How To Start An Amazon FBA Business
April 8, 2016 | Posted in: Businesses
I have been selling online through an Amazon FBA business since 2013, but I haven’t really spoken about it much on this blog. I hesitate because to a reader I think it sounds too easy. There are a lot of the articles written about Amazon FBA and they too often just like a scammy get-rich-quick scheme.
The logic is simple and the businesses are very profitable, but they do take time and are a lot of work to get going. It is worth it, but you should treat your Amazon FBA business seriously and just like any other business.
What is an Amazon FBA Business?
I am sure you have heard of Amazon. It is the largest online retailer in the USA, UK and much of Europe. A household name. But what you might not know is that when you purchase something from Amazon, there is a very good chance that you are buying from a third party seller using a service called Amazon FBA.
FBA stands for ‘fulfilment by Amazon’. What is means is that Amazon looks after all of the seller’s stock. When a customer places an order, it by-passes the seller altogether and goes straight to the FBA warehouse. Amazon then picks out the order and delivers it to the customer.
Amazon FBA also handles most of the customer service. They process all customer returns and only the most specific queries get forwarded on to the seller.
To the customer, there is almost no difference between purchasing from Amazon directly and from a person selling their items on Amazon through Amazon FBA. They get the same delivery options, the same returns policy and the same customer service team.
In the image below you can see that the torch below is sold by ‘TriumphInnovations’ and ‘Fulfilled by Amazon’. ‘TirumphInnovations’ is an Amazon FBA business.
An Amazon FBA business is a great intermediary between a bedroom eBay business, and a full-time brand with a large staff. As a seller, you don’t have to look after the stock and it takes the same amount of work to sell 10,000 items as it does to sell 10. But to the customer, they get a quality of service that is on par with the biggest brands in the word.
As a seller, you can run a one-man-band business that sells thousands of items each month, all remotely from anywhere in the world. In fact, I am currently in South America with Amazon FBA businesses in Europe and North America.
You acquire the stock and get it delivered to Amazon FBA. Then all you need to do is focus on getting sales.
In this article, we will talk about the main two types of Amazon FBA businesses. (there is one other type is completely different that I covered in this article: Retail Arbitrage).
- Invent a product from scratch. Get it professionally designed and manufactured. Then work your arse off to try and convince people that they really want it and will buy it. This is the approach we follow and I documented for the table tennis bat cases in this post. It’s a lot of work and you run the very real risk of discovering that people don’t really want whatever you have invented.
- Reinvent/improve on someone else’s product. Simply find a not very good item that is selling well and create a better version of it. There are hundreds of items on Amazon that are just rebrands of readily available white-label products. You can even find the same factory that makes the original item and get them to do your manufacturing. As of 2016, this is the easiest and still a very profitable route to take.
How to Source Your Products
We’ve spoken a lot about Amazon, but there is another global company that is almost as important. Alibaba.
Alibaba is a Chinese online wholesale market where factories and distributors from all around the world display their items. Most of these companies will work with you to create and manufacture your unique product.
Since Alibaba came on the scene it has got very easy to create a basic Amazon FBA business. Too easy. And has led to Amazon getting flooded with white-labelled products that are straight from Alibaba with a brand attached and a huge price markup. Most of them don’t sell well, but there are plenty that do.
Here’s an example.
The only difference between the two is the adding of a brand name… and the price increase.
You can buy them in bulk on Alibaba, branded with your own brand for between $1 and $7 each (depending on how many you purchase and how good you are at negotiating), and people are buying them on Amazon for £16.95. Even with all the fees and costs (which we will talk about later), that is still a very good profit margin.
Now I can’t be 100% sure that it is the same factory that makes both of them. But it doesn’t really matter. Provided the factory is able to make us a better version, then we’re in business.
Now that pest repeller looks pretty low quality, but you can also find very high quality, well-respected brands on Alibaba.
The next images are of a very popular supplier of boxing gloves on Amazon and Alibaba.
On the Alibaba factories’ website, they describe themselves as: “the official supplier of ‘RDX’ one of the world’s leading fitness brand, along with many other brands.”.
I am not suggesting that you should try and create fake RDX gloves. That would be unethical and also bad business – it wouldn’t take long before you were shut down. But I am suggesting that if you can come up with an improvement to the boxing glove, you could legitimately contact that factory on Alibaba, get your own unique boxing gloves made, add your own branding and start competing with RDX.
Getting a really good idea for a product can take quite a bit of time and research, and is worth not rushing. In fact it is a full topic in its own right. You can check out my in-depth guide here.
In short, there are some paid for tools that really help with the research. The most popular being JungleScout. It costs $99 a month, but if you work hard in that first month you will only need to pay for one.
