How Does Amazon FBA Work?

With FBA, so long as you make the sales and ensure Amazon’s warehouses stay stocked with your products, the rest is done for you.

Of course, Amazon charges a fee for providing these services.

• Check out the official Fulfillment by Amazon page

If you want to sell on Amazon but don’t want to use their FBA services, you can instead do what’s called Fulfillment by Merchant (FBM). 

If you go the FBM route, you’ll have to handle things like storage, shipment and customer service for the products you sell via Amazon.

For you as the seller, FBM is cheaper than FBA, but also requires more work.

FBA is far more popular than FBM, though some sellers choose to use a combination of both.

(There is also a third fulfillment option called Seller-Fulfilled Prime or SFP, but that’s more advanced and few sellers seem to use it.)

Here’s an official explainer video for Amazon FBA…

Expenses for FBA sellers can include:

• Cost of creating or sourcing the product
• Shipping fees to get your product to Amazon’s warehouses
• FBA fees charged by Amazon
• Advertising (usually Amazon PPC)
• Software to help run the business
• Hiring help
• Training or education programs

According to one survey, 36% of Amazon sellers report a 20% or greater profit margin.

Keep that in mind when you see income reports like this one…

The revenue shown there is $10,030 in 30 days, but there’s a good chance the generated profit was less than $2,000.

Also be aware that it often takes several months and several thousand dollars of investment before new Amazon sellers start to turn a profit, if they ever turn a profit at all.

That said, it’s certainly possible to earn big money with an Amazon FBA business.

Dan Meadors and his business partner are proof of that…

• Dan Meadors

• Co-founder of The Wholesale Formula

• $400,000+ monthly amazon wholesale revenue

They buy products in bulk, get those products shipped to Amazon’s FBA warehouses, then resell them on Amazon.com.

(This approach is known as Wholesale, and is one of several business models you can use to sell on Amazon. More on this below.)

Also, a recent survey showed that 6% of Amazon sellers have made more than $1 million in lifetime profits 🤑

This is true for pretty much every business.

Expect to spend at least 20 hours per week for several months getting your first Amazon FBA business off the ground. 

And keep in mind that about half of Amazon sellers need to launch two or three products before turning a profit…

While 54% of sellers say their first product launch was successful — that is, it sold enough inventory to turn a profit after accounting for the cost of goods, any fees, shipping, etc. — others didn’t succeed until their second or third launch attempt. (source)

The good news is that once you have gained some experience successfully selling a product on Amazon, FBA makes it relatively easy to scale up your operations and start earning more money with less effort.

However, you’ll always have lots of competition on the Amazon marketplace, so don’t be surprised if your “hit” product spawns several copycats which eat into your sales.

(The percentages above refer to how many sellers use each business model on Amazon, as per a survey of nearly 5,000 sellers.)

Let’s run through each of those quickly…

Private Label

This is when you sell your own branded products on Amazon. You’d usually get these products created to spec by a manufacturer.

• Example: you design a specialized backpack, find a factory to manufacture it, then sell on Amazon under your own brand name.

The costs here are usually quite high but Private Label also tends to be the most lucrative Amazon business model, so long as you can hit on a winning product.

Wholesale

Here you would buy existing products in bulk, ideally at a big discount, then resell in smaller quantities via Amazon for a nice profit.

• Example: you find a bulk deal on Cuisinart toasters, buy 300 for $30 apiece, then resell for $70 apiece via Amazon.

This can be quick to get up and running since you aren’t creating or branding the products, but competition can be an issue as it’s not hard for other people to sell the same thing on Amazon.

Retail Arbitrage

This is when you buy items at local markets or brick-and-mortar stores, then resell via Amazon for a profit. 

• Example: you see a bunch of stylish notebooks reduced to clear at your local Walmart, buy a few dozen of them at a 50% discount, then resell for full price on Amazon.

Retail Arbitrage requires a lot of leg work and it’s hard to scale, but it’s considered the fastest and cheapest way to start selling on Amazon. 

Online Arbitrage

This is the same as Retail Arbitrage except you’re looking for deals online instead of in your local area.

• Example: you see a popular spice rack selling for 40% off at homedepot.com, so you buy a few dozen, then resell for a profit on Amazon.

Other Amazon Business Models

Two other Amazon business models you might hear about:

• Dropshipping
  Dropshipping is when you have the supplier or manufacturer of your product ship directly to the customer on your behalf. With this model you wouldn’t be using FBA, even if you make the sale via Amazon.
• Handmade
  Handmade usually refers to small sellers who make and sell handcrafted items – eg. jewelry and other accessories – via the Amazon marketplace. They would usually ship items directly to the buyer after a sale is made (FBM).

The amount of money you need to launch your Amazon FBA business depends on many factors, but I consider these to be the most important two:

• The business model you choose
• What products you sell

In the previous section, I laid out the 4 business models you can use for Amazon FBA.

Here’s how they generally shake out in terms of startup costs:

• Private Label – high
• Wholesale – medium to high 
• Online Arbitrage – low to medium
• Retail Arbitrage – low

Private Label is usually the most expensive to start, since you need to get your own branded product manufactured and then shipped to Amazon’s warehouses. The more complex or high-quality your product, the more expensive it will be to manufacture. Larger products are also more expensive to ship.

