Breaking down the costs of selling on Amazon in 2024

TL;DR

• Selling on Amazon offers vast opportunities but comes with various costs.

• Product sourcing involves sampling, ordering, and shipping, with costs ranging from $100 to $2,000 depending on quantities and shipping methods.

• Amazon seller fees include referral fees, individual seller fees, and professional seller subscription fees.

• FBA services include storage fees, aged inventory surcharges, and new low-level inventory fees.

• Advertising costs vary based on PPC campaigns.

• Brand registry costs include trademark application fees.

• Tips for cost optimization include choosing the right seller plan, efficient inventory management, reassessing shipping strategies, and exploring alternative business models.

Selling on Amazon is an attractive option for many entrepreneurs looking to reach a wider audience. Amazon, being one of the largest online marketplaces in the world, offers immense potential for merchants to expand their businesses. However, before diving into selling on this platform, it's crucial to understand the associated costs. From listing fees to fulfillment expenses, the costs of selling on Amazon can vary widely depending on your business model, product categories, and the scale of your operations. This guide will break down the various expenses involved in selling on Amazon, helping you make an informed decision about whether it’s the right marketplace for your products.

How do you sell on Amazon?

• Product research: Begin by exploring Amazon to identify products that are in high demand but face little competition. Leverage Amazon’s data, look at customer reviews, and consider market trends to pinpoint potential opportunities where you can introduce a new product that meets unfulfilled needs.

• Sourcing products: Once you’ve decided on a product, the next step is to find a reliable supplier who can produce your item. This involves searching for manufacturers that already produce similar items and can tailor their products to match your specifications, thereby creating a unique version under your brand. Platforms like Alibaba are often used to connect with suppliers overseas.

• Launching your product: After sourcing your product, you need to list it on Amazon. This involves creating an Amazon listing that includes high-quality Amazon product images, detailed descriptions, and optimized keywords that make your product easily discoverable. At this stage, you’ll also choose how to fulfill orders. You can opt for Fulfillment by Amazon (FBA), where Amazon handles storage, shipping, and customer service. Alternatively, you can manage these aspects yourself through Fulfillment by Merchant (FBM).

• Marketing your product: With your product listed, focus on driving sales through advertising. Amazon’s Pay-Per-Click (PPC) advertising platform allows you to display ads within Amazon’s search results and on other product pages, which can significantly increase visibility and sales. Besides Amazon PPC services, consider other marketing strategies like social media promotion, influencer partnerships, and email marketing to build awareness and attract customers.

A comprehensive breakdown of costs associated with selling on Amazon

#1: Product sourcing cost

When you decide to sell a product on Amazon, one of the first steps is to ensure you're sourcing a high-quality product. This process involves several costs that you need to consider setting a realistic budget and pricing strategy.

• Getting samples: Before committing to a large order, it's crucial to assess the quality of the product. Differences in quality and specifications are common compared to what you might see online. Ordering samples from potential suppliers is the best way to mitigate this risk. It's advisable to get samples from at least three different suppliers to compare quality and pricing effectively. Typically, each sample might cost around $100, depending on the product type and shipping costs. This cost includes manufacturing the sample and shipping it directly to your doorstep, usually within five days. If you opt for three samples, the total cost will likely be around $300.

• Purchasing products: Once you've selected the best sample that meets your criteria, the next step is to place an order with the chosen supplier. Most suppliers have a Minimum Order Quantity (MOQ). The cost per unit usually includes both the manufacturing and shipping costs. Typically, for an MOQ of around 250 units and standard products, the cost usually ranges between $1,000 and $2,000. As the MOQ increases, the per-unit price tends to decrease.

• Additional costs: Beyond the price of the product itself, you'll need to budget for shipping costs from the supplier to either your location or directly to Amazon's fulfillment centers. The cost of freight or shipping varies based on the type of product, its weight and the seller's location and can be adjusted according to standard air or ocean rates, depending on the seller's preference.

Additionally, if you're importing products from overseas, be prepared to handle customs duties, taxes, and import fees. Shipping can range from a few hundred to several thousand dollars. Typically, for a small to medium-sized product with an average weight and a minimum order quantity (MOQ) of 250, the cost to ship to most U.S. fulfillment centers (FC) ranges from $1,000 to $2,000. This estimate includes custom duties, taxes, and import fees when using a shipping freight agency.

