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Word of Caution
Before diving into it further, the cost of admission to selling your private label product on Amazon FBA 2021 has never been higher.
Gone were the days where you can launch a product for just $500. Since early 2016 (the year that I started), the cost and competition have gone up. Not only has the competition increased, but the fees/other miscellaneous costs Amazon charges have also gone up.
But show me something nowadays that is not competitive. Want you to know that you will be in a dog fight. Do not be discouraged as everyone said that Amazon is saturated every single year.
The total all-in cost to launch your first Amazon FBA private label product can be anywhere from $4000-$12,000 USD, assuming you are trying to sell on Amazon.com marketplace.
I will sound like captain obvious here, but having more money gives you a better chance to succeed; capital is a barrier to entry in and of itself. But you still have a chance with a smaller amount, you will just have to hustle a bit more and be more creative. I just want to make sure that you know of the success rate to capital trade-off before you start. A lot of Amazon gurus will skew this concept to get you to spend on their course.
Find your Unit Cost and MoQ (Minimum Order Quantity)
Your product research is your first major step to estimating your all-in cost.
Alibaba is a well-known marketplace of suppliers, there are other alternatives to Alibaba, but Alibaba allows for a quick and dirty way to estimate per unit cost and corresponding MOQ (Minimum Order Quantity). Let’s just assume that you have indeed done your research and found the product you want to sell (Will make another Guide for that). Now you are ready to estimate your inventory cost.
For the sake of this article we will give a hypothetical example of $5/Unit at an MoQ of 500pcs
Inventory Cost (Mandatory)
Stepping back and going off topic a bit, the name of the game in Amazon FBA private label is to stay in stock.
Staying in stock allows your listing to keep its ranking juice and will make sure the “honeymoon period” (known in the Amazon seller circle) will last as long as possible. You can liken it to a marathon race where running out of stock will mean stopping in the middle of the race. Hence, you should have enough cash available to make sure that you can make one reorder immediately after you see some traction.
To show how detrimental being OOS (out of stock) is in your initial product launch, it is helpful to understand that Amazon ranking is based on moving averages and not just sales at any particular point in time. I will express this in two examples: 1) the Product is in stock for the first 2 months of launch, and 2) the Product is OOS for two weeks in the middle of the two months.
Example 1) In Stock for 2 Months
The average sales is 7.44
Example 2) OOS for two weeks
The average sales is 5.75
As you can see by the above examples you want to avoid the example 2 scenario at all cost, in order to recover from OOS you will need to achieve sales way above your 5.75 average.
So what you need to allocate for inventory in our example is (500pcs x $5)*2 = $5000
Inspection or visit Factory cost (Optional)
With inspection services, there is a school of thought that this cost is mandatory, but beware where these strong opinions are being promoted by inspection companies themselves. Inspections are run the cost of about $300 to $1000, depending on the distance and experience of the inspector.
Beware of the inspection services that are either incompetent or corrupt, as in taking kickbacks from the factory that they are supposed to inspect. The inspection industry is a bit of a wild west in terms of the wide ranges of service levels you can get.
If you choose not to pay for the inspection service, there are a few ways to mitigate your risk. One way is to visit the factory, which I chose to do when I made my first order back in 2016. I decided to take a vacation in Asia, and I just visited the factory along the way. It definitely gives me peace of mind to be able to meet the people and feel the product.
The second way is to ask your factory to take live videos and perform some tests on the spot for your product. Make them do this for maybe a dozen in different boxes or cartons of your choosing.
In our example, will just assume an inspection service cost of $500.
Shipping Cost (Mandatory)
Shipping cost varies depending on the method and the size of your product for Amazon FBA private label. The rule of thumb is that sea shipping is much slower than Air shipping. Within Airhsipping there are tiers of service, air freight, and air express. Air express is like the DHL and FedEx where they can deliver the goods end to end, where air freight will be slower cause your item will wait for the cargo airplane to fill up before heading to the destination country where cheaper and slower ground transportation will pick up to deliver to the end destination.
We recommend you use a freight forwarder for the shipping process as they can take care of all the procedures of international shipping such as customs clearance on the export and import side, and arranging domestic ground transportation.
Estimate of Shipping Cost
The freight forwarder will give a volumetric weight quote in kilograms (kg) via air, while it will be in cbm (cubic meters} for via sea. Please note the volumetric kg is calculated by the formula [(Length x height x width (cm)) / 5000 ]*number of cartons. As of September 2020, the air freight cost is about $6/kg (volumetric kg), while sea shipping is $2/kg. Shipping a big topic so I am not going to explore this topic any further.
If your product is of standard size by FBA standards, we can estimate that the shipping cost by air to be about $1.20 extra per unit (this is a rough estimate based on my experience). So one shipment in our example will be (500pcs x $1.2)*2 = $1200.
Product Photos (Mandatory)
In the world of E-Commerce, consumers make their purchase decisions on the photos whether they realize it or not. For Amazon FBA private label, having clear, crisp, and descriptive photos is beyond important. Saving on the professional photos is basically penny wise and dollar foolish. Photos are a key low hanging difference-maker in terms of CTR and conversion rate.
