The Fulfillment By Amazon (FBA) program allows third party sellers on Amazon to ship their inventory to Amazon, and Amazon performs the pick, pack, and ship when you receive an order on Amazon. They also handle returns, and all customer service functions. It’s about as hands-off as you can get, and with Amazon capturing a large part of online sales it’s a great opportunity for anyone who wants to grow their online sales into their main income.
Amazon recently announced changes to their pricing for FBA services, and I wanted to talk about them here because they definitely affect your business.
Amazon would like to receive FBA merchandise in condition to be ready to ship to a customer. However, it doesn’t always arrive that way and Amazon performs the necessary preparations when they receive the merchandise. For example, since the merchandise will be stored in a warehouse, which can be rather dirty, they require anything that’s particularly harmed by some dirt to be in polybags. Clothes would be a good example of this. Until now, Amazon has done this preparation free of charge, but that has now changed.
If your merchandise reaches the Amazon warehouse, and it isn’t prepared the way Amazon specifies, they’ll still do the preparation for you, but they’ll now charge you for it. As examples, at the time of this writing, putting a label on a product is $0.20, and putting a product in a polybag is $0.50.
These aren’t unreasonable prices for these services, but the fees will definitely add up. E.g., if you ship 10,000 items to Amazon per year that need to be polybagged and labeled, it will cost you $7,000 per year. Ouch! These fees may also make it no longer worth it to carry some products. If you’re making $1 per item, and your fees go up $0.70 per item, it’s probably not worth it to carry anymore (or at least, you’ll need to start doing the preparations yourself).
This is a new and rather large change, and it will take time for Amazon to get all of this right. E.g., when I was creating a shipment recently they indicated the products needed to be polybagged. However, the product comes from the manufacturer in a sealed box, clearly no polybag was actually needed. So be prepared to file help requests letting them know when they flag a product as needing preparation when in reality it doesn’t. No one shipment will cost you that much, but over time it will add up.
One more note before leaving this topic, you can also use the FBA program to fulfill orders on other channels, like eBay or Sears Marketplace. You’ll need to enter the orders on your Amazon account yourself, or pay a service to do this for you, but it’s still a good deal because of the shipping rates they get, compared to what a small retailer can get from UPS / FedEx / USPS.
If you’re looking for things to sell online, and you should always be doing this, a good source can be liquidation companies. These are companies that buy excess inventory from retailers and manufacturers, and re-sell it.
Of course, the success of this strategy depends on knowing that you can actually sell what it is you’re buying, so you need to know how the product does on your sales channels. Success also depends on knowing the price you’re paying will allow you to get a good profit margin, so don’t buy anything unless you know what you can sell it for, and what your fulfillment costs will be.
There are liquidation companies that do this online. E.g., www.liquidation.com is a marketplace where sellers can list their excess inventory, and buyers can bid on it. This can make your job a lot easier, because you can simultaneously check out what’s available online, and what you can get for it. As a side note, I’m not endorsing liquidation.com here, I’m just pointing them out as an example. You need to do your homework and find a liquidation company that works well for you.
Of course, the downside to this strategy, which is the same as the downside to any strategy involving one-off products, is that it’s time consuming. In addition to the time spent searching for things to sell, which will only be amortized over a fairly small number of items, you also have to spend time creating a listing. But, if you’re just starting out, or don’t have much capital to buy inventory, this could be a good way for you to get your online sales started.
I’ve updated my list of potentially good things for you to sell, this is the May 2013 list.
