e-commerce brand, like we teach is the amount of money you’re going to spend on inventory itself. I mean, it is the thing that allows you to produce profit, to sell your business, to grow your business. That’s what the whole business is based around.

Initial Product Inventory Costs

That’s, that’s the nature of what you’re selling. Just like if you were creating a software business, you’d have to spend money to develop the software you’re in a physical products business. So you need to buy inventory. So if you buy, say for example, you know, we recommend typically if you’re starting out that you have at least 300 units and then, you know, based on the selling prices that we recommend, you know, somewhere between 20 and say a hundred dollars is the selling price of the kind of products that we recommend. You start with a cost for that is maybe around $5 to $25 per unit. And so if you buy 300 units at $5 to $25, your upfront inventory cost for the product itself is somewhere around 1500 to $7,500.

That’s to get your 300 units. Fortunately, if you do the work and find a good product opportunity, you source it and you get a good supplier, all that sort of stuff, and you get a good high quality product. Then that is an investment. It’s not just like a cost. You’re not going to get back. You’re investing money in that product so that you can hopefully sell it at a profit and be able to keep growing your business. So it’s more of an investment than it is a cost, but that is probably the biggest expense in this whole thing, you know?

And it doesn’t mean that there aren’t other cheaper options out there. I think we were just looking at some kind of like grips for weightlifting. I believe the cost for those is like three, three and a half bucks. So it is possible. We’re just trying to give you like a realistic number left. You’re starting out in general, somewhere between 1,570 $500 is a good range for getting started.

When I first started selling on Amazon, I only sold health supplements. And so I was from the U S selling health supplements. And so everything was sourced in the U S and so the business was relatively simple. Then we started teaching amazing selling machine and we started having people from other countries and people that wanted to source products from China. So we had to figure all this stuff out along the way. So Mike, maybe let’s talk a little bit about the next one, which is kind of all wrapped together, shipping freight forwarding, customs tariffs, which for a lot of people you’re starting out can sound kind of scary, but, but it’s just part of the business.

Shipping and Inventory Inspection Costs

So one thing to keep in mind is right now, we’re, you know, in the spring time kind of heading into summer pretty soon of 2021, we’re still feeling the aftereffects of the pandemic. So right now shimmy prices are higher than they normally are. So when you want to look and see exactly we’re going to spend on shipping, you’ll need to know what the product is because the dimensions can be all over the place and the dimensions. I mean, not only the weight of it, but also the size, what you’re shipping out there. But in general, if you’re getting around 300 units, you’re going to spend somewhere between 300 and a thousand dollars for shipping that in order to get that product shipped all the, from the manufacturer, if you’re shipping from overseas, then you want to get all the way to somewhere like a warehouse in United States or to Amazon.

It’s a pretty big range because you can imagine the size of products range pretty widely as well. Now, one thing that’s great about shipping, we’re just talking about this the other day is that as your business grows and you’re able to order more and more products, you do not just double your shipping costs, they grow up just a very small percentage. One example I saw yesterday was the initial shipping was around $900 for 300 units.

When we doubled that, it only went up by a couple hundred dollars because there’s these fixed fees and shipping, you have to pay for people to load the products, to unload the products. There’s all kinds of, you know, port fees that are just kind of out there a flat fee. So those are fixed, but as you increase your sales, the shipping cost per unit will go down, which is really nice. Cause that’s one easy way by just growing your business to decrease your costs and increase profits.

Yep. And then the next one kind of related is your inventory inspection. So if you’re getting specifically inventory produced in another country, such as China, which a lot of people are before that inventory gets shipped from over there, and it gets all the way over to the U S for example, and then you have to find out whether it was actually high quality and kind of meeting your, meet your standards. You can use a service out there.

That’ll inspect all that for about 200 bucks flat fee because they’re just kind of spot checking some of your inventory. So they can do that in China, before it ever leaves, which can save a lot of hassle down the road. Because even if the supplier is in the wrong, it’s a little bit harder of a conversation. If that’s already been shipped all the way over here, because the shipping like Mike said can be pretty substantial. So you you’re much better off sorting that out in the country where it’s being produced before it ever leaves the manufacturer’s facility.

