The Future Of Amazon FBA
Guest post from Jacob Hatflield, full time Amazon FBA Seller.
If you’re the type of person who knows they want to start something on the side but don’t know if Amazon FBA is worth it in 2020, you’re in the right place.
After selling on Amazon for several years and helping thousands of other sellers, I feel like I’m in a unique position to answer that question for you. My aim with this article is to let you know the good and the bad about being an FBA seller.
I will weigh the pros and cons of each of the three methods to sell via Amazon FBA: arbitrage, wholesale, and private label. I’ll rate each on their ease to get started, long-term potential, and cost to maintain.
Amazon's Potential (And What That Means For You)
First, let me break down Amazon FBA for you in case you’re unfamiliar.
Sales made on Amazon make up nearly 50% of all the sales made on the internet. The amount of virtual real estate they’ve been able to capture is enormous, and the potential future growth has a high ceiling.
However, many people don’t understand the impact 3rd party sellers make on the marketplace. Of all the sales made on Amazon, over half of them come from 3rd party sellers. That means that 25% of all the sales made online are made by regular people on Amazon’s platform.
Fulfillment by Amazon, or FBA, is the most efficient way for these sellers to participate in the market. The process is very straightforward:
- You ship in the products you want to sell on Amazon.
- They store it in their warehouses.
- When you make a sale, they ship your orders for you.
- They also handle support for your customers.
Of course, they charge fees for selling on their platform and handling the logistics of your business, but the charges are substantially less than doing it all yourself. Furthermore, you get the opportunity to have your products seen by millions of shoppers every day.
All that’s left is to figure out what to sell, and that's primarily what determines if Amazon FBA will be a good opportunity for you. Which sourcing method you choose is crucial to your success.
FBA Method One: Arbitrage
This method is very simple: it’s the process of finding products cheaper in one marketplace and selling them in another for a profit.
Arbitrage has always existed in some shape or form. Before Amazon, people were finding great deals at garage sales and flipping them on eBay. As long as a product has a price gap in two different marketplaces, people will take advantage of it.
Arbitrage is the easiest method to get into out of all the ways to sell on Amazon. All that’s needed is an Amazon Seller account and a product to flip. You don’t need to have an LLC or file any official documents to get started. In fact, you could get everything set up and ship your first batch of products into Amazon in just a few hours.
The investment requirement is also substantially lower than any other method of selling. Many sellers start with a few hundred dollars and roll any profits they make into more inventory until they’ve built up a good base of capital.
So what should you sell? If you’re testing the waters and want to take absolutely zero risk, you can find stuff around your house to flip. Things like textbooks, electronics, and even some toys are a great place to start.
The first product I ever sold was one of my old college textbooks. I had no retail experience and had no real expectation of success; but when it went live on Amazon and sold within a few hours (for a $50 profit), I understood how powerful the platform was.
To find profitable products that don’t live on your bookshelf, you’ll need to check out retailers like Walmart, Target, etc. You can either go to the stores in person (which can be time-consuming) or you can purchase products directly from the online sites.
However you choose to source, there are lots of different tools, programs, and services to make your life easier. If you want to learn about the best ways to source arbitrage products, I put together the ultimate guide on online arbitrage. It includes the top 49 things new sellers should know to succeed with this method of selling (and why it’s the best place to start with FBA).
By far the biggest downside to arbitrage is that new sellers will be highly restricted. In order to prevent people from selling inauthentic goods on their platform, Amazon has put a few hurdles in place for new sellers. They aren’t immediately able to sell in some categories like beauty & toys or major brands like Nike and Apple.
It is possible to get approved, but the process can sometimes be difficult or expensive. In the meantime, newbies will need to sell products that are unrestricted (also known as ungated products). Finding ungated products at scale is arduous and frustrating if you don’t know what you’re looking for.
Lastly, the nature of an arbitrage business means that you’re always on the lookout for a great deal - the bigger the deal, the more profit for you. That means that you continuously need to source new inventory to replenish your stock.
