Please Don't Start an Amazon FBA Business

I’ve sold over $4,000,000 of product on Amazon.

If anyone should be bullish on the space, it’s me.

But here’s the thing:

I’m not.

When someone asks me whether they should start an Amazon FBA business, 95% of the time I say no.

In today’s issue, I’ll explain why.

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What is FBA?

FBA stands for Fulfilled By Amazon.

It’s a subset of the larger eCommerce category.

It works like this:

• You manufacture products (usually overseas) under your own brand

• You ship those products into Amazon’s distribution center

• Customers buy the product on the Amazon marketplace

• Amazon handles getting the product to the customer

The Beauty of FBA

To be fair, there are some major advantages of the FBA business model:

Traffic

It’s very difficult to get people to visit your website.

It’s even harder to get them to buy something.

Selling through Amazon’s marketplace makes this much easier.

They have 300 million active users you can tap into.

Brand affinity

Amazon has an exceptionally strong reputation.

Customers trust they’ll provide a fair, reliable and convenient shopping experience.

As a seller on their marketplace, you directly benefit from this brand affinity.

Resulting in disproportionately higher conversion rates.

Last mile delivery

How do you affordably deliver to all 50 US states?

You can use a 3rd party logistics company, but it’s not cheap.

Amazon’s fulfillment platform is leagues ahead of its peers.

They have a major pricing advantage.

FBA sellers directly benefit from this.

The Downsides

Given these businesses can be operated from anywhere in the world, Amazon FBA has emerged as an attractive side hustle idea.

But it has its downsides….

Platform Risk

I say this often:

If your business relies on a single sales channel, customer, supplier, or employee, it’s not a real business.

It’s a house built on sand.

Unfortunately, that was my business.

Amazon controlled it.

Amazon brought me customers and sent them my stuff.

I woke up one Sunday and my top listing had been taken down.

“Suspended”

No reason provided.

Three weeks later the listing was restored.

Still no reason provided (just $20k in lost income and days of stress).

This happened several times over the course of four years running the business.

Low Margins (and Poor Cash Conversion)

Here are the major cost lines of a healthy $1 million Amazon FBA business:

Chart Takeaways:

• Amazon keeps ~60% of your revenue (referral fees, fulfillment, advertising, and refunds)

• 20% to the manufacture (cost of goods)

• 5% to miscellaneous costs (software, bookkeeping, etc)

• 15% to you (pre-tax)

Working Capital:

You will likely pay your supplier 45-60 days before your goods are available for sale in the US.

Meanwhile, Amazon holds back a percent of your funds just in case more refunds come in.

Low margins + bad supplier terms + high accounts receivable = very poor cash conversion cycle.

I didn’t take a dollar from our business for the first 2 years of operating.

If you want to grow, don’t expect your FBA business to generate “passive income”.

Intense Competition

I came up with my first product idea after 30-mins playing around with Helium10’s keyword research tool.

6 months later that product was live on Amazon.

I was selling 30 units per day by month 9.

If I could launch a product and generate sales so quickly, why couldn't others?

The only way to legally protect your idea is a patent.

But patents are difficult and expensive to obtain.

Moreover, succeeding on Amazon isn’t about being novel.

It’s about doing something just a little bit better (or different) than someone else.

That’s not the game I want to play.

You may be able to win for a short while, but eventually someone will come along and displace you.

This all begs the question…

Who should start an Amazon FBA business?

1. Businesses with defensible intellectual property that generate most of their revenue off-Amazon (eg. wholesale accounts or direct-to-consumer).
   

2. Full-time employees who aren’t looking to get rich, but want a semi-passive source of modest income (~$5k/month). If this is you, don’t let the goal posts move. It’s far too easy to taste success and want a lot more of it.

Most importantly:

I do not recommend buying an established Amazon FBA business.

For the reasons mentioned above, I’d have serious concerns paying 4-5x profits for a business with platform dependency, low margins and no barrier to entry.

There are better options (like this offline SMB we’re under LOI on)….

That’s it for today.

In a few weeks, I’ll share side hustle ideas that I prefer over Amazon FBA.

Ideas with lower competition, higher margins and much less platform dependency.

Until next week,

Danny

PS - I recently shared my experience with Amazon FBA on a podcast.