I used to, I remember when I started out, we did inspections here in the states and kind of fell into that trap. Our supplier was great, but all they ended up doing was crediting us back for any missed products that were, that weren’t working, but we had already paid for the shipping for that for one. So getting it done from China absolutely.

The way to go. Yep. So next one is the branding side. You want to touch on that one?

Branding and Product Photos Costs

Yeah. So if you think about creating a brand, it’s, you know, Stuart’s office coming up with a name wherever you want your company to be. We always like to think like, thank your customers. What’s, something’s going to resonate with them related to your product. But you know, coming after you come up with a name, you also want to get a couple of things. One, you’re probably gonna want a logo, especially if you’re gonna create packaging or maybe put your logo on your product. And then you also may want to come up with some packaging.

Now your manufacturer can help you out with that. But one rapid, go get some high-end packaging and going to a site like, you know, 99 designs is when we talk about and use usually for a couple hundred bucks, you can have a professional designer, create a logo for you and give you some graphic files that you can then put into your packaging. Now, the cost for this, you can go pretty cheap anywhere from 50 bucks, maybe up to $300 to get a really nice design job done as well. And then that’s a one-time cost because you don’t have to pay for that ever again. That’s branding you can use throughout the entire life here product.

Yeah. And if you go over to 99 designs, I believe still, and this has been the same way for a while. Leave their lowest level logo packages like $299 around there. I haven’t found that found a lot of better results getting there one or more, more expensive packages. So they have them that I think go up to like 500, 700 plus dollars for a logo.

You know, it’s just a bunch of random people submitting you know, files basically to submit for your, your logo contest. And in my experience, I don’t know if you’ve seen some different, but I haven’t really seen much of a benefit about doing anything above their cheapest plan. It’s just kind of can be hit or miss every once in a while. But I haven’t seen like a, so much better quality by spending more for their logo.

By spending more, you get more submissions, but usually the people, even the lower level plans are spreading. They’re really good. I mean, they’re the people on the 99 designs are, they do this for a living, so you can pretty much count. You’re going to find someone, even though.

Yeah. I would say the biggest tip there that I’ve seen is to give lots of feedback. If you just kind of sit back and don’t tell him, you tell him anything. Like, I like this, I don’t like this, change, this change that then they’re all just kind of flying blind. And they don’t know if you’re just kind of, you know, not going to pick anybody or you’re just going to send them pick any random person that may not be them. But when you start giving them lots of feedback, you tend to get better logos and they tend to start doing more submissions.

One tip is that if you’re going to go to 99 designs and come up with a logo and your brand name, I would recommend one of the cost of Brandon we’ll talk about was getting your domain before you do that. Because we have seen on a few instances where we didn’t get the domain for some people that are getting, building a product, they went to 99 designs and ask them to create some logos. And some people can see these different concepts that go on there and people go out there and kind of grab a bunch of domains. So if you’re gonna do that before you go out and use 900 designs, go get your domain. It’s 10 bucks for an entire year to get your domain for your web.

Yeah, that’s a good point. Cool. So next Amazon product photos, you know when somebody is looking at your product on Amazon, the photos are one of the most important aspects. And so we recommend getting good, nice high quality photos. I do not recommend taking them yourself. If you can avoid it. I know people want to do it because they like the kind of creative aspect and they think it looks okay. But I mean, from the customer’s standpoint, they don’t care how hard you worked. Great, those photos. They just want really nice looking photos.

If they’re going to spend their money on this product, they never heard of it before. So a lot of different resources you can use. I mean, one that we’ve used for a while is just product photography.com. I know they’ve gotten pretty busy and I think their lead times have gotten a little bit slower. They’ve gotten a little bit more expensive, but you know, good guy, I believe his name is Robert that owns a business. So they did a great job. We’ve worked with them basically since the beginning for, you know, probably 10 years now. So getting some good, nice product photos the average cost is about 50 bucks each these days. Yeah. It’s about 50 bucks each. You probably want minimum of four, ideally fill up all the slots, which should be nine on most available products. Yeah. 8, 8, 9, depending on the product.

