The model works by Amazon providing users with the ability to send their products to its warehouse, and having them “fulfilled” by the retain giant (it sends them out) upon successful purchase.
The reason why Amazon would do this is partly to get free niche products which are both unique and valuable (you own the products – they just ship them for you), and partly to make use of their massive infrastructure (which they would be paying for anyway).
It also adds to their offering as a business, as it gives them an even more diverse array of products to add to their portfolio (which is pretty much their core competitive advantage).
The important thing to consider about the “FBA” model is that it is indicative of the new “digital” business culture that seems to have become even more prevalent after the 2008 crash. Rather than keeping large amounts of stock, overheads and a large team… companies have taken to the Internet & social media to find buyers & create lean enterprises.
Gone are the days when distributors determined the fate of products. Now, new businesses, entrepreneurs and everyday people are able to create $10,000+ a month income streams without even having to own any land. All the infrastructure, marketing and fulfilment is handled by a completely independent company (Amazon) – to which you just do the work of sourcing a successful product.
To determine if you’d like to gain advantage from this method of investment, I’ve created this tutorial to explain the process of utilizing Amazon FBA. Rather than trying to get by on scraps from a local market, the new “digital” realm with all its promise is one of the best ways to get your foot in the door of the new world of enterprise.
How It Works
All businesses work in the same way – buy/build a product, offer the product to a market and any “profit” you’re able to make can either be used to live off, or reinvest into more/better products.
The problem for most people is two-fold: 1) they have no product 2) they have no access to a market.
Whilst both are legitimate problems – which would have been a significant drawback in a time without the “digital” medium – times have moved on to the point that barriers-to-entry are so low that you only really need to be able to invest several $1,000 to have the opportunity of selling to a global audience.
And despite the fact that the “Amazon” opportunity has existed for almost 10 years now (anyone can list products in its marketplace), the “FBA” model (which is truly hands-off) has only started to become popular in the past 24 months-or-so.
If you didn’t go to business school, to briefly explain how to run a “successful” business, you basically need to be able provide a product/service to a large audience. You’d typically aim for around 30% net profit margin (after COGS & advertising costs). How you do this is up to you – the key is to buy low, sell high.
Now, just because the “digital” realm is large doesn’t mean it’s devoid of the way in which “markets” typically work. Competition is obviously a major force, as is the idea that because something is “easy”, it can be replicated relatively simply by others (leading to an erosion of your profits).
Selling on Amazon typically works by providing access to products which people either don’t have access to locally, or are able to obtain locally but with major restrictions (such as color/size issues), or with problems in reliability of supply. In other words, whilst the Amazon marketplace is vast – don’t think you can outwit supply/demand.
The real trick with “digital” businesses is to provide access to unique products (typically made by yourself or your company) which are only available through you. These products have to be focused on providing a solution that most people have no idea about, and thus makes the proposition of buying it through the Internet legitimate.
Obviously, creating a “unique” product is 1,000x easier said-than-done – the trick with it is to work on solutions to your own problems. Work towards sharpening a skillset, which you’re able to apply to a wider audience, from which you’ll be able to identify “products” which can be created and offered as a means to simplify/solve problems you’ve experienced yourself.
To begin selling on Amazon, there are several steps to take:
- Sign Up For Amazon Seller Account The first step is to get a “seller” account from Amazon. There are two types of seller account – “individual” and “professional”. Individual is free and allows you to “list” items which already exist in the Amazon catalogue. You pay a small fee each time a product is sold. Professional costs $40/mo, and has no extra “per sale” fees (although other fees such as a stocking fee etc may apply). This is the only account which allows you to list new items in Amazon’s catalogue.
- Sign Up For GS1 This gives you the ability to *create* barcodes. They come in two formats – UPC (Universal Product Code) and EAN (European Article Number). Whilst these can be bought relatively cheaply ($10), Amazon, Google and eBay strongly recommend using GS1 for standardization. By using GS1, you’re able to have your products recognized by the likes of Amazon. The downside is the cost, but it shouldn’t really matter – we always recommend setting aside ~$500 for admin costs, of which this would definitely be one.
- Create A Legal Company (Optional) If you’re looking to set up a real FBA operation, you’ll need a legal business (and bank account). Apart from giving Amazon the ability to open a business account, it allows you to better manage taxes (which are notoriously bad for investing your own money in a personal capacity). This is very easy to setup, but is only necessary if you want to actually deal with Amazon on an FBA basis only. If you want to just sell products on the system, you’re welcome to do it under your own name.
- Buy/Build Boxed Products You then need to get a set of boxed versions of the product. If you make the product yourself, you need to get them into standardized boxes. Because thre are so many ways to do this, we’ll just say that you should look for a boxing/printing company to handle it for you. There are many capable ones. You must also follow Amazon’s guidelines on what types of packaging they accept.
- Send The Products To Amazon Once you have the boxed products, you need to send them to Amazon. This is arranged through the Amazon seller system, allowing you to pick a time when the products should receive at the Amazon warehouse. Again, due to the level of variation in the process, it’s best to say that you should follow the Amazon guidelines in order to do this.
- Start Selling This is the hardest part, which is explained below.
Selling The Products
The last step is to get the products sold. This is the hardest as you’re almost entirely at the whim of the market (both Amazon’s and any other market you may bring to the platform).
The trick to getting products bought from Amazon is effective marketing.
Marketing comes down to several points – the most notable being that you need to be able to firstly attract the attention of potential buyers and then build demand – giving them the opportunity to buy your product as a means to satisfy that demand.
Whilst there are many ways to do this, you must remember that if you’re going to do it effectively, you need to be able to go out and market the product independently of whether it’s going to be popular on Amazon. The less you need Amazon, the more likely it will be that you’ll actually get people buying through the channel.
Finally, we must also point out that any sales you make must NOT be counted as pure profit.
Your profit ONLY comes after your other costs have been accounted for (such as the actual products themselves, boxes and marketing). It is a rookie mistake to think that the money you receive from Amazon will actually be your “take home” profit – it’s not.