Getting Your Stock From Alibaba to Amazon FBA
The final piece of the puzzle to setting up an Amazon FBA business is how you get your stock in bulk from the factory to the FBA warehouses. On the surface, it can be very complicated. Every country has different customs processes and Amazon have some pretty complex requirements for how they need your items to be delivered.
Thankfully there are plenty of companies that deal with all the hassle for you and make it really easy, they are known as freight forwarders and customs brokers. I recommend Flexport. They are funded by Google, have a really good online interface and due to the transparent price comparison service, are cheap.
The steps are fairly simple:
- The factory delivers the stock to the Flexport freight forwarder.
- The freight forwarder gets the stock into your destination country and deals with all taxes and paperwork.
- The freight forwarder hands the stock over to the Amazon partnered couriers who books them into the FBA warehouses.
Simple eh? Well that’s the basics of an Amazon FBA business:
- Find a factory on Alibaba.
- Open conversations with them and design your product.
- Get a large batch of the item manufactured.
- Use a freight forwarder such as Flexport to get the items from the factory to Amazon.
- Get marketing and sell your items.
Now let’s dive into the nitty gritty.
If you have done some browsing on Alibaba, you may be a bit shocked at how cheap the factories are selling wholesale quantities of their goods for. Unfortunately, it’s not quite as simple as taking the price you sell it for and minusing the price you paid, There are a lot of costs to include.
I am talking about pricing and margin early on because it is so important. You can’t start talking to manufacturers until you know how much margin you need.
Luckily Amazon has a handy calculator that you can use for most of the costs:
Just find an item similar to yours, or enter in your product’s dimensions.
On top of these costs, there are a few other ones you need to add in manually.
- The price of the item.
- Shipping to the country.
- Tax and customs charges.
- Delivery to the Amazon FBA warehouses.
You can talk to Flexport and the Alibaba factories to get all these costs.
A typical example might be:
- You expect to be able to sell the item for $16
- It costs $4 per item to buy.
- Shipping is $1 per item.
- Tax and import duties are $0.75 per item.
- Delivery to the FBA warehouse is $0.2 per item.
- FBA fulfilment fees are $3.05 per item.
- Amazon closing fee is 15% of sale price, so $2.4.
- Your profit is $4.6 per item.
That is still a good margin and provided we can get sales is a good Amazon FBA business.
Because of the way the Amazon fees work, your ideal product will be:
- Selling for between £15 and £50 ($20 and $70).
- Small and lightweight.
- Simple and with not too many moving parts.
And of course, an item that people want to buy. As mentioned earlier, finding the best products to sell on Amazon has it’s own whole post here. In short, there are a few great tools that can help you research the ideal product. JungleScout is probably the best and most popular.
Once you understand how the margin and fees work, the next step is to start chatting with some manufacturers.
Open communications with different manufacturers.
I suggest talking with as many factories as possible.
With Alibaba it is so easy, just use the search bar for whatever you are looking for and click “contact supplier” next to the companies that look interesting.
When searching add the word ‘OEM’ to the end of your search. For instance “Flashlight OEM”. It stands for ‘original object manufacture’ and should filter out all the re-sellers and give you the factories that actually manufacture the items.
You might as well shoot off the same message to lots of different factories and then play them off against each other. The factories know the value of even a new Amazon FBA business and will want to work with you.
It is very hard to describe what I look for in a good factory beyond “a good feeling”. I think it comes with practice. I suggest that once you have spoken to them, try having a chat over Skype. If their English is so bad you can’t really communicate, then it is probably not going to work out.
Once you have narrowed down your search to your favourite 3 or 4 factories, ask them to send you out a sample. Some places will send you one for free, others will charge you but then take the cost off any large order you eventually make. A few will ask you to pay full price.
Once you have samples from a couple of factories you are happy with, it is time to move onto the next step.
Now remember, we are not just looking to re-sell their products. We want to improve and customise them.
This process can take quite a long time, but it is worth getting right. If you can get the designs done professionally, that could really help to really speed the process up. You can hire a freelancer on Freelancer to help you.
Or you can make amateur suggestions and ask the factory to turn them into products. Here are some designs we made in Microsoft Paint for our table tennis bat cases.
One of the keys to an Amazon FBA business is keeping costs as low as possible. So make sure to think through what is the best use of your money.
During this design phase, you need to incorporate a barcode. A barcode (or UPC code) is a series of digits that is unique to your product all over the world. There are plenty of websites where you can buy barcodes, this is the website I use.
Once you have the perfect prototype it is time to get them manufactured.
Negotiation and Manufacturing
Although I hate negotiating, on Alibaba it is a requirement. You can often get 40%-70% off the asking price.
As it is so easy for customers to price compare a lot of factories are starting to realise that they can get more business by opening with their best price. But I think it will still be another few years before you don’t need to negotiate.