It's essential to get quotes from shipping companies and consult with experts to get an accurate estimate.

#2: Amazon Seller Fees

• Referral fees: Amazon charges a referral fee for each item sold, which is essentially their way of taking a commission. This fee is usually a percentage of the sale price, typically up to 15%. You won’t need to pay these fees upfront; they are automatically deducted from your earnings after each sale.

• Individual seller per-item fee: If you choose to operate under an individual seller account, Amazon will charge you $0.99 for each item sold. This fee is taken out of the payment you receive from the sale, so there's no need to pay anything upfront. This option is cost-effective if you're selling fewer items.

• Professional seller subscription fee: For those opting for a professional seller account, Amazon charges a monthly fee of $39.99. This plan is suitable if you’re selling more than 40 items per month, as it waives the $0.99 per item fee, making it more economical at higher volumes. Like the individual per-item fee, this fee is deducted from your account balance. If your balance isn’t sufficient, it will be charged to your linked credit card.

#3: Costs of FBA services

As an Amazon FBA seller, you enjoy the convenience of not having to manage shipping, handling, or packaging. Amazon's team handles all aspects of fulfillment—from picking and packing to shipping your products.

FBA seller services fees: The fees you pay for the FBA are based on your product's size and weight. This structure ensures that you only pay for the actual storage and handling your products require.

Storing your products in Amazon's fulfillment centers incurs storage fees, which help cover the cost of maintaining your inventory within Amazon's vast logistics network. The fees are:

• Monthly storage fees: These fees are charged at the end of each month, based on the amount of inventory you have stored. If your Amazon account balance doesn't cover the fee, it will be charged to the credit card linked to your seller account.

• Aged inventory surcharge previously known as long-term storage fees: On the 15th of each month, Amazon checks for products that have been in storage for 181 days or more. Items stored for this duration will incur an aged inventory surcharge. This fee, like the monthly storage fee, is deducted from your Amazon account balance or charged to your credit card.

• New low-level inventory fee: Starting April 1, 2024, Amazon will introduce a low-level inventory fee for standard-sized products that consistently show low inventory levels compared to customer demand. This fee encourages sellers to maintain adequate stock and avoid missing potential sales due to low inventory.

#4: Advertising costs

Using Amazon's Pay-Per-Click (PPC) advertising can be an effective strategy to boost your product's visibility and sales.

Types of Amazon PPC ads:

• Sponsored Products: Available to all professional sellers, this ad type boosts visibility for specific product listings.

• Sponsored Brands and Sponsored Display: These options are only available if you're enrolled in Amazon's Brand Registry. Sponsored Brands help promote a collection of products, while Sponsored Displays targets customers based on their shopping behavior.

For a new product that isn't yet easy to find, PPC ads can propel your listing to the first page of search results. It’s advisable to start with a small budget, such as $10 per day, as Amazon recommends. This modest investment can yield about 20-30 clicks per day, potentially leading to 2-3 sales, assuming a conversion rate of about 10%.

Make sure your product listing is optimized with high-quality images and complete product information. A well-prepared listing is crucial because no matter how many people click on your ads, if the listing doesn't sell itself well, those clicks won’t convert into sales, and you’ll end up wasting money.

#5: Brand Registry cost

To participate in the Amazon Brand Registry and gain access to its benefits, such as A+ Content, Amazon Stores, and enhanced advertising options like Sponsored brand ads, you must have a registered trademark for your brand. The Brand Registry program helps Amazon authenticate your products as genuine and provides you with advanced tools to protect and promote your brand.

This process involves:

• Applying for a trademark: You can apply for a trademark directly through the U.S. Patent and Trademark Office (USPTO.gov) website. Doing it yourself is often cheaper, costing about half what you would pay if you hired a local intellectual property (IP) attorney.

• Costs: If you choose to file the trademark application yourself, the fees are generally lower. You might spend around $175-$350 depending on the specifics of your application. If you opt for professional help from an IP attorney, the cost could be around $350 or more.

