Pros & Cons of Dominant Amazon Business Models

Selling products via Amazon FBA as a “Make money online” or “Make money from home” business model has grown exponentially in the past few years.

Millennials are waking up to the fact that their college degrees don’t guarantee a job that will pay off their student loans before they die.

This reality has contributed to the rise of successful people in various Amazon FBA models publishing their information. Their aim is to help curious minds and budding entrepreneurs gather the necessary information in order to start their own Amazon FBA business.

The influx of all this information might well be giving you information overload and probably and has, undoubtedly, led you to inaction and left you wondering where to start.

The purpose of this article is to give you some insight on a few of the FBA business models. I want you to read this article and be able to say “aha! I like that model” and then go for it.

I personally have chosen to go all in on the “wholesale” model after considering the following.

The three dominant business models out there

Retail/Online Arbitrage

Buying from retail stores on and offline, and flipping it on Amazon.com for a profit.

Pros

1. This model is profitable because sometimes, the price of a product in a store, or on a retail website, is super cheap, while the price on Amazon is at or around retail price.
2. You can start this business with less than $100 ($39.99/month for an Amazon account, and $10-50 in inventory. This is how I started Amazon FBA and sold close to $3 million by this method.
3. You don’t need any advanced skills in marketing to make money. Many people, including myself have started and done over 7-figures in sales per year with this model.

Cons

1. As you can imagine, these opportunities are not in abundance due to the low barrier of entry to this model. Everyone and their mom is doing it now, so you need to go through products and stores to find that needle in the haystack. This is incredibly time consuming and labor/cost intensive factoring in the shopping, time and travel expenses to find profitable items.
   People also apply this model to drop-shipping where they list a product on Amazon as MF (merchant fulfilled) vs. FBA, then buy from a retailer (Walmart, Target etc.) when they get an order.
   That model is explicitly against Amazon’s terms of service and will get you suspended when they find out.
2. An increasing amount of brand owners report these sellers to Amazon if you list their product because they are seeking 100% control of who sells their product on marketplaces like Amazon – in order to offer the highest level of service for their brand. They see this as a MUST which puts a damper in the long term viability of this model because this can put your account at risk and lead to suspension if you keep on getting reported by them.

Private Label

Buying from overseas manufacturers on Alibaba from China, India, Pakistan etc. and putting your own brand name (private label) on it and selling it on Amazon.

Pros

1. You do not have to compete for the product page “buy box” which means that all traffic and sales for that product go to you 100%.
2. You will have inventory that can be replenished over and over again and doesn’t need you to drive from store to store “hunting” for inventory in order to generate revenue.
3. You can increase your product sales by marketing the product more with paid advertising (Amazon, Facebook etc.)
4. Some of the largest Amazon sellers on Amazon are Private Label sellers that sell over $100 million per year through Amazon FBA.

Cons

1. Even though you do not compete for the “buy box” on the product page, you compete with the “silent buy box” which means you get increasing competition monthly or even weekly that all try to sell your same product, only with their logo under the same search results.For example, if you private label “Joe’s Apple Slicer”, and you are in the top 3 results on Amazon when someone types in “apple slicer”, you can bet that you will soon move down to spot 4, 5, 6, 10, etc. eventually as the sheer volume of people who are selling a “hot selling product”For a given keyword like “apple slicer”, 70% of sales come from the top 3 spots on Amazon, while 90% of sales come from page 1.This means, if you drop in ranking, your sales drastically drop and you can overstock on inventory and kill your business. This is one of the most common problems amongst private label sellers on Amazon.com.Even though people gravitate to private label selling because of the fact that they don’t share the buy box, they are still subject to the “Silent Buy Box.”
2. Due to Chinese factory rules, you need to place large MOQ’s (Minimum Order Quantities) for the products you order. This typically is a MINIMUM of $3000, easily ranging up to $10,000 in an initial inventory purchase.The way to play this game is actually to GIVE AWAY that $3000-$10,000 in inventory, so you can move up the ranking in Amazon. If you mess up during this step, you essentially lose money and must start over. This could be soul crushing for most people getting started in the world of Amazon if this was the only ‘seed money’ you had to get this business off the ground.If you do things right and launch your product successfully, you STILL need to wait for your second order to arrive 40-80 days (due to the time it takes to ship your product) later to finally start making money. The average successful scenario where a giveaway is needed, takes around 4-5 months to start making profitable sales from private label.
3. You are exposed to more liability due to product testing and certifications that brand owners are required to do to keep consumers safe. Many new sellers skip this, and it can come back to haunt them later on if competitors test buy your products and prove that your product isn’t compliant.

Wholesale

This model is known as buying bulk (wholesale) from small and medium brand owners, or distributors for big brands and selling their product on Amazon.

This is currently our business model that we found has the best mix of risk to reward ratio and we are projecting $10 million in sales during 2018 in the U.S. and $3 million internationally between the UK/EU and Canada.

Pros

1. No need to giveaway thousands of dollars worth of inventory to make profitable sales. You are selling products that have demand and sales are a near certainty. You basically piggyback on success that is already happening. I personally don’t like to reinvent the wheel and leverage what is already working and profitable.
2. MOQ’s are not as high as China, and the product is typically domestic, so you can have it physically shipped to you in days or weeks at the most.
3. No need for product testing and certification since the brand owner takes care of all that for you and shoulders this risk, burden and liability.
4. You can make profitable sales from day one instead of waiting months to complete giveaways and ranking which can be sometimes up to 6 months. I thought that since this would get me profitable fastest it would help me pay my bills and expenses faster.

Cons

1. Margins are typically half of Private Label (18-20%) due to the brand owner doing more than half of the work for you already.
2. 3rd party sellers can take a share of your Buy Box. This means you would either need to get the brand owner to halt new sellers, or cut down the existing sellers that are carrying the product on Amazon.
3. Success depends on your ability to build relationships with brand owners.

I hope that this article has given you a little bit more clarity on what Amazon FBA model you would like to pursue.

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