You may be great at haggling and love competing for the best price. If on the other hand you’re more like my, here are my thirty seconds on negotiating on Alibaba.
There are a few things we really care about:
- Minimum Order Requirement.
- Lead Time.
At the beginning, the first one is the most important. You may be able to get a great deal if you order 10,000 items, but that would be crazy for a new product you haven’t tried to sell yet. If no-one buys it you’re left paying storage on 10,000 items! I recommend starting with about 500.
On lead time, sometimes the factories can take months to create your product. If you’re just starting out you may well be willing to sacrifice a bit of margin to get your products to Amazon quicker.
If you have a few different good options for manufacturer you can play them off against each other on choose the best deal.
The only other thing I would say about negotiating is: don’t burn your bridges. The first manufacturer may turn out to be a dud and you may want that second one. So even if you don’t go with them, leave the option open for future business.
When you finally give them the go-ahead, make sure to request that the items are packaged together in the same size cartons. This will be important when organising the final part of the delivery to Amazon.
Freight Forwarding & Customs
I’ve already mentioned that Flexport or another freight forwarder will do most of the work of shipping and customs for you. They’re generally good enough that I don’t need to go into much more detail. Except to talk about shipping options.
You have the choice of sending your stock by ship or by plane.
A shipment from China to the UK or the USA will take 6-8 weeks. By plane, it will take less than a week. But plane will be about five times more expensive.
If I am running low I will fly in some emergency stock, but the majority I send by boat. On your initial order you could always send a small amount, say 60, by plane and the rest by boat. That way you can be up and selling much quicker.
Amazon and Amazon FBA
Once your shipment has landed in the destination country you need to get it to the Amazon warehouses.
But first, you will need to create an Amazon account.
I strongly suggest creating the account before you start manufacturing.
It is free to sign-up as an ‘Individual’ Amazon seller in most countries and anyone from most countries can do it. India is the only exception that I know of, there you need to have an India-based business to register. I suggest starting with just one country, the one you are most local to:
- Amazon UK (includes Germany, Italy, France & Italy).
- Amazon USA (includes Mexico & Canada).
- Amazon India (you need to have an Indian based business to sign up)
There are two types of Amazon accounts. Individual and Professional.
- Individual is free but you pay an extra fee per item sold, you also have access to less analytics.
- Professional charges a monthly fee.
Both can be used with Amazon FBA, so I simply suggest signing up for an individual account and upgrading once your sales hit the threshold where the professional account is cheaper.
Creating the Listing on Amazon
Once you have finished creating your account. From the homepage navigate to the inventory tab and select “Add a Product”.
Select “Create a new product listing”. Then select the most relevant category.
You will then be taken to the details page of your new product. There are hundreds of fields, but most of them you can safely ignore as they don’t really add anything. Make sure to fill out:
Under ‘Vital Info’
- Item Name. I like to include the brand name here as well as it it is what the customer sees when searching through Amazon. e.g. “Awesomo Fly Swatter Mk2”
- Brand Name. This is your Amazon FBA business brand. e.g. “Awesomo”
- Recommended Browse Node.
- Product ID. This is the UPC number that you purchased when designing the product. It is the unique barcode.
- Your Price.
- Fulfilment Channel = ‘I want Amazon to dispatch and provide customer service for my items if they sell.’
The fulfilment channel is important. This is where you tell Amazon that you want to create an Amazon FBA business and have Amazon handle your stock and customer service for you.
Images are very important. Make sure you have someone take some professional looking photographs of your item.
Make full use of this page and make your product sound as appealing as possible.
Enter a few alternative words that people might search for your item. For instance, if you are selling a pest repeller they might also search for ‘bug repeller’ or ‘mosquito repeller’.
And that’s all you need. Now click ‘Save and Finish’.
Sending Stock to Amazon FBA
Provided you selected that you want Amazon to fulfil your items, you will next be sent to the ‘Send/Replenish Inventory’ page.
Just follow the instructions. At some point, you will be asked for some more details about your item, including the proportions and weight.
Every product sent to Amazon needs to be labelled with a label that is unique for the item and shipment ID. This is an internal barcode that Amazon uses to track and manage inventory. You can either get your freight forwarder to do this or pay Amazon to do it.
I’ve found that the freight forwarder is normally a cheaper option, but there’s not much in it and it is more work on your behalf. To get them to do it you need to negotiate it as an added extra, then download and send them the PDFs of the labels.
Once you have clicked through all the steps you will have a chance to review and accept the shipment.
Once it is created select ‘Work on Shipment’ to tell Amazon how it is going to be delivered.
The easiest way is to select ‘Small Parcel Delivery’ and choose the ‘Amazon Partnered Carrier’.
Remember how we made sure that all the cartons sent by the factory were of the same size and weight? This is why.