Ease to start: 5/5
Long-term potential: 3/5
Difficulty to maintain: 4/5
FBA Method Two: Wholesale
Wholesale is really simple: find profitable products and order them in bulk from suppliers.
The wholesale landscape is changing with so many variables at play. I think it’s safe to say that wholesale in 2020 is not going to look like wholesale in the years before it. Huge shifts have been made in 2019 that are signaling a bigger reformation on Amazon.
First, I’d like to talk about the elements of wholesale that have stayed the same. These pieces of wholesale are foundational and are unlikely to change in the next few years.
Firstly, the capital requirement to enter wholesale is still large. It depends on the policies of who you’re buying from, but most wholesalers have a Minimum Order Quantity (MOQ).
That means that you are required to purchase at least ‘X’ number of units of a specific product - the range can be anywhere from a few dozen to hundreds or even thousands of the same SKU.
The upside is that those units are going to be cheaper the more you buy, but the downside is locking in such a hefty chunk of your capital (if you’re even willing to commit that much at all).
Another aspect that’s stayed the same in Amazon wholesale is that the legitimacy of your business is much more important than arbitrage. Many arbitrage sellers may just be testing the waters before committing to selling via FBA full-time.
With wholesale, however, you’ll need to register for an LLC (at the very least) to even apply to work with most legitimate companies. While not a huge hurdle to get a legal business up and running, many of your prospective partners will want to see that you have a functional e-commerce website and may even require a physical storefront before permitting you to purchase from them.
How Wholesale Is Changing
With that out of the way, I want to cover the major - and relatively swift - ways that wholesale is continuing to evolve.
Here’s how wholesale largely worked in the past:
- You’d find a distributor that was willing to work with Amazon sellers (not all are) and they’d send you a spreadsheet of all the brands and products they distribute.
- Savvy Amazon sellers would plug this into their software of choice and sort out the products worth purchasing.
- All that’s left to do is purchase from the wholesaler, ship the products into Amazon, and re-order when stock is low.
Easy enough, right?
Well, those days are largely over.
There’s been a gradual shift over the past few years that reached its peak in 2019.
At first, many brands didn’t care to be on Amazon. Many companies didn’t understand the behemoth opportunity the platform represented. Others found it way too complicated to manage their products, so they didn’t even bother to try. However, some brands were on the fence about whether to join the marketplace. All they need is a little nudge to jump in.
This is a huge opportunity for Amazon sellers who want to cut out the distributors (i.e. middlemen) and raise their margins. Rather than dealing with the marked-up prices from a wholesaler, they could negotiate deals with the brands directly, thereby saving time and money. With a little bit of people skills and an understanding of the inner workings of Amazon, they could convince a brand to sell to them.
The details of these deals varied, although many times it would look like the Amazon seller creating and managing the listings for the brand in exchange for the exclusivity of being the only one allowed to sell the products. It’s a win-win situation for both parties.
Some brands would even make these kinds of agreements with Amazon itself. This is what you call brands selling 1st party (1p). Unfortunately, due to mismanagement of the brand by Amazon, there’s a growing trend of companies getting fed up, taking over Amazon sales themselves, or cutting the cord with the platform entirely.
How To Handle Wholesale In 2020
As knowledge of FBA becomes more pervasive, you really have to master your craft to stand out from everyone else trying to catch the brand’s attention. Deep knowledge of Amazon’s algorithms, knowing how to launch products, how to run an ad campaign, how to research keywords, how to optimize conversion rates for listings, and other highly specialized topics are a necessity to provide any value to a brand.
Even then, they may still not take you seriously or be willing to work with you at all. I recommend starting off by working with smaller brands and delivering on results for them. Building a portfolio of successes you’ve helped other brands achieve will be your strongest ally when creating proposals for larger companies.
There are opportunities out there to network at a large scale. Trade shows like ASD in Las Vegas are a great way to network with these companies in person. That’s truly the most effective way to communicate in the wholesale world - many of the players are old-school and face-to-face meetings are what they’re most receptive to.
So what’s the bottom line? You’re probably going to have to put in serious legwork to have any success in wholesale nowadays. The low-hanging fruit is gone - competition is stiffer and brands are far more wary of dealing with Amazon sellers without a successful reputation (and rightfully so).
