The Amazon FBA Business

Model Explained

The Amazon FBA business has been the darling of 2015 and 2016, and will
possibly continue to be so as more people find out about this business. You
may have heard of it, and you may be wondering exactly what an Amazon
FBA business is.

An Amazon FBA business stands for Amazon fulfilled-by-Amazon. This is

how it breaks down:

• You set up an agreement with a factory/supplier to provide you a

product.
• You ship that product from the factory (usually from China) to North
America.
• Instead of being housed by you or another warehouse, the product
sits in a warehouse owned by Amazon.
• When people buy your product off Amazon, Amazon “fulfills” the
order by handling all of the logistics, including shipping and customer
service.

“Fulfills” means that Amazon is basically acting as the fulfillment service. A

normal fulfillment service stores and ships items on behalf of a product
owner whenever a sale comes through.

In addition to fulfillment, Amazon FBA also includes some pretty awesome

benefits which we will dive into here in a second.

How Does it Earn Money?

When someone comes to your Amazon FBA listing, looks at the product,
and buys the product from Amazon, you make money. It is a pretty straight
forward process from there. Amazon ships the product to the purchaser,
and you just make sure you have enough stock to meet the demand of the
market.
If you buy anything off of Amazon, this is a page you are probably super
familiar with. With an Amazon FBA business, you get the same internet real
estate as other Amazon items to use as your “website” to sell your items
through.

The Pros of the Amazon FBA Business

Model
There are a lot of benefits to the Amazon FBA business model. Once you
have an Amazon FBA business that is driving profits, the business model
itself creates more passive income and lowers work intensity. Many people
only spend a few hours a week on their businesses, just making sure there
is plenty of stock to match the current demand.

People who love the Amazon affiliate business model often really love
Amazon FBA businesses, because you now have hordes of Amazon
affiliates to sell your product.

This is a fantastic benefit, as you could potentially have affiliates driving

significant amounts of traffic to your Amazon listing, and providing you with
customers.

Speaking of traffic, an Amazon FBA business benefits from all the traffic
that Amazon already gets. Amazon is an absolute juggernaut of organic
traffic, and this can drive significant sales your way. If your product starts
doing really well, with a spike of sales, it can trigger the Amazon algorithm
and they will promote your product to potential buyers throughout their
website via “Related Products,” or by being the “Best of” in a certain
category.

There is also a “People Who Bought this Product Also Bought This”
category where your product could be featured depending on your sales.
Because of the variety of places where your products can be promoted,
Amazon could send significant organic traffic to your product page without
any work on your part. Many Amazon FBA owners rely 100% on this
organic traffic to generate their revenue.

Compared to having your own website and online store, Amazon wins
hands down in terms of the amount of traffic they will send to you for free.

Although that said, it is never a safe idea to bet all of your traffic on one
system.

Many Amazon FBA owners also use Google organic traffic to send traffic to
their products. This process is often called Parasite Search Engine
Optimization (SEO). The premise behind Parasite SEO is that since
Amazon already gets tens of thousands of backlinks from other websites
on a daily basis, you can aggressively build backlinks towards your listing
without being penalized.

You can have a keyword-rich Amazon product listing targeting keywords

that get good search traffic (you can use the Google Keyword Planner as a
free tool to find these keywords), and then use several different link
packages to start driving good backlinks towards your listing (such as the
Hoth).

This is a benefit Amazon FBA has over Adsense & Amazon affiliates (or
almost any other business model), since in their cases your website will
usually be too young and lack the authority to have so many links pointed
towards it without Google seeing some red flags.

In addition to these special little traffic streams you can take advantage of,
an Amazon FBA business tends to have much higher profit margins than if
you were doing Google Adsense or Amazon affiliate websites. Just like an
affiliate though, all of the logistics are handled for you every time you make
a sale. Amazon ships the product and handles all the customer service
through their FBA program.

If you are familiar with and love the Amazon Prime membership that
Amazon offers, you might love having an Amazon FBA business as well,
since you will be automatically enrolled into the product, allowing all of your
customers to benefit from free shipping. This is fantastic, since online
shoppers are twice as likely to respond to free shipping than they are to
product discounts.

As your Amazon FBA business grows, you might want to eventually start
distributing your products outside of Amazon as well. One of the nice things
about the Amazon FBA program is that it allows for multi-channel
distribution, meaning that if you start up your own online store, and
someone comes there and buys your product, Amazon will still ship it for
you.

