Selling on Amazon

How Much Does it Cost to Sell on Amazon?

By May 6, 2021 No Comments
 

Before you make an investment, you want to know the total cost (risk) and possible return. So it’s smart to try to estimate the true cost to start a business on Amazon. The answer isn’t as simple as it would seem. But, let’s give it a try.

Amazon Seller Central fee ($39.99/month)

To sell on Amazon, you need a Seller Central account. Amazon offers two plans, but only one makes sense for most people. You want the Professional plan which costs $39.99 per month. The Individual plan is only $0.99 per item sold, but doesn’t include all the features you’ll want in the Professional plan. It will also likely become more expensive as soon as you pass about forty items sold per month. We recommend signing up for the Professional plan from the start.

Amazon referral fee (15% of sales)

For most categories you will sell in on Amazon, especially for private label-type products, you pay a 15% referral fee. These are in addition to the plan fees mentioned above. For example, if you sell a $100 product on Amazon, you will likely pay $15 to Amazon. Here are the fees per category.

Fulfillment by Amazon, or FBA, fees (varies based on product size and weight)

FBA is essential if you sell on Amazon. You want your inventory in Amazon’s warehouses, available for two-day and one-day shipping for Prime members. If you don’t use FBA, you’re at a huge disadvantage versus other sellers.

FBA fees are dependent on the size and weight of the products you sell. Larger items take up more warehouse space and thus cost more to fulfill. For example, a “FBA Small and Light” product under 4 oz has a $1.97 fulfillment fee per unit. A “Large standard” product between two and three pounds has a $5.42 fulfillment fee per unit. See the current pricing table here.

The easiest way to calculate your Amazon FBA fees, and your Amazon referral fee, is to use the Amazon FBA Revenue Calculator. According to the calculator, the fees to sell a product similar to this LEVOIT air purifier which retails for $99.99 are the following:

  • Referral fee: $15.00
  • Fulfillment by Amazon fees: $12.82
  • Monthly storage cost per unit: $0.49

To access Amazon’s hundreds of millions of customers and massive fulfillment network, you will pay about $28 per unit sold for this product selling at $99.99. Considering what you’re getting, I think this is a reasonable and acceptable cost.

Product cost ($1,500 to $7,500 or more)

To sell on Amazon, you need a product to sell. Following the private label model we recommend, you want to start with at least 300 units. We also recommend you sell a product between around $20 and $100. Now we can estimate a total initial product investment.

First, you want at least three product samples. A product sample for most products will cost about $50. So your cost will be around $150 for three samples, including shipping.

Once you’ve chosen a product and supplier, you need to place an inventory order. Typically, suppliers will want 30% upfront and the remaining 70% when your inventory is ready for shipment. A product that sells for $20 to $100 will likely have a cost per unit of $5 to $25, including basic packaging from the manufacturer. This means your 30% down payment for 300 units will cost around $450 to $2,250, your remaining 70% will cost $1,050 to $5,250, and your total product cost will be $1,500 to $7,500.

Shipping, freight forwarding, customs, and tariffs ($300 to $600)

In addition to the direct costs to manufacture units of your product, you will need to pay to get your product shipped from the manufacturer to Amazon’s warehouses. Fortunately, this is all freight forwarders do. You can hire a freight forwarder and they’ll take care of the entire process for you.

The invoice they’ll send you will include their fees for providing the service, the shipping cost, customs fees, and any tariffs. You can get your own estimate using the calculator provided by freightos.com. You will need some information from your manufacturer.

However, an estimated cost for all of this for a typical light and small product sold by Amazon sellers is $1.00 to $2.00 per unit. This means that you will likely pay an additional $300 to $600 in shipping-related costs to get your product from the manufacturer to Amazon FBA.

Inventory inspection ($200)

You will likely want your inventory to be inspected before it ships to Amazon, especially if you’re ordering from China. A typical inventory inspection fee is a flat fee of around $200.

Brand ($50 to $350)

If you’re just starting out, we recommend keeping your costs as low as possible. This applies to your branding. If you haven’t made any sales yet, it doesn’t make sense to spend a lot of money on branding. You can always upgrade later.

To start, you need a basic logo, decent social media profiles, and, maybe, a domain. A logo will cost anywhere from $10 on Fiverr.com to $300 on 99designs.com. Then, get a few social media cover graphics created for around $10 each on Fiverr.com. Lastly, go ahead and secure a unique domain for your business, which can be redirected to your Facebook page for now, from a site such as GoDaddy for around $10. Your total upfront cost should be between $50 to $350.

Later, you can use Wix.com or Shopify to create a website with your domain, both which cost around $30 per month.

Amazon product photos ($300)

You want high-quality photos for your new product on Amazon. Basic product photos cost around $50 each. You’ll likely want at least six created showing off various angles and benefits of your product. Getting a combination of white background photos and digitally rendered lifestyle photos to start out is ideal. Your total cost for product photos should be around $300.

