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What You Need to Know to Start an Amazon FBA Business

By Ian Drogin
Last Updated on | Reading Time: 14 minutes

There are more than 140,000 Amazon sellers whose FBA businesses exceed $100,000 in annual sales, making it no surprise that the Amazon marketplace is ripe with opportunity. Even so, you might be asking yourself is Amazon FBA worth it?

There have been over a million new sellers who believe so, and have joined the platform in the last year alone, reflecting Amazon’s unparalleled popularity among internet entrepreneurs. While the potential is enormous, it’s essential to follow the right strategies to be successful on the platform.

This article will provide an in-depth appreciation of how Amazon FBA works for new sellers. It will also offer a clear roadmap for launching and scaling your very own FBA business.

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How Amazon FBA Works

 

You’ve heard all the hype about people making millions on Amazon while traveling the world or working from home. However, you may still be wondering how Amazon FBA actually works…

First of all, FBA stands for “Fulfillment By Amazon”. FBA is the system by which Amazon receives and warehouses inventory, ships orders to customers, and processes returns. In other words, FBA handles all of the critical tasks related to getting your products into the hands of your Prime customers.

In addition to offering unparalleled logistics and inventory management systems, Amazon also provides sellers with an easy-to-use Seller Central account where you can manage almost every activity taking place within your business. 

Let’s examine each of these activities in more detail.

Receiving and Warehousing Inventory

 

One of the beautiful things about selling via Amazon’s FBA program is that you never need to touch your own inventory. Once you’ve sourced a product and placed an inventory order, you can have your supplier ship your inventory directly to Amazon’s FBA warehouse. 

When your inventory arrives at one of Amazon’s fulfillment centers, it will be processed into their inventory tracking and management systems. Within your seller account, you’ll be able to see exactly how many units of each product you have available at Amazon.

Amazon’s warehousing services remove the headache of keeping hundreds of products stacked in your garage, allowing you to focus on higher-leverage business activities.

Shipping Orders to Customers

 

Once your inventory has been processed into an Amazon warehouse, you’re ready to start selling.

When a customer places an order for one of your products on Amazon, Amazon will automatically ship the order to the buyer. This includes gathering your product, packing it, and sending it directly to your customer’s shipping address.

This removes the hassle of you needing to find the product, run to FedEx, and send orders yourself. Not only is it convenient, but Amazon’s fulfillment rates are very competitive.  

Processing Returns

 

Once you start selling, it’s inevitable that some customers will want to return your product(s). Luckily, Amazon handles this process as well.

If you’ve ever returned a product that you purchased on Amazon, you know that there’s a highly standardized process that is easy for customers. For an FBA seller, the process is equally simple and straightforward.

When someone returns a product you’re selling, Amazon will have the customer ship the product back to Amazon so you don’t ever need to deal with the process. Of course, the refund will count against your total sales, but at least you won’t need to be bothered by receiving returned products yourself.

Understanding Amazon Seller Central

 

Amazon Seller Central is where sellers manage most aspects of their FBA businesses. If you decide to sell on Amazon, you’re going to become very familiar with all of the different components within Seller Central.

Seller Central is Amazon’s “portal” for sellers. Within your Amazon account you can:

  • Create product listings
  • Manage inventory and product orders
  • Manage ad campaigns
  • Track sales and business reports

After you’ve sourced your first product to sell on Amazon, you need to create a product listing within Seller Central.

Creating an FBA product listing includes writing a product title, bullet points, and description. It also requires that you upload product photos for customers to view on the Amazon marketplace. 

Additionally, you’ll need to have your supplier ship inventory to Amazon’s fulfillment center. Before sending inventory, you’ll have to initiate the shipment within Amazon by providing important product and inventory information. After you’ve updated all the necessary information, Amazon will provide barcodes and shipping labels for your first batch of inventory.

Once your products are ranking well on Amazon, you should start getting organic traffic. However, most successful sellers also use paid advertising to drive traffic. Ad campaigns can also be managed within Seller Central. 

Lastly, within Seller Central, you can track and manage your Amazon sales, reviews, feedback, customer messages, FBA inventory, and more. Making good use of the available metrics is a great way to increase your best seller rank and improve your FBA business. 