You can have the product photos taken by a professional photographer or have the product 3D rendered. The latter is my preferred choice as the finished product comes out potentially much more crisp and clear. Using 3D rendering can also potentially be a cost saver as having really good professional photos could cost an arm and leg (think >$500 a set), while a good set of product rendering will probably cost <$250.
I started using 3D rendering back in 2018 and have never looked back and this is what this author recommends. We’ll allocate product photos cost to $250.
Packaging Cost (Mandatory)
You do need to put your product in some sort of packaging and then add an FNSKU label for the Amazon FBA warehouse. Amazon FBA private label products generally means you need custom packaging for them. To save on cost for this expense you don’t need to go all out unless you really point out the packaging in your product photos your packaging will not be the selling point when you first launch.
My first packaging is just a polybag and a header card, total cost of which is only $0.25/pcs.
Since it is in a bag instead of a box, I was able to fit a lot of these inside a carton. This saved additional costs.
Again, you don’t have to go spartan like me in terms of packaging, you can always upgrade along the way. Nice packaging can increase your brand value. What I am getting at is that at the beginning of your FBA journey no need to go crazy on the packaging. I would not spend more than $0.50/pc on packaging at the start.
In our example, we will allocating packaging cost to (500pcs x $0.50)*2 = $500.
Amazon PPC Cost (Mandatory)
One of the best white hat ways – and not against Amazon TOS – to launch is to use Amazon Advertising (Amazon PPC). It is basically what our product, SellerMetrics, helps Amazon sellers with. We will be producing a complete guide on Amazon PPC soon, so click and subscribe to our newsletter.
Amazon PPC allows your products selling on the Amazon marketplace to have high placement on customer search results. It is a quick way to funnel traffic into your listing.
Aside from getting sales, Amazon PPC also allows for customer search term discovery. Yes, you probably did keyword research on your product, but you cannot be 100% sure until you see how many sales are made against a customer keyword search. This is what makes Amazon PPC very useful in the beginning and give you direction on how to spend your time and resources on specific keywords.
Estimate of Amazon PPC Costs
Now how much should you be spending on Amazon PPC? We can basically reverse engineer a rough estimate. In our example, the total COGS (cost of goods sold) per unit is $6.70 ($5 unit cost + $1.20 shipping + $0.50 packaging). Your offer price on Amazon should be close to 3x your COGS to achieve a decent net profit margin. You should be spending at least half your net profit per sale on Amazon PPC, a lot of seasoned sellers like to be super aggressive on Amazon PPC during launch. Your net profit margin per unit in our example will be $6.80, ($19.99 sales price – $6.47 Amazon fees – $6.70 COGS).
This is a large hidden cost that people are not in the know that would not talk about. This cost can either be taken off your credit card (a great way to earn points) or from your Amazon payment balance.
The total amount to be allocated to Amazon PPC should be around $3,400 ([$6.80/2]*1000pcs).
Trademark Registration (Optional)
Trademark is one of those wait-and-see type of expenses (along with bookkeeping/accounting). Don’t get me wrong, trademarking your brand name is important and Amazon Brand Registry makes it more so. Getting your brand trademarked is not a must to get your products in on Amazon to start, but you’ll eventually want to get it trademarked via USPTO.
Some sites such as Trademarkia can get your trademark registered as low as $399 and up. The price variance depends on how many product classes you want to register for and also if there any follow up action necessary by the trademark lawyer.
We’ll allocate $399 for the cost of trademarking in our example.
Software Tool (Optional)
Tools are great, some offer awesome value, but most of them have a time and place. To start, you may want to sign up for software to do your product research, then keep track of your P&L (profit and loss). Softwares do save you time, but it will not make or break you in the beginning. This cost item is not mandatory and entirely discretionary when you start on Amazon. I don’t recommend a lot of software, but I think Helium10 is quite good.
We’ll allocate $100 for the cost of software.
Off Amazon Marketing (Optional)
Some sellers like to use off Amazon channels to promote their products such as Youtube, FB, IG, and Blogs. Unless you have experience in off Amazon marketing and is confident in getting traction in these channels it is best to concentrate on Amazon in the beginning.
A influence campaign can cost between $500 to $4000, lets allocate $1000 for this cost item in this example.
Putting it all Together
All the mandatory cost comes to $10,350. This assumes you use Amazon PPC and have enough cash to make 2 batches of orders at $5/pc on 500 MoQ. With the optional cost, the total comes to $12,349.
Options if you don’t have the Cash to Start
- Sell on other Amazon marketplaces such as .ca/.de/.uk/.jp. These marketplaces are less competitive where it is more probable to be able to sell a lower-cost product (below $5) at a better profit margin than in Amazon.com
- Other marketplaces such as eBay, Etsy, and Walmart
- Look into other Amazon business models such as OA, RA, Kindle Direct Publishing, merch, and bookselling. All the aforementioned business model have a lower startup cost than doing private label
- Work and save up
You’ll probably look at the numbers and say. “No way! It can’t be that much I see someone on YouTube says they made 1 million dollars Amazon on $500 starting capital.” Not saying that it is impossible, but it probably is either one of 1) this person did this in 2010, where it was possible to put a $1 product and sell it for $20, or 2) this person on YouTube is trying to sell you a course.
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