I’ve seen many Private Label sellers recommending that you have at least a $4,000 budget to create and market your first product. Some even recommend you have at least $10,000 to spend.

There are stories of sellers launching successful Private Label products for less than $2000, but that’s tough to pull off on your first try.

Wholesale can be cheaper since you don’t have to create the product from scratch, and you’re usually selling products and brands that people are already looking to buy. But to make a good profit with Wholesale you usually have to buy in significant quantities, so you usually need a budget in the $1000’s.

Online Arbitrage also often relies on bulk buying at discounted rates, but you can start this on a smaller scale and ramp it up over time. A few hundred dollars can be enough to launch this kind of business, though $1000 or more will give you a better chance of success.

Retail Arbitrage is regarded as the cheapest way to do Amazon FBA, since you can start with items you buy for next-to-nothing at a local flea market, or even with unwanted items you already have lying around at home. $200 to $1000 is a reasonable beginner budget.

Lastly here, remember that the type of product you choose to sell on Amazon makes a big difference in how much money you make.

Some products are cheaper to ship, some have tough competition, others require a big marketing budget to gain traction.

After that, check out YouTube for tons of videos about Amazon FBA.

In particular, check out Jungle Scout’s learning resources and YouTube channel. Jungle Scout is a popular Amazon product research tool and they put out tons of solid free info about Amazon FBA.

Here’s their step-by-step tutorial for the Private Label business model:

There are also many paid courses out there about Amazon FBA, some much better than others.

Here are our top course picks based on 120+ hours of research and feedback from real students…

Personally I consider 2016 to 2018 to be the golden age of Amazon FBA. That’s when FBA was still relatively new and cheap and there wasn’t so much competition. It seemed like almost anyone could make money with FBA.

Nowadays much of the low hanging fruit has been picked and you have to operate at a higher level – and often with a big budget – to achieve significant success with FBA. There are many moving parts to this kind of business and therefore a lot to learn before you can master it.

So don’t think of Amazon FBA as a quick or easy way to get rich.

Also, it’s worth noting that many Amazon Sellers feel that things have gotten worse for them over the years. As you can see when you visit the Amazon seller forums today, many of the top posts speak to sellers leaving or expressing frustration 🤬

A 2021 report noted that Amazon Seller fees had almost doubled in only 7 years:

Using a variety of fees, Amazon now pockets a 34 percent cut of the revenue earned by independent sellers on its site, our analysis found. That’s up from 30 percent in 2018, and 19 percent in 2014.

Brad Stone, author of the book Amazon Unbound, reached out to several Amazon sellers “who had previously lobbied for Amazon or spoken out on its behalf.” He found that many of them had since changed their tune.

A telling quote from one such seller who has seen his business increasingly struggle on Amazon…

I’m all for competition, but I did not start my business and go sell on Amazon so that I could eventually become fertilizer for Amazon’s growth as I am buried and destroyed. It’s apparent this is happening to a lot of sellers, and I don’t believe it’s right. What Amazon does is analogous to being invited over for Thanksgiving dinner, then finding out as you sit down to dine that you’re the turkey.

You are far more likely to earn a living online in the next 3-6 months via freelancing or a remote job.

Whereas with Amazon FBA, it’s rare to be earning a significant profit within 6 months. Most people should expect to invest 1-2 years in building up their FBA business before it provides them with a full-time income.

If you are brand new to working online, here’s the most reliable path to Amazon FBA success:

• Learn skills related to Amazon FBA
  Like product research, Amazon PPC, project management, writing product descriptions, etc. Look for free training on YouTube or cheap courses on Udemy.
• Develop your skill(s) via freelancing or a remote job
  Start with a low rate if you have to. Ideally work with people who are running established FBA businesses. This will accelerate your learning and you’ll be earning while you learn.
• Increase your income from freelancing or remote work
  As your skills improve, you can charge more for your services. Aim to earn a full-time income while working only 20 hours a week.
• Start your own Amazon business
  You should now have the time, money and skills to make it happen. Keep working your 20 hours a week and build up your Amazon business on the side. Invest in good training. Go all-in once you start generating significant and consistent profits.

Many of those sellers will still sell on Amazon.com, but I’ve also seen plenty of success stories from sellers who focus on Amazon UK, Amazon Australia, etc.

For example, here’s a couple from London who started off with one product in the UK and sold it successfully in European Amazon stores…

(The couple in that video are students of a course called Marketplace Superheroes, reviewed here.)

The Best Amazon FBA Course?

Here are our picks, based on the 120+ hours my team and I have spent researching FBA, investigating courses, and getting feedback from real students…

• Other ways to make money online

What kind of online business is Amazon FBA?

Here’s how an Amazon FBA business would fit into our online business framework:

• Resale (Level 3)
  You would source existing products and resell them via Amazon, perhaps with enhanced packaging or marketing.
• Physical Product (Level 5)
  Here you would be creating the product yourself – or modifying an existing product – then selling via Amazon.

Click the links above to see real examples of each type of business, and the pros and cons of each.