Advertising (indirect cost, taken out of profits)

To launch your product on Amazon, you’ll want to run some discount or product rebate campaigns in which people get cheaper, or free, products. This helps push your product up in the rankings and get discovered on Amazon. The cost of this type of promotion should be covered by the profits you generate from sales of the remaining units you purchased for your initial inventory.

You will also want to turn on Amazon Sponsored ads. You get charged per click for these campaigns and the fees are deducted from your Amazon payouts shown in Seller Central. If you run these ads correctly, you should break even and not lose money on them, especially once you sell your product at your target selling price.

Inventory reorders (possibly no additional investment)

What happens when your inventory starts to run low and you need to restock? Will you have to invest additional cash in your business? Maybe, let’s look at an example.

Let’s say you create your own brand of a coffee grinder similar to this one. You purchase 300 units at $15 each, including all product, freight forwarding, shipping, and other costs, for a total of $4,500 in upfront inventory costs. You also invest $1,000 total for branding, including product photos, a logo, and social media graphics. Your total upfront cost is $5,500.

You start off with a low selling price to build rankings and reviews. You slowly raise your price to your target selling price of $59.99. On average, you sell the first 200 units, or two thirds of your inventory, for $50 per unit. According to the FBA Revenue Calculator, you should net around $34.33 per unit after Amazon’s fees, not including your product costs. This means you’ve brought in $6,866 after Amazon fees. Let’s say you spend 10% of your sales, or $1,000 (200 units x $50/unit x 10%), on Amazon advertising. This means Amazon pays you approximately $5,866 from your first 200 units sold.

This means you have $5,866 to reorder inventory before the remaining 100 units in stock run out. You can order 391 units this time without putting any additional cash into the business.

Based on this example, you can see how you can use the profit from your sales to grow your business without additional cash. However, if you sell for a lower price than anticipated, spend more on marketing, invest more in your branding, or ramp up sales very fast and want to stay in-stock, you might need to invest more in inventory to grow your business.

You might want to reorder another $4,500 of inventory earlier, say after only receiving $2,000 from Amazon, so you don’t run out of stock. However, if you only have to put down a 30% deposit, or $1,350, for the new inventory order, you might have already sold enough of the initial inventory on Amazon to cover the full remaining 70% of the second order before the payment is due.

Other costs (varies)

So what haven’t we discussed? Primarily taxes, insurance, and legal fees.

If you use FBA, Amazon collects sales taxes as necessary from customers, so you most likely don’t have to worry about sales tax as an additional expense. You will need to pay taxes on the profits your business generates, just like you need to pay taxes on the compensation you receive from an employer. This will be highly dependent on where you live, where you sell, and how much you make.

Product liability insurance can be a good idea. Amazon requires product liability insurance for Professional sellers once you sell at least $10,000 per month for three consecutive months. However, in my experience, very few people have needed product liability insurance. This is a good item to discuss with an attorney for your particular situation. According to this article, if you sell $500,000 worth of products in a low-risk category per year, product liability insurance might cost you $1,250. This isn’t a huge sum of money compared to the sales you produce, in my opinion.

Lastly, there are legal expenses you might incur to setup and manage your business. Lawyers are always happy to take your money. The less you can rely on lawyers, the cheaper your startup costs will be. To start a basic business selling products on Amazon, you shouldn’t need to spend anything more than a couple hours of a decent attorney’s time, at most, for some basic advice. This cost should be $0 to $500 for your first six months.

Summary of the total cost to start a business on Amazon

Here’s a summary of the total cost you might expect to start a private label business selling on Amazon with FBA:

Upfront costs:

  • Product (200 units): $1,500 to $7,500
  • Shipping, freight forwarding, customs, and tariffs (200 units): $300 to $600
  • Inventory inspection: $200
  • Branding: $50 to $350
  • Product photos: $300
  • Total upfront costs: $2,350 to $8,950

Recurring costs:

  • Amazon Seller Central (Professional plan): $39.99/month
  • Amazon referral fee: 15% of sales
  • Amazon FBA fees: Mainly based on your sales volume
  • Advertising: Should be run at break-even
  • Inventory reorders: Profits from sales should cover reorders
  • Total recurring costs (outside of fees covered by sales): $39.99/month

Is it worth the risk?

If you build a brand selling exclusively on Amazon with three products that each sell 30 units per day at an average selling price of $30, you own a business worth almost a million dollars. Assuming your business produces an average net profit of 25%, your $985,500 in sales result in $246,375 in profit per year. A typical valuation for this type of business is three to five times annual profit, or about a million dollars in this case.

There are no guarantees of success. Your product might fail. You might not like the business. Or, you might decide to do something else. However, if you have the potential to build a million dollar business with an initial investment of $2,350 to $8,950 plus $39.99 per month, the risk is likely worth the reward.

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