I wanted to talk today about selling clothes online. There are a lot of good things about choosing clothes:
- They’re always in demand, even in a weak economy
- There’s a huge variety, so people are willing to buy clothes even if none of their existing clothes have worn out
- There’s a large number of manufacturers, so even if one manufacturer won’t sell to you (as an online retailer), there will be others that will
- They’re relatively high-priced, so you can earn a good income per hour of your time invested
Unfortunately, there are also a number of drawbacks:
- The return rate on clothing tends to be much higher than for other products
- It can be hard to judge demand for a specific style / size / color of clothing (e.g., you know there’s good demand for a particular jacket, so you buy it in ‘large red’, but the demand is heavily concentrated in ‘medium blue’)
To touch on the return rate problem a little more, unlike a store where people can try on different sizes to see which fits best, there’s no way to do this when shopping online. So buyers will try it and just return it if it doesn’t fit right. One of the most frustrating things as a clothing retailer is to see someone order a particular item in two or three sizes, you know with near certainty that all but one of those will be returned.
Amazon is a good marketplace to sell clothing. One specific downside to selling clothing on Amazon, though, is that Amazon sells a lot in this category themselves. If you see Amazon selling a particular item, it’s going to be hard to compete. They’re getting lower wholesale prices than you will, and they price very aggressively. That’s great if you’re a buyer, not so great if you’re a seller. They sell most of the well-known brands, and are particularly aggressive about selling women’s clothing.
If you’re just starting out and don’t have a lot of capital for inventory, one strategy you could try is to buy clothing in outlet stores and re-sell it online. You’ll need to do your homework to make this pay off, of course. You need to check what’s available in the store, then go see how it’s selling online (eBay, Amazon, Sears Marketplace, etc.), then go back to the store and buy it if it’s a good match. If you focus on a small number of brands and go to the outlet stores every day, after a while you’ll know what sells online without having to double check, so it will get more efficient. But when you’re just starting it will take a lot of your time.
You could even create a listing for clothes you haven’t bought yet, knowing they’re available in the outlet stores. Then when someone buys from you online, you go to the outlet store and buy it. You’ll get some extra negative reviews from people if you’re not able to fill the order because the store sold out before you get there, though. You’d want to at least check the store every day and remove listings for items no longer available.
It looks like the U.S. Senate is going to pass an Internet Sales Tax bill this week. It isn’t clear if there’s enough support in the House to pass it. I can only hope not, and I strongly urge you to call your Representative and ask them to vote against it.
The Senate bill isn’t as bad as some of the proposals that had been floated. It requires online retailers with more than $1 million in sales outside of their state to pay sales tax to every tax jurisdiction they make a sale in. $1 million in sales isn’t very much, and will affect a lot of small retailers. Some earlier proposals would have affected sellers with revenue over $500 thousand, which would have decimated the ranks of small sellers.
There are approximately 10,000 tax jurisdictions in the United States. The cost of the tax itself isn’t a problem, but the cost to a small business of complying with 10,000 independent tax jurisdiction laws is. Large retailers like Amazon will hire a few accountants and programmers and never notice the difference. Small retailers will be crushed trying to comply with all of those laws.
I know the intent of this law is to enable state and local tax jurisdictions to collect sales taxes that they rely on, but the unintended consequence will be to give a huge advantage to the large, established online retailers, and make it that much harder for small retailers to grow and challenge them. The same goal could be achieved by requiring online retailers to pay a flat percentage of online sales to the Federal Government, and have the proceeds distributed among states in proportion to their population. That would give state and local governments the revenue they’re missing out on with a very low cost of compliance to small businesses.
A lot of families rely on the supplemental income they make from selling online to meet their basic expenses, whatever Internet sales tax law that’s passed should protect them. The bill in the Senate will financially crush a lot of innocent people, though I realize that isn’t their intent.
Please contact your Congressmen about defeating this bill, and ask your friends and family to contact them as well. Congress can do a better job, it isn’t hard, and it will protect a lot of small sellers and families.
I’ve updated my list of potentially good products for you to sell on Amazon for April, please download it if you haven’t had a chance to yet.
Obviously the reason to sell online is to earn an income, so it’s important to understand why you’re making as much as you currently are, and what you need to do to improve it. This post shows what determines your gross profit, so you’ll have an idea of what changes you can make to your business to earn more, and how to estimate the effect of those changes.