We have some in-house ones, you know, we do. We’re not trying to sell anything here, but we also have some in-house photography service we use and Amazon has their own as well. I don’t recommend using Amazon’s photography service. They came out that about two years ago. It was free at the time. They wanted to see what they could do. They have the products in their warehouse and their thought was, we can go ahead, photograph your product for you that way, you know, we’ll create an affordable picture for you, from what we’ve seen. They’re just not the same quality that the, that we would be creating ourselves or our photographer working for you.

Amazon Advertising and Calculating ACoS

We just have a couple more and then we’ll kind of summarize the total cost, all this. So next one is advertising and specifically Amazon advertising. So in most cases, you know, you’re running ads on Amazon to get traffic without losing money. So you calculate something called eight costs, which is basically your breakeven point for advertising that product on a profit standpoint. And so ideally you’re spending the amount of money on ads that allows you to bring in revenue without losing money.

And so if you’re doing that, then you’re spending money on ads and you’re making some profit from the product and those kind of balance each other out. So you’re not necessarily, it’s not necessarily an extra cost. You’ve spent the time and money and stuff to get this inventory, but then you’re running ads. You’re basically using up some of your inventory to get some extra traffic.

You do this so you can get more reviews so you can build rankings, all that sort of stuff. And so, which is a little bit strange because you’re paying money for ads. But a lot of times we don’t really consider that an extra cost. It’s just part of how you do this business. Now, some people do want to run ads at a slight loss so that they can build up train traffic and organic ranking because it’s more sales long-term. But in general, we recommend people at least beyond the initial launch phase to run ads at basically breakeven.

So it’s not necessarily an extra cost. You’re incurring beyond everything else we talked about or is that whatever your, whatever sales they are generating your ads. Even if those are breakeven, your other sales that you’re making organically as we call that because you’re increasing visibility on Amazon, people are seeing the product you’re getting rankings. Those you have no ad costs. So that should make up for that and make profits.

And one thing we didn’t mention here as well, Matt, is that the cost for the ads aren’t out of pocket. So Amazon simply deducts those from the money they pay for every two week. So it’s not like you need to have $500 in cash to send anyone to run ads. Ammons is going to run. You run the ads for you, basically loaning the money. And then before they pay this, deduct the cost out of this, there’s no cash out of

That. At some point, your product may sell fast enough that you need to reorder to stay in stock before you’ve sold out of all of that initial inventory, or maybe even you haven’t sold out enough to be able to cover the next inventory investment. However, typically when you’re ordering inventory, you’re only putting 30% down and you pay 70% when the product’s actually ready to ship. So a lot of times those can kind of balance each other out unless your product, you know, is just taking off super fast or you need to order a ton more inventory the next time, or you haven’t done some of your initial calculations very well.

And your return on investment or ROI numbers are not kind of in your favor. And so otherwise it’s like you should be able to hopefully anyways, reorder inventory without having to dump extra money in the business. Or if you do put extra money, it’s because your business is growing so fast. And to me, that’s kind of a positive. But you know, we, we know a lot of people want to build this business on the least amount of capital as possible. And so ideally you’re able to do that reorder inventory without having to put extra money in.

Inventory Reorders and Staying in Stock

With us giving that recommendation of 300 units minimum, if you do order the minimum and your product takes off, you’re going to run out of inventory. It’s just kinda like it’s one of the things advanced sellers, you know, we don’t like to run out of inventory if we don’t have to, but when you’re starting out and you’re really validating that this is a good product opportunity, you’re limiting your risk because there’s no reason you should go out there and spend 10, $20,000 on inventory, unless you absolutely know that product’s going to take off.

It makes sense to limit your risk order, 300, 500 units, maybe there knowing you’re going to run out and that’s okay. If you run out, then once you’ve sold those, you take that profits. You place your order. And then you know that another couple months you’ll be back up and selling. So don’t worry about running out of Missouri, happens to almost every brand new seller out there.

So the last kind of cost category is what we’re kind of calling other costs, which is basically like you can start selling on Amazon under your personal name. You don’t have to go out there and form a corporation or an LLC, or do any of that sort of stuff. So you can start with basically no cost there. Or on the other hand, you may want to go form a company. And so in Texas, and I believe some other states have similar kinds of costs is about $300. You pay to the state, the form, the company, and then you may use a service.