What you need to start an Amazon FBA business

One quality that makes selling on Amazon so attractive is that it’s accessible to most people. Unlike many other business models, you don’t need a huge budget, specialized knowledge, a particular degree, or other qualifications…

However, there are a few assets that you do need to successfully launch an Amazon FBA business. These include:

  • A modest start-up budget
  • A willingness to learn and take action
  • The right strategies

You also need to choose products that will perform well on such a competitive platform. Products tend to fall into two distinct categories:

Retail arbitrage products are goods that are manufactured by someone else, you purchase wholesale or at a reduced cost, and then sell at a markup.

Private label products are goods that you control the manufacturing relationship and label under your own brand. It is generally considered that you will create more long-term value by selling private label.

How Much Money Do You Need to Start an FBA Business?

 

One of the first questions that aspiring sellers ask is, “how much money do I need to invest in a new Amazon FBA business?”

While there is no set answer, many experts believe that you should be willing to invest around $5,000 to start a new FBA business. Of course, your start-up budget will largely inform the strategies you use to launch and scale. 

If you’re attempting to start an FBA business on a tight budget, it’s important to launch a product that is inexpensive to source. For example, if you can keep your product cost at $1 to $3 per unit, it won’t be difficult to order an initial batch of inventory without breaking the bank. Additionally, minimizing your initial inventory investment will also help conserve funds for other purposes.

Sometimes, new sellers tend to dedicate their entire budget to inventory. While this may seem like the right choice intuitively, there are other important costs to consider when allocating your start-up capital.

It’s recommended that you invest only one-third of your total budget in inventory. This will allow enough capital to invest in digital assets and marketing activities.

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For example, you may want to hire a professional photographer to take high-quality product photos for your product page. Often, this can cost a few hundred dollars or more. Additionally, you’ll want to set aside money for paid advertising to drive traffic and generate your initial sales and reviews.

If you’re starting with a small budget, it’s best to choose products with low competition. If you have more capital to invest, it might be prudent to launch more expensive products that have higher competition. With a larger budget, you have the option of launching more expensive products that have greater advertising requirements.

In general, there are both pros and cons to launching more expensive products. 

The biggest pro is that there may be less competition since the capital investment requirements are an entry barrier to many sellers. The biggest con of course is that there’s more capital at stake. 

You Must Be Willing to Learn and Take Action

 

Selling on Amazon doesn’t require a degree or specialized knowledge. However, it does require that you’re willing to learn, make decisions, and take action.

In today’s environment, there are numerous resources to help you build, scale, and even sell an Amazon business. To succeed, you’ll need to proactively learn from those resources to implement the right strategies.

Some entrepreneurs love learning on their own terms and welcome the opportunity to take charge in their Amazon journey. For them, searching for new strategies or reading case studies of successful sellers is all part of the fun. 

For other Amazon e-commerce business owners, the lack of a clear and tangible roadmap is a deterrent to selling on Amazon. Unlike a specialized graduate degree at a University, there isn’t one set path that you can take. This can lead to feeling lost or confused in certain cases.

One of the keys to succeeding on Amazon is being resourceful, diligent, and constantly learning. If you’re willing to embrace uncertainty and persevere, there’s enormous opportunity on the other side. 

Strategies for Launching a Successful FBA Business

 

While there is no “one-size-fits-all” formula to launching a successful FBA business, there is an overall strategy and framework that most profitable sellers follow.

There are several stages involved in launching an Amazon FBA business:

 

  1. Market research
  2. Product research
  3. Product sourcing
  4. Listing creation 
  5. Launching your product
  6. Scaling your FBA business

Conducting Market Research on Amazon 

 

For most FBA sellers, market research is the first step to finding the right product and building an Amazon business.

Just like in any business, there are two main criteria for evaluating different markets on the Amazon platform:

  • Demand
  • Competition

First, it’s important to find a market in which there is adequate customer demand. In other words, you want to be sure that there are customers actually willing to buy products in the market you’re considering.

Fortunately, there are several software programs that make the market research process extremely simple to navigate. By installing a Jungle Scout or Helium 10 Chrome extension, all you have to do is enter a keyword in the search bar, hit the “search” button, and then use the Chrome extension when the search results appear. 