The Cons of the Amazon FBA Model

While there are plenty of benefits that come with an Amazon FBA model, it
is not all roses and sunshine. There are several flaws in the business
model that you should be aware of before you build this kind of business, or
should take into account if you are in the market to sell an Amazon FBA
business that you have already built.

First of all, don’t expect to throw up a product and think Amazon is just
going to send you organic traffic. Unless your product is something that
people are showing an active interest in (i.e. you have spikes in sales in a
very short period of time), Amazon is not going to put in a lot of promotional
work.

They only promote products that are objective winners in their marketplace,
so if you want to reap the rewards of that organic traffic, you will have to
hustle a little bit when your product first goes live.

Another downside with Amazon FBA is a dilemma in dealing with suppliers.

This negative is something that is actually shared by dropshippers and e-
commerce business models as well. In many ways, your supplier is the life
of the business. If demand for your product becomes very high, your
supplier might not be able to produce the item for you fast enough.

Or they could change their policies on you, in a way that could significantly
cut into your profit margins. At the end of the day, suppliers are businesses
as well, which means they can go out of business, leaving you with a bunch
orders to fulfill and no supplier to build your product. Because of this, we
always suggest you look into multiple suppliers, so you have back-up
channels in case an emergency like this happens.

In addition to all of this, it can be a hassle finding the right supplier. You
need to have the supplier send you a prototype of the product you will be
listing on Amazon to make sure it is a quality item. After you set yourself up
with the right factory, you then need to research whether the product
should be shipped via air or via ocean cargo ships.

Usually transferring product via cargo ships to an Amazon FBA warehouse

is going to be the cheaper route. Either way, figuring out the logistics is
important as it can seriously decrease your profit margin if you choose a
poor shipping solution.

As far as the revenue earned from an Amazon FBA business goes, you
can break it down using this rule of thumb:

• ⅓ Product costs
• ⅓ Amazon costs
• ⅓ Profit

So while your profit margin is actually higher with an Amazon FBA business
than if you were selling similar products as an Amazon affiliate, your total
earnings is actually much less than if you had your own online store (of
course, that’s assuming the sales of the store were equal to the sales
coming from the Amazon product listing).

Overall, the entire business model relies on Amazon. You are essentially
playing in their ballpark. If they change a policy, such as not making your
products available for Amazon Prime anymore, it could seriously impact
your business. Since you have no control over what Amazon does, if they
do something that hurts your business it is completely out of your hands.

What Buyers Need to Know

Before buying an Amazon FBA business, you need to know a few things.

The product is extremely important. If the product requires electronics, you

are going to face some uphill battles of potential technical difficulties. You
might get an entire batch of faulty electronics shipped out to your
customers without even knowing it, until the one-star reviews start flooding
in and kill all the momentum of your listing page!
Another product concern is with digestibles. As much as you want to sell an
awesome protein shake and get in on the meal replacement wellness
industry, you have to be careful. It is better if these products come from
American factories held to American standards. And even if this is the
case, if someone gets sick from your product you may be facing more than
just one-star reviews from consumers that could become sue-happy
towards your company.

The best Amazon FBA products are simple, typically costing $15-40. These
are usually smaller products. If you decide you really want to get into an
Amazon FBA business selling bigger products — such as foosball tables
for example — realize you will be paying much higher storage fees from
Amazon to keep your product in their warehouse.

As we mentioned earlier, suppliers are incredibly important to the success

of this business. You need to make sure that the seller of an Amazon FBA
business will introduce you to the supplier and the shipping company that
they are currently using. In a best-case scenario, they will also have a few
other suppliers you can reach out to in case of emergency, or if you need to
switch suppliers for any other reason.

It is always a great deal if you can get the supplier to make that product
exclusively only for you, since it will cut down on copycat marketers
significantly.

Before you pull the trigger to buy the business, make sure you also check
that the seller has enough supplies to match current demand till the next
shipment comes in. The last thing you want is to buy a business with a
supply chain issue!

Keep all of these points in mind and it will help you to successfully buy a
potentially very lucrative Amazon FBA business.

What Sellers Need to Know

When selling your Amazon FBA business, there are a few points to keep in
mind to help maximize the profit you earn from the sale, and make the
whole process go as smoothly as possible.

First things first: have a solid proof of earnings and a successful track
record using the same supplier. While three months is a minimum, the
longer you have a track record of success, the more you can ask for your
website.
Track all of your expenses meticulously. Amazon FBAs are notoriously
capital intensive businesses, as people are often shelling out tens of
thousands of dollars a month to keep Amazon warehouses topped up with
enough product to meet market demand.