Let me take a moment to provide some caveats. I’m going to use numbers in this post for illustration purposes. I’m not saying these numbers are representative of mine, of a typical seller, or of anyone else. I’m also not saying these numbers should be your goals, that you’ll do as well as these numbers, or that you can’t do any better. The numbers are completely fictitious. They help to understand the concepts presented here, but shouldn’t be used for any other purpose.
One more thing I want to point out is that gross profit is (sales – cost of goods sold), but in this post I’m going to include cost of fulfillment in gross profit as well (sales – cost of goods sold – fulfillment expenses, including marketplace fees). Your accountant will point out this is wrong, and your accountant is correct. However, for online sellers cost of fulfillment is often high, so I want to make sure you account for it in your planning.
With that out of the way, let’s get started. Let’s suppose that you have inventory that cost you $1,000 to buy (inventory value will be represented as ‘IV’). Also, suppose that for every $1 of inventory you sell, you get back $1.20 after accounting for fulfillment expenses (postage, shipping materials, marketplace fees, etc.). That means that for every $1 of inventory you sell, you get back an extra $0.20, or 20% of your investment (this percentage will be represented as ‘M’). Finally, suppose that in a typical year you turn your inventory 4 times. I.e., you sell the value of the inventory you hold 4 times, or $4,000 worth of inventory per year using the fictitious assumptions here (inventory turn will be represented as ‘T’). Therefore, the gross profit (‘GP’) per year would be:
GP = $1,000 * 4 * 0.20 = $800
Therefore, your annual gross profit is $800, or 80% of the value you invest in inventory. As an aside, this number, annual gross profit as a percentage of the value you invest in inventory, is something you should track as a guide post to how you’re doing. In general,
GP = IV * T * M
A good way to use this formula is actually to work backwards, and see what you need to do to achieve a target gross profit. For example, suppose you want $25,000 per year of gross profit from your online selling business. If you only change one of the assumptions I made above (about inventory value, inventory turn, or margin), what do you have to do to make $25,000 of gross profit annually? Suppose we want to just increase inventory value:
25,000 = IV * 4 * 0.20, or IV = $31,250
So if you don’t do anything to improve inventory turn or margins, with all of the fictitious assumptions made, you would need to have $31,250 available to invest in inventory. Along a similar line, if we only have $1,000 available for inventory, and our margin remains 20%, what does our inventory turn need to be to make $25,000 in gross profit per year?
25,000 = 1,000 * T * 0.20, or T = 125
Wow, with only $1,000 in inventory, we’d have to turn our inventory 125 times per year (about once every 3 days) to make $25,000 in gross profit per year. Finally, if we have $1,000 in inventory, and we can turn our inventory 4 times per year, what margin do we need on each sale to make $25,000 of gross profit per year?
25,000 = 1,000 * 4 * M, or M = 625%
To put this in perspective, for every $1 of inventory we sold, we’d need to get back $7.25 after fulfillment expenses.
Of course, you can change all 3 to achieve your goals (inventory value, inventory turn, and margin), and you need to choose values that, based on your personal experience, you can achieve. While the value of inventory you work with is very much under your control, the inventory turn and margin are heavily dependent on consumer choices and competition from other sellers, which change constantly.
This illustrates the importance of constantly, accurately measuring your margin and inventory turn for every product you sell. If they slip and you aren’t aware of it, you’ll feel it at the end of the year when you’re calculating your profit, and suddenly discover it’s much lower than you expected. Don’t use guesses, estimates, or rules of thumb for your margin or inventory turn, use precise measurements.
If your business has hit a plateau and you’re wondering what to do to improve it, setting a specific goal for gross profit and thinking deeply about the equation GP = IV * T * M will provide clarity like you wouldn’t believe. You won’t find answers in a day or two, but if you spend time every day in undistracted thought on specific changes you can make to achieve your gross profit goal, you’ll develop long-term, realistic strategies that get you there.