With the click of a mouse, you can quickly see each products’ review quantity, average rating, price, and an estimation of their monthly revenue. 

Looking at the revenue numbers gives a pretty good idea of the revenue potential in a given market, while review quantity and quality allow you to gauge the competition. Of course, when conducting market research, you want to look for markets in which there is high revenue potential and little competition. 

How to Research Amazon Products 

 

Once you’ve identified a market opportunity, it’s time to do some product research to find out if the opportunity is really as promising as it appears on the surface. 

To research new products, most third-party sellers turn to Alibaba. Alibaba is widely referred to as “the Amazon for Amazon sellers.” 

To start your product research, simply search for your considered product. You’ll immediately see a long list of products matching your search term with price ranges displayed next to each. 

While the price ranges can provide you with a rough idea of how much each product will cost to source, it’s a good idea to contact the suppliers directly to request quotes. Also, ask the suppliers to include an itemized DDP shipping cost estimate in their quotation so you can get an idea of the total landed costs of goods sold (COGS).

Once you’ve learned how much a product will cost to purchase, simply compare that figure to the sales prices you see on Amazon. If there’s a healthy profit margin between the two numbers, then you might have found a winning product. However, if the margin is slim, it’s probably best to walk away from that product idea.

For an in-depth article on product research and sourcing, be sure to check out The Complete Guide for Choosing Profitable FBA Products to Sell

Sourcing Amazon FBA Products to Sell

 

If you’ve completed the product research phase discussed above, you’ve already done half of the sourcing process. However, while the research phase can be a quick and casual process, sourcing should be approached with diligence and attention to detail.

There are several important elements involved in finding the right supplier and sourcing a great product. These include:

  • Product quality
  • Supplier communication
  • Lead times
  • Product cost

First and foremost, you want to make sure that you’re selling a high-quality product. Therefore, it’s strongly recommended that you order product samples from several suppliers to test the products before placing an order.

Second, you want to pay close attention to how well each supplier communicates. It’s easy to be drawn to a manufacturer who offers low prices, but it may not be worth moving forward if they have poor or inconsistent communication. In the long run, poor communication will likely lead to product quality and/or logistics issues.

Additionally, be sure to ask for lead times. In the beginning, it may not seem important whether it takes two weeks or two months to receive inventory. However, once you’re up and running, your lead time will have a significant impact on your inventory management practices and effectiveness.

Most owners don’t need to be told that product cost is important. Ensuring that you have healthy margins is essential to success on the Amazon platform.

In addition to looking at the product cost, it’s also a wise idea to research each products’ fulfillment fee using the Amazon FBA fee calculator.

Creating Your Amazon Product Listing

 

Once you’ve identified a market and sourced a product, it’s time to create a product listing.

Having a high-quality product listing is essential when it comes to attracting customers. Therefore, it’s smart to set aside a sizable budget to hire a photographer and copywriter (unless you’re a skilled photographer or writer yourself).

In addition to creating a product title, description, and bullet points, many sellers create A+ content, which allows them to combine visual media and marketing copy to represent products in a unique and compelling way. 

Product listings can be created inside your Amazon Seller Central account.

Launching Your Product on the Amazon Marketplace

 

It’s finally time to launch your product on Amazon! While every seller wishes they could sit back and watch the sales roll in at the second their product goes live, there’s still quite a bit of work that needs to happen after the product is available on the Amazon marketplace. 

Most products don’t sell themselves (at least not in the beginning). Therefore, most sellers run promotions and invest heavily in paid advertising to gain reviews and search rankings, and win the buy box.

Typically, most Amazon products aren’t profitable from day one. Rather, there is a period following the launch in which you must invest in customer acquisition efforts until your rankings and review quantity allows you to generate organic sales. 

Once your product is ranking for a few important keywords and your product page is converting well, you can generally expect your overall acquisition cost to drop significantly. This allows you to finally start earning a profit from your business.

It’s important to note that there is a wide range in start-up costs for different products. Some products require a significant investment just to get off the ground, while others can become profitable relatively quickly. Competition and product cost are two of the primary elements that determine how long it will take for an Amazon product to become profitable.  

Scaling Your Amazon FBA Business

 

Having a profitable product up and running on Amazon is certainly exciting, but it’s by no means the end of the journey. Most Amazon entrepreneurs decide to continue on and launch more products.