#6: Cost of product photography and copywriting

When launching a product on Amazon, high-quality product photography and compelling copywriting are essential for attracting customers and driving sales.

• Product photography for Amazon: Good photography is crucial as it helps potential buyers visualize the product and can significantly impact the decision to purchase. The cost for professional product photography typically ranges from $200 to $300.

• Copywriting: Effective product descriptions and bullet points play a key role in communicating the benefits and features of your product to shoppers. Professional copywriting for your product listings can cost around $100. This service includes crafting persuasive and informative text that not only boosts SEO but also helps convert browsers into buyers by clearly explaining what the product does and why it's worth purchasing.

#7: Miscellaneous costs

When selling products on Amazon, several miscellaneous costs can impact your overall budget such as:

Returns and refunds

Handling returns and issuing refunds are a part of doing business on Amazon, especially in categories with higher return rates such as clothing and electronics. The cost associated with returns includes the potential loss of sales, the logistics of handling returned items, and any restocking fees if you are using Fulfillment by Amazon (FBA). While it's challenging to predict the exact cost of returns, setting aside 1-2% of your total revenue as a contingency for handling returns and refunds is a prudent approach. This percentage might need to be adjusted based on your product category and return rate history.

Packaging materials

The costs for packaging materials can vary widely depending on the size and fragility of your products.

• Boxes: Depending on their size and quality, boxes can cost anywhere from $0.50 to $2.00 each.

• Packing tape: A standard roll of packing tape might cost around $1 to $3.

• Bubble wrap: For items that require additional protection during shipping, bubble wrap can cost around $20 for a large roll.

For a small to medium-sized operation, you might spend approximately $100 to $200 per month on packaging materials, though this estimate could increase if you are shipping large volumes or particularly delicate items.

Tips for cost optimization

• Choose the right seller plan: If you sell more than 40 items a month, the Professional plan is more cost-effective due to its flat monthly fee rather than a per-item charge. Evaluate your sales volume and choose the plan that minimizes your costs.

• Manage inventory efficiently: Storage fees can add up, especially if you use Fulfillment by Amazon (FBA). Keep track of your inventory turnover rates and adjust your inventory levels to avoid overstocking. This can help reduce storage fees and minimize the risk of having to pay for unsold inventory.

• Reassess shipping strategies: If you're using Fulfilled by Merchant (FBM), compare shipping costs from different carriers and consider bulk shipping discounts or regional carriers for cheaper options. For FBA sellers, ensure your products are properly sized and packaged to avoid unnecessary charges.

• Explore alternative business models: Instead of starting with a private label, consider other approaches like selling used books, and handmade items, or engaging in retail or online arbitrage. This involves buying products from one market and selling them on Amazon. Many sellers begin with these methods and transition to private labeling as they gain more experience and capital.

• Minimize initial inventory costs: To lower your upfront expenses, consider ordering smaller quantities from platforms like Aliexpress, which allows for purchasing at lower quantities than Alibaba. While this might mean higher per-unit costs and fewer customization options, it's a good strategy to test the market before making larger investments. For those committed to building a brand, it might still be worth purchasing slightly more expensive inventory from Alibaba to ensure quality and customization.

• Select low-cost products to start: When choosing a product, aim for items with low cost-per-unit. For example, if you find a product on Alibaba priced at $1.00 per unit and estimate the shipping cost to be $0.50 per unit, purchasing an initial inventory of 500 units would total $750. Including the costs for samples and Amazon seller fees, you might be able to launch your business with an investment of approximately $1,050. This strategy significantly reduces the initial financial barrier compared to average costs for starting a private label business.

• Regularly review expenses: Set a routine to review your cost structure. Look for any new fees or changes in Amazon’s fee structure and adjust your pricing and strategy accordingly.

Final thoughts

In conclusion, understanding and managing the various costs associated with selling on Amazon is crucial for running a successful online business. From the fees Amazon charges for each sale and monthly subscriptions for professional sellers to the costs of product photography, copywriting, and handling returns, each expense plays a role in shaping your business's financial health. By carefully planning and budgeting for these expenses, you can set realistic prices for your products, maintain healthy profit margins, and grow your presence on one of the world's most powerful e-commerce platforms.

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