I mean, I don’t have experience with this, but I heard you recommended, you know, was incorporate.com. I’ve used attorneys, I’ve done it myself, but incorporate.com seems like a nice option. Rocket. Lawyer’s another one I’ve used incorporate.com. I believe it was like a couple hundred bucks plus the state fee.

Other Costs of Selling and Taxes

They would basically handle all the company formation stuff for you. So maybe total cost and there’s like 500 bucks. If you go to use a traditional attorney, it may be double that thousand dollars for them to form your company. That’s an optional cost. That’s kind of up to you. Eventually you’ll want to do that. Then maybe you don’t have to do that when you first get started. Then we have insurance.

So product liability insurance, out of all the people we’ve ever helped and taught this business to, I can point to zero that have had a product liability issue. On the other hand, some people have had those issues and other businesses, other markets, and it can be a big problem. And so it’s kind of up to your risk tolerance and you may want to talk to an attorney to get their advice on this. But you know, getting product liability insurance is another option.

You know, and right now Amazon seems to be reaching out to some sellers requesting that for proof of insurance, they hardly done this at all in the past. And I believe the threshold is around a million dollars in sales before you need to get product liability insurance. Or it might be three straight months of a certain number. I don’t know what that is, but unless they, you know, unless they’re reaching out to you, it’s not something you necessarily have to have to have if they do. It’s very easy to get. There are lots of people out there selling product liability insurance, and it’s not expensive. It’s all based upon your revenue, your sales volume anyway. And so if you’re not selling a lot cost a lot, and even if you’re selling, you are selling a lot, it’s a very small percentage to go towards it.

The last major cost is taxes. And so in most cases, nowadays, Amazon is collecting your sales tax. So you don’t really have to worry about that. If you’re selling only on Amazon, then there’s income tax. And so this is going to be highly dependent. It’s kind of outside the scope of what we’re talking about here, but you know, if you’re in the U S depending on your tax bracket, you may have to pay income taxes there. And, but, you know, it was kind of affected by what expenses you run through the business that are legitimate. These are things you definitely want to talk to an accountant about when the time comes. If you’re in another country, it’s a whole different kind of situation, but if you make money, the government wants some of it.

I mean, that’s kind of you know, just something we all have to deal with, whether you have a job or a business or whatever, at the end of the day, this is a business just like every other. And if you’re making money, you have to pay taxes for that business. Yeah. So the good sign is, is that if you’re paying taxes, typically you’re making pretty good money. So I’m not really an issue, but it’s part of a part of anything.

Total Costs to Start Selling on Amazon

So if you add all this stuff together, you know, we’ve talked about a lot of different things. I think we have, you know, maybe 10 or 11 different kinds of costs items here. If you add all this together for your average person, who’s starting from scratch, building a business on Amazon and e-commerce business owning their own brand, which is what we recommend total costs from everything we’ve added together is $2,400 to about $9,500. So that’s pretty reasonable from what we’ve seen.

Some people may go more less and less likely you’ll go less these days, unless you just start with like an unbranded product, or you have some sort of unique situation, you may be able to pull it off. And it is probably possible, but typically, you know, say $2,400 to $9,500, that’s everything included to start and grow your business. Plus, you know, the $40 a month, Amazon fee, professional seller fee for the account which is pretty small compared to everything else. But that’s the general sort of amount of money it looks like today. It’s going to take for you to start an e-commerce business on Amazon.

Yeah. Pretty reasonable. When you think about what it takes to invest in starting any other type of small business. And remember about two thirds of that is for your inventory alone. And so some of the other stuff may be one-time cost, and you can never get back such as getting your product photos, logo, that kind of thing. But two thirds of it is your inventory, which is great, which means you have a pretty low cost structure for everything else. And that inventory is built so that you can go out there and sell it and make a profit.

And so I’m glad to spend money on inventory within reason, because it means that you can make more profit down the road. And if anything bad ever happens, there’s ways to kind of liquidate and get rid of inventory, sell it at a discount if you have to. So it’s not just money, that’s stuck that even if you don’t sell it, there’s no way you can ever get it back because there are, but in general, that’s the kind of cost structure we see.

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