A good practice to start is to pull all of the reports from your Amazon Seller
Central account every single month since Amazon won’t let you go back
farther than three months for most of these reports. Some important reports
that potential buyers will be looking at are the reports filtered by SKU,
inventory, ACOS and your PPC stats. While some buyers might not be
interested in this data, having more data to share is always the better move
to make the business more attractive.

As is the case for buyers, as a seller you too should make sure your supply
chain is working perfectly. Work out any hiccups before listing your
business for sale. There should be plenty of product in the warehouse and
product on the way for the buyer, so that they have ample time to get up to
speed on running the business.

You will want to introduce the buyer to the supplier and shipping company
that you use. Offer training and support in handing off the business. If you
can, also have a small rolodex of backup suppliers that the buyer can use
in case the current supplier changes their policies, or in the worst case
scenario goes out of business and can no longer create the product.

Do all of these things and you will stand a strong chance of selling your
business much quicker and likely for a much higher listing price.

What Buyer Persona Best Fits the

Amazon FBA Business Model?
Portfolio Paul

Amazon FBA businesses that are set up and already producing a profit are
fairly hands-off businesses. This appeals to someone like Portfolio Paul,
who wants to have several income-producing assets. Also, as it is not an
affiliate business model, income streams can be diversified to protect them
if an affiliate account or offer gets closed down.

DIY Dave

This is a great business model for someone wanting to take a deep dive
into the details. There are lots of tricks and strategies to decrease supplier
and shipping costs that can increase your margins. Not to mention there
are many diverse growth sectors for an Amazon FBA business, such as
adding new keywords to the listing page, or utilizing paid advertising to
send traffic to the listing.

Flipper Fred

Amazon FBA businesses are great for someone looking to buy a business,
improve its revenues, then sell it for a higher list price than what they
bought it for. Since people are currently rushing to get their hands on
Amazon FBA businesses, it is a good time for a Flipper Fred to come in
and buy one of these businesses to turn around and sell.

Strategic Sally

Someone looking to expand their business into related businesses might

find a good fit with an Amazon FBA business. For example, if someone is
an Amazon affiliate website owner that is producing good revenue, their
product might be a worthwhile Amazon FBA product. Instead of using their
website to sell someone else’s product on Amazon, they can use the
proven buyer traffic to send their product instead, while still using their
Amazon affiliate link.

Growth Strategies
As mentioned throughout this article, there are tons of growth opportunity
for Amazon FBA businesses. Since most of them rely on Amazon organic
traffic, the paths listed below are the best route for taking a profitable
Amazon FBA business and growing it even more.

Paid Traffic

This is the easiest option for sending new targeted customers to your
Amazon listing. Many e-commerce stores make their entire revenue using
facebook ads. The nice thing about paid traffic is that there is no waiting
around. It is like turning on a water faucet. That said, you want to test this
and monitor paid campaigns closely, so you do not take a wash in losing a
bunch of money.

Build a Brand

This is one of my favorite strategies. Instead of having a ton of unrelated

Amazon products, why not create a true brand for your products? By
creating a brand, it will become easier to market in other channels. Instead
of having “Random Red BBQ Brush” you might have “Extreme Chef Red
BBQ Brush,” and once you have a brand you could introduce other
Extreme Chef products to an audience that will recognize the brand and
buy your products based off that alone.

Build an Email List

This is not always a viable strategy. However, if you are focused on

building a brand with a suite of relevant products, this can be very effective.
You are turning your Amazon presence from a niche product listing into an
authority by doing this.

You will need to share good content with your email subscribers outside of
just promoting your product launches, but this is a great channel to let
people know when you have special deals going on or to email out during
high buyer season like Black Friday and Christmas.

Social Media

This marketing method will be easier if you decide to go the brand route,
obviously. Organic traffic from places like Instagram, Twitter, and Pinterest
can be insanely lucrative. The best part about this traffic is that it is usually
free, and in the case of Instagram and Pinterest it can be somewhat
passive as people keep rediscovering your pictures.

Open a New Distribution Channel

Instead of relying 100% on the Amazon platform to sell your goods, you
should eventually expand into starting your own e-commerce store selling
the same products. Since Amazon FBA will still fulfil the shipping of your
product to your customers even if they bought it on a different website than
Amazon, this should be something you seriously take advantage of, as it
protects you too.

If Amazon ever closed down their FBA program or changed the rules, it will
be a simpler matter to transfer your product over to a new fulfillment
service, as you already have a second web presence to sell your products
through.