There was a recent addition to FBA Fees that I want to mention. For those of you not familiar with Amazon’s ‘Fulfillment By Amazon’ service, it’s a product fulfillment service where you ship your inventory to Amazon, and when an order comes in on Amazon for one of your FBA-fulfilled items Amazon does the pick, pack, and ship for you. They also handle any customer problems with the order, such as returns. It’s a great deal, and if you sell any reasonable amount of volume on Amazon I recommend you consider using their FBA service.
To date Amazon did not charge a fee to process customer returns. Obviously it does cost them money to process a return, so doing this for free was a real gift to FBA sellers. Unfortunately, they’ve decided to start charging a fee to process returns, with the fee being equivalent to the fee they charge to fulfill the order. If you look at a transaction report from March or onwards (assuming you had any FBA returns), you’ll see these fees in your report now.
While it’s unfortunate that processing returns is no longer free, I still feel FBA is a good deal. It frees you from having to touch every individual order you receive. It also frees you from having to process returns and from most order-related customer interactions.
If you do use FBA, you need to account for the return fees when setting your price. Of course, you need to know what percentage of each sku you stock gets returned on average to effectively do this.
Having no returns is the best way to minimize the cost to you of return fees. Avoiding low-quality manufacturers is your best bet here, over the years I’ve dropped a number of manufacturers whose products sold well, but the merchandise was often defective. It’s bad for both your customers and you if the merchandise is often defective.
Some types of products, though, just naturally have a higher return rate even if the merchandise isn’t defective. Anything that must ‘fit’ correctly, and there’s no way to guarantee a fit without the customer physically having the product in hand, is an example of this. For these products it will be especially important to factor the cost of returns into your price, or you will end up making little or no money on these items.
I should mention that the FBA service can also be used to fill non-Amazon orders. When you get an order on another channel (Sears Marketplace, eBay, etc.), you enter the order into your Amazon seller account and they take care of the pick, pack and ship for you. This isn’t quite as automated as your orders from Amazon, since the order information must be entered into the Amazon system. If you don’t have high volumes from outside of Amazon this isn’t a problem, and if you do have high volumes outside of Amazon there are services available to automatically transfer this order information to Amazon for you, for a fee.
My monthly list of potentially good products to sell online has been updated for March 2013, if you haven’t checked it out yet this would be a good time to do so.
As you probably know from my previous posts, I recommend that anyone who is just starting to sell online start on Amazon. Of the marketplaces I’ve sold on they’re the easiest. They let you do as much or as little as you want. If you want to just have your listings show up on Amazon, and do all of the order fulfillment and customer support yourself, you can. If you want to just buy products, send them to an Amazon warehouse, and have no more to do with the sales process, you can do that, too.
Your desired level of involvement will change over time as your sales grow and your objectives change. At first, with small volumes, you may as well handle the order fulfillment yourself, it doesn’t take much time or storage space. Eventually you’ll reach a point where it’s taking a lot of your time and holding you back from growing sales, and you’ll want a fulfillment service to take that over from you.
The two things that generally constrain your sales are time and money. Time to find new products to sell, which should always be a big part of the time you spend on your online business, and money to buy additional inventory. As a retailer you can only sell what you buy, so having capital to buy more inventory is essential to growing your sales.
In terms of time, always keep track of how much time you’re spending on each aspect of your business, and actively spend time every week thinking of ways to reduce it. Reducing how much time you spend on any activity will free up more time to look for additional products to sell (to help, here is a free list I update monthly with items to sell on Amazon). This isn’t rocket science, if you actively spend time thinking of ways to become more efficient every week you’ll find them. Maybe not every week, but you will find them.
Money is trickier. I recommend that you not borrow money. Not every product you sell is going to sell well, you don’t want to borrow money to buy inventory that you can’t sell. If you’re just starting out and don’t have much money for inventory, you can look for one-off products to sell in outlet stores and the like. It’s a lot more time intensive to sell one-off products, and I don’t know of a way to really ramp up to large volumes doing that, but if you’re just getting started and need a way to generate profit to but more inventory it’s a path that can work.