Building an Amazon FBA wholesale business is going to look a lot more like - well - a business than it has in the past. With a high barrier to entry and a long time before it’s (realistically) profitable, it’s going to be tough.
However, for the people that stick to it and learn from their mistakes, they’ll find a highly scalable and profitable machine at the end of it. The connections you build with brands tend to last for years, and once they’re made you just need to re-order products and do some minimal management.
- Ease to start: 3/5
- Long-term potential: 4/5
- Difficulty to maintain: 3/5
FBA Method Three: Private Label
Private Labeling Defined
For those unfamiliar, let me explain what private labeling is: In arbitrage and wholesale, you’re reselling a brand’s products. In private labeling, you are the brand.
You’re going to be involved in picking out the product that you want to sell, selecting and negotiating with a manufacturer, the shipping and logistics to get it into a warehouse, launching the product on Amazon, and maintaining the product to ensure its success.
It’s a much more involved process than the other methods of selling on Amazon, and there’s a lot that goes into it.
Private label products have the biggest margins out of the three selling methods. You control the production of the product and can pick out which manufacturer you want to work with, so you’re able to set
While some people may argue that choosing the perfect private label product is a matter of data, data, data, I disagree. Although private label does require accurate data and trend interpretation, the biggest factor in being successful is creativity.
If you see a product doing well on Amazon, you might be tempted to just find a manufacturer that can replicate the product, slap your brand name on it, sell it at a slightly cheaper price. If you hope to do well, you’re making a mistake. To have any success with private label, you need to differentiate your product from the competition - the more difference, the better.
With so many Amazon sellers using the same software to find private label ideas, over-saturation is a real threat. By the time you pick a product out and begin manufacturing, it will likely be months before you will have it in stock and ready to sell. A lot can happen in that time frame, including several new competitors jumping on the scene.
If the only thing helping you stand out from the sea of white-label products is your price (I’m looking at you, garlic presses, scratch-off maps, ashwagandha supplements, and posture correctors), you will not be successful.
Price is important, but much more important is value.
This mandates that you perform in-depth market research into your competitors. Identify what they’re doing right, what they’re doing wrong, and what you will do better than they can.
Next, you’ll need to figure out the features that are most important to your potential customers. Read every single customer review on your competitor’s products, paying particular attention to the negative ones - this is what you’re going to try to improve when you design yours.
Ultimately, I think the private label has the most places to go wrong, but the biggest reward for doing things right. Yes, the marketplace provides more than enough potential to grab a piece of the pie, but you’re going to have to be creative from beginning to end. Think outside the box with how you pick out your product, design it, launch it, and maintain it.
Ease to start: 2/5
Long-term potential: 5/5
Difficulty to maintain: 2/5
Closing Thoughts on Amazon FBA worth in 2020
If you’re brand new to Amazon FBA, my recommendation is to start with arbitrage. It’s the easiest, fastest, and lowest-risk way to learn the ins and outs of the marketplace. I know plenty of sellers who are making a full-time income on arbitrage alone.
However, many people use arbitrage as a home base for Amazon FBA and pivot into a different selling method once they understand how the platform works. The most natural next step after arbitrage is wholesale.
The two methods share many similarities, but wholesale will require an official business, building and managing supplier relations, and understanding - as well as solving - the problems a brand faces. The payoff is a scalable business with long-term profitability.
Sellers looking to build their own brand with private label will need to put in the creative legwork to differentiate themselves from the growing competition. This very hands-on approach has a lot of places to go wrong but also has the biggest opportunity to reap the rewards.
After helping hundreds of Amazon sellers figure out which method is best for them, I strongly recommend learning all you can about how to build a private label product before jumping into it. The results of a half-baked plan can be very costly; therefore, seeking out a mentor who’s been successful with PL is invaluable.
Amazon FBA is still a great opportunity in 2020. The landscape is changing and the competition is growing fiercer, but the platform rewards creative and original sellers who are willing to put hard work in.