One time I jumped off a waterfall into a river below. And that 3 seconds of fun ended with two shattered legs and 6 months in the hospital.
Okay. Not really. I would never do something like that without first knowing that it’s safe to jump. Would you?
And now for the clever metaphor for selling private label products on Amazon: I would never just pick a product and jump all-in without knowing what was under the surface.
There are numerous costs and fees involved with sourcing private label products and selling them on Amazon. And if you don’t consider all of them when you’re looking at products, they could break you (again, metaphorically…and actually financially, too). So let’s run through them. I’m going to cover each of these costs in the order in which they appear in the whole timeline of this process.
I guess this is common sense, but you have to actually have a product before you can sell it. Like physically. In your hands. (Or in the hands of the Amazon fulfillment center). And unless you build up some major clout later on, you’re going to have to pay for the product up front before you sell it. Most likely you’ll pay a deposit to get production started. Then you’ll pay another installment before the manufacturer ships the order. Finally, you’ll have to pay the balance after you receive and inspect the shipment.
All manufacturers are a little different with their terms, but that’s roughly how it will work for you at first. As you start placing bigger orders and pay your bills on time, you can negotiate better terms that will allow you to hold onto your money a little longer.
Shipping to Your Home Country
Unless your product is made in your home country, then you have to get it from their port to your door. Or to the fulfillment center’s door. But I’ve found that this typically isn’t a cost that’s built into the initial pricing you get from the manufacturers. Most of them quote you a price that includes FOB (“free on board”). This basically means they will get it to the port in their country, and you’ll have to take it from there. My first products are being made in China, so that means I have to figure out how to (pay to) get it from there to the USA.
Keep in mind, though, that this is just the unit pricing the manufacturers display on Alibaba. Most good ones will take care of shipping it all the way to you, but that will be a cost that is passed onto you. Since my first two products are extremely small and light, I’m just having the manufacturer air freight my first order directly to my house. I’m guessing it’s going to cost me between $50-80 (based on the samples I’ve had shipped to me so far). As my order quantities increase, then I will look at using a cargo ship to cut down on the cost.
But regardless, just know that you will have to pay to get your products to the country you are selling from.
Shipping to the FBA / Fulfillment Center
I’m having my first orders sent directly to me so I can inspect them. I imagine I’ll do this for the first few orders until I’m comfortable with the quality of the products. So after I inspect the shipment, I’ll have to turn around and ship it back out to an Amazon fulfillment center. I can probably do this in the US for $15-20 (based on the size and quantity of my products).
Of course, you could fulfill all the orders yourself and save that $15 if you wanted. If that’s your thing, then more power to you. But I’m letting Amazon deal with customer service from day one.
Amazon Referral Fee
Now fast-forward to when your product starts selling, and you have a whole new batch of fees. The referral fee is basically just money that Amazon charges you for using their website to sell your products. I’m not sure what all it’s for specifically, but I’m sure it covers affiliate fees, overhead, etc. If you know of a way to build an eCommerce platform that will attract billions of visitors then you could probably avoid this fee. But I’d rather just say “thank you” for the free traffic.
The referral fee is 15% of the sales price of your product. If that sounds steep, then just think of it as your “customer acquisition cost.” There aren’t many products you could sell on your own that would give you as cheap of a CAC. This is because you only pay when your item sells. If you were running a PPC campaign to sell directly from your own website, it would cost you a whole lot more to acquire customers.
Again, just say “thank you” and make sure you consider this fee in your product pricing.
Part of the beauty of the FBA program is that Amazon handles everything from the moment they receive your product. And the most beautiful thing they handle is customer service. Do you want to deal with returns or refunds? Me neither. For small products (which are the only type I look at), Amazon charges you $1 to handle the order. From processing the payment to sending receipts to handling returns, they deal with everything customer-facing.
Best dollar ever spent!
Pick and Pack
Once the order has been processed, Amazon “picks” the order and “packs” it. Clever name for this fee, right? Again, this varies based on the size of your product, but I’m going small. The FBA fee for pulling my product off their shelf and packing it for shipment is $1.06. I’m pretty sure it would take me 10 minutes a piece just to pack an order for shipment if I did it myself. This also includes the price of the packaging. So this is more money well-spent.
This almost as self-explanatory as pick and pack. All of the carriers charge by the pound for shipping (plus some considerations for size). So the heavier your product, the higher the weight handling fee. This is just another reason to go small and light on your private label product.
And this also may be my number one reason to use FBA for fulfilling your orders (or at least it’s tied with the whole “customer service” thing above). When I plug my product into Amazon’s FBA fee calculator, my weight handling charge is $0.50. Amazon is SO HUGE that their shipping fees from UPS, FedEx, etc. are minuscule! I’d say they get a pretty decent discount.
When I was analyzing whether or not I wanted to start by fulfilling orders myself, this was the deciding factor. And it was a no-brainer. It would cost me at least $3-4 to ship my tiny little product via UPS Ground. Maybe I could do it for $2-3 with a USPS flat-rate box. But fifty cents? Come on. And there’s no way I could match the 2-day shipping for Amazon Prime customers for those rates.
So I think that’s the thing – so many Amazon customers are Prime members. And they (or we) pay $99 a year in advance for “free” shipping. I don’t know exactly how this works. I freely admit it. But I know there is no way I could ship anything cheaper than Amazon can. And if the buyer isn’t a Prime member? Amazon just passes the shipping charges onto them.
This is the “rent” that Amazon charges for using shelf space in their fulfillment centers. And – you may want to sit down for this – the inventory surcharge for my tiny product is $0.01. Once cent. The bigger your product, the more space it will take up. And the more space you take up, the more rent you’ll have to pay. But for my product, this fee is as close to negligible as it gets.
Finally: The Math
So now that we know all of the costs and fees involved with sourcing and selling our private label product, we just need to know if it is potentially profitable. Here’s the complex equation used to figure that out:
(Product Sales Price) – (All of those fees described above) = $____________
As long as the answer to that equation is positive, then you’re on the right track. And if it’s at least $5 or more per unit (or sale), then you’ve possibly got a good private label product.
But my $5 number is completely arbitrary. There’s no hard and fast rule for what makes a product “worth it.” If you’re making $3 profit per unit sold, but you could sell 5,000 of them per month, then I’d say that’s worth doing. (Also, please let me know what the product is so I can poach it). But from everything I’ve looked at, a 30-40% profit margin is pretty common for good private label products. Some items are close to 60%.
Here are what my numbers look like for the first two private label products I’m sourcing:
I set this table up to kind of mirror the sales progression, just like the cost / fee structure I used in this article. My unit costs for the goods are exact. For the different shipping costs, I just took my estimated total freight cost and divided it by the number of units I expect to order. All of the Amazon / FBA fees are exact, as they are from the Fulfillment by Amazon Revenue Calculator.
My product sales price isn’t finalized yet, so I have them set at what comparable products are selling for. And with that, I’m looking at a profit for Widget A of $7.62 per unit (45%). Widget B looks like it will be around $8.77 each, or 49%.
This is subject to change depending on actual shipping costs and the final sales price that I set, but the numbers look good right now. And this is all based on my first order being pretty small: 100 units of each. If either of them gain traction and start selling, then I will start ordering in larger quantities and my unit pricing will go down (pretty substantially).
Hopefully, this summary of my costs and private label product examples were helpful. For some more detail and actual examples from Amazon, you can find a summary of all the FBA fees right here. And I’d love to hear about any different experiences you’ve had analyzing products and fees. Let me know in the comments.
Now let’s just hope my 3rd grade math isn’t too far off.