Launching additional products allows you to generate more revenue and scale your business. After having success with one product, it’s often easier to experience success with other products. 

How Much Money Can You Expect to Make with an Amazon FBA Business?

 

If you’re a new Amazon FBA seller, you may want to know how much potential there is on the Amazon platform. The short answer is, there is almost no limit to how large your Amazon business can grow. 

The better question is, what do you want to achieve with your Amazon FBA business?

Some sellers just want to have a small extra stream of income to supplement a job or career. Others are seeking to replace their salary from their traditional job in order to travel or work from home. And then, there are those who want to build a large business that they can later sell for millions.

Asking yourself what you really want from your FBA business can help clarify your business goals.

How To Build On Your Initial Amazon Selling Success

 

If you’re one of those ambitious individuals seeking to build your own Amazon business empire, you may be wondering what separates a small Amazon business from a large one?

Building a large Amazon business requires consistently doing the right things, even after you’ve experienced initial success. In other words, instead of kicking back once everything is up and running, it’s important to continually invest your time and money where it will generate the greatest financial return.

A lot of sellers are hyper-focused in the beginning, but then relax their efforts once the business is profitable. There’s nothing wrong with that if that’s what you want, but it will prevent you from building a ‘large’ business.

Additionally, once your business is profitable, it’s important not to view your business bank account as your own personal ATM. 

Every dollar you take out of your Amazon business is one less dollar you have to invest in growth activities. The effects of taking money out of your business are especially harmful during the early stages. 

For example, if your business is only making $6,000 per month, and you’re spending $4,000 on your own personal expenses, it’s going to be very difficult to experience rapid growth. However, if your business is earning $60,000 per month in profit, then taking out $4,000 probably won’t be too damaging.

Using Systems to Scale Your FBA Business

 

In addition to continuing to invest your financial resources into your Amazon FBA business, it’s also important to implement effective management systems as you scale your business.

In the beginning, it’s often easy to keep track of orders, inventory, and other important aspects of your business. However, as you scale, things often become more complicated. 

Having effective systems in your FBA business allows you to ensure that everything runs smoothly and avoids common challenges. For example, as you have more products, it becomes increasingly important to keep track of inventory orders, ad campaigns, and customer communications. Systems can also allow you to keep a close eye on key financial metrics

Tracking systems are also important when it comes to understanding your seller fees and metrics, including each product’s referral fee, storage fee, FBA fee, and buy box rate. 

Alternatives to Amazon FBA

Before becoming a seller on Amazon, it only makes sense to consider all of your online business options.

When it comes to launching an ecommerce business, there are two primary paths you can take: selling on Amazon or selling through your own website.

Within the realm of selling directly through your own website, there is one ecommerce website builder that truly stands out: Shopify.

Benefits of Using Shopify

 

Shopify allows you to quickly and easily create your own fully branded online store. Unlike Amazon, Shopify provides you with the ability to fully customize your customers’ experience on your website. Everything from web design to branding, to product presentation, can be curated to fit your specific preferences. 

Although Shopify doesn’t offer the same logistics systems as Amazon prime, the platform is developing a robust fulfillment network to serve its business customers. However, it still pales in comparison to Amazon’s unparalleled order fulfillment capacity.

For entrepreneurs who want to build a distinguished brand and have full control over every aspect of their business’s appearance and presentation, Shopify is a great choice.

Benefits of Amazon FBA 

 

Even though Amazon doesn’t provide the customization options that Shopify offers, the platform more than makes up for it through it’s order fulfillment capabilities and enormity of available traffic. 

In terms of access to customers and order fulfillment capabilities, Amazon is second to none. 

While it often makes sense to focus your efforts on one platform when launching a new ecommerce business, many owners decide to sell on both Amazon and Shopify. For example, if you choose to start with Amazon, you can always create a strategy to launch on Shopify when designing your four-year plan

Conclusion

 

Selling on Amazon can be a fun, exciting, and financially rewarding experience. For those wondering, “is Amazon worth it?” the answer is a resounding, “yes!” If you have some capital to invest, are willing to learn, and follow the right strategies, there are nearly limitless possibilities for where your business can take you. 

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