By using the ‘Amazon Partnered Carrier’ (which is UPS) you will pre-pay for delivery based on the number and proportions of the boxes you are sending. Amazon will then generate you a pre-paid label in the form of a PDF file.
Just gives these PDF files to the freight forwarder, they will attach them to the cartons and give them to UPS. Next thing you know your stock will be at Amazon.
And that’s it… once your stock arrives your Amazon FBA business will be live and people will be able to buy and receive the items without you even having to be told about it.
Well not quite. If you just leave it, no-one will buy your product. The final step in the puzzle is also the most difficult. How on earth do you get people to buy your items?
In my experience, I have found the best way to get decent sales for a new product on a new Amazon FBA business is to do a short sharp burst and try get as high up as possible on the best-seller rankings.
Once there the Amazon algorithm will start showing the item to people searching on the website.
Let me explain.
When you start a new Amazon FBA business. You have zero reviews and zero sales. You don’t even have an Amazon seller ranking. There is no reason for the customer or Amazon to trust your product is any good.
Amazon has a secret formula that determines what shows up when people search for something. It’s secret but we can take a guess at how logically it could work. It is known as the Amazon Search algorithm.
Let’s pretend that I am the Amazon algorithm, and it’s my job to choose what we show people who are using the site. Imagine someone searches for a teapot. How do I choose from the hundreds of teapots which ones to show the user?
Well, I think my first instinct would be just to rank all the teapots on Amazon by how well they’re selling. Put the best-selling one at the top and the worst selling one at the bottom.
But that’s a bit too simple. What happens if the best selling teapot is just a big brand name that is rubbish but they are spending a lot on advertising? People are still buying it but they are giving it bad reviews.
Ok, so ratings are important too, let’s take that into account. Perhaps I show a better-reviewed teapot higher than a teapot that has slightly more sales.
But that’s also too simple. What about a teapot that only has one review. Even if it’s a 5-star review I can’t show that higher than a teapot with 100 4.9 reviews. Ok, so I weight the rating in some way by the number of reviews.
But what if there is some new teapot technology out and the best-selling teapot is behind the times? It still has all those good reviews. And it is still the best-seller. But it is unfair because it has been around so long that it would take a new better teapot years to get the same number of reviews.
Ok now I am going to take into account momentum. An item that has only been around a few weeks but is getting a lot of sales and good reviews I will show in a high place.
Ahh. Now we’re getting somewhere. We have no idea how exactly the algorithm balances these factors, but we can be pretty sure that the it favours:
Sales, good reviews, many reviews and momentum.
A brand new product with no reviews and sales is not going to be shown to anyone. A brand new product that has a lot of sales in the first week and a lot of good reviews is going to be shown to people.
It is our job as a new seller to get as many new sales and reviews as possible in a short space of time. We need that momentum to start showing up organically on people’s Amazon searches.
The simplest ways to do this is by:
- Asking all your friends and family to buy and review your product.
- Hosting a competition.
- Send free samples to professional & amateur reviewers.
- Paid for advertising.
Best of luck!
Expand to Different Countries.
Once you have started to rank in one country it’s time to expand and do the same in others.
The great thing is that with the central accounts of the UK and USA you can expand your selling to a bunch of other countries with just a few clicks.
For instance, with Amazon UK you can cross-list your items on Amazon Germany. When a customer buys your item in Germany it will be shipped to them from the UK FBA warehouse.
Amazon even provides a translation service so that your listings will be spelt correctly in the target language.
Congratulations! You now have a multi-national global Amazon FBA business.
Expand to Different Products.
Now you are selling strongly everywhere. Time to move on to a new product and start the whole process again. Except this time it should go much smoother and easier.
Ok. So that was long and complicated. Let’s quickly recap the steps to setting up an Amazon FBA business:
- Decide on a product idea.
- Find and open communication with relevant factories on Alibaba that manufacture similar items.
- Request samples and then commission prototypes to be made.
- Purchase a barcode.
- Start manufacturing.
- Use a freight forwarder such as Flexport to get your stock to the target country and through customs.
- Open an Amazon Seller Account and create your listings.
- Create a shipment on Amazon FBA and pre-pay for shipping.
- Give your freight forwarder the pre-paid shipping labels.
- Start marketing.
Phew. That was a long post. I think I have covered pretty much everything but if I have missed anything out then please drop me an email. I get quite a few emails and don’t have enough time to reply to all of them, but I will do my best.
I also do a tiny bit of consulting at $200 an hour. If you are in whatever country I happen to be in (as of 8th April 2016 that is Chile) we can meet up, or you can schedule a call with me through Clarity. It could be specifically on Amazon FBA business, or on anything I talk about on this blog.
Cover photo courtesy of Intel Free Press