CRITICAL FACTORS AND BLIND SPOTS INVOLVED IN STARTING AND RUNNING A PHYSICAL PRODUCT AMAZON FBA BUSINESS
In this article, I will discuss the critical areas that you need to factor into your Amazon FBA research before starting or while running an Amazon FBA business. I have run Amazon FBA business at a large scale and have learnt these to be true by doing it. You will find that I am very critical of Amazon FBA, however this is just to ensure that you understand what it takes to selling physical products BEFORE you get into it. You need to choose an online business model that works for You, there is no need to join the fad or because someone said so.
FBA along with private label physical products have tremendous potential. However, let me first start by reminding you five factors that you should be aiming for when starting an online business, I mean any online business. An online business should:
- provide you with passive income (i.e. your active involvement is not required for business to operate day to day basis)
- where you should be able to leverage systems of automation primarily on the basis of outsourcing and software
- provide you with maximum net profit margin potential (i.e. costs must be much less than revenues)
- provide you with a clear path to scale
- be able to bootstrap with reasonable amount of initial capital
Now, let me benchmark Amazon FBA on those five principles:
Passive income (i.e. your active involvement is not required for business to operate day to day basis)
On the surface, due to Amazon (demand and Ops) and Alibaba (supply), it may seem that Amazon FBA should be able to provide you with nearly 100% passive income, however in reality that is not the case. How so?
Today, Amazon FBA is not what it used to be 5 years ago. Bootstrapping requires significant amount of research and due diligence on your part. If you rush through product research, you set yourself up for failure. It is super critical to select the right market or niche and a profitable product.
While FBA may work for some people wonderfully, however that may not be the case for you. Why? Because FBA requires knowledge of several domains such as product/market research, working with overseas suppliers, inventory management etc.
During the bootstrap phase, you need to decide on your private label branding and launch your brand with your first product, there is no room for price arbitration with FBA. Branding necessitates that you pick your color palette, logo design and optionally a website or a landing page where you can provide some details about your brand and or product.
Let me summarize. Selling physical products with or without FBA is not everyone’s cup of tea. If, you are willing to learn those domains and ready to invest some initial capital, then FBA may work for you.
Leverage systems of automation primarily on the basis of outsourcing and software
Physical products, as opposed to digital, have to be made (cost), shipped to you (another cost) and then eventually to the end customer (yet another cost). Physical products have finite inventories, so when they run out, you repeat the cycle again.
While you apply nearly all automation to FBA, much like Kindle, but they are not as capital efficient. For example, you can outsource all domains of knowledge to someone else who can do them for you while you focus solely on niche market and product selection, however in reality every one of those outsourcers would bring your profit margins down.
Let me explain. In a digital business, no matter how much you invest into systems of automation, it doesn’t add up to more than say 20-25% since your margins to begin with are nearly 100%. For physical products, due to all of the costs involved including the product itself whether you buy from someone or build it yourself, your margins to begin with may not be more than 50% and thus costs will add up quickly before you even account for Amazon’s referral, pick-pack, shipping, and storage fees. I think you get the picture.
Maximum net profit margin potential (i.e. costs must be much less than revenues)
Profitability with physical products, unlike digital, lies in reaching economies of scale. However, reaching economies of scale, is a tedious task given that there are unfavorable cost structure involved to begin with. IMO, you’ve to narrowly focus on a single product with strong differentiation to carve out some space for your brand. Now, this obviously, all depends on how you’re tapping into demand, i.e. your ability to harness various traffic channels but there is a way to make it work as long as your margin expectations are tampered. You’ve to ask yourself a question, why in the world nearly everyone who’s selling FBA products is also teaching others how to do it? 🙂
Path to scale
Amazon FBA path to scale requires careful consideration of your niche market and product selection. If you launch a product in a wrong category with hyper competition, say electronics and smartphones, you will quickly see yourself in a race to bottom with big boys. Unless you can sell one product at scale or volume, there is absolutely no reason to get into more. There is also a real marketing cost involved with physical product, every product sample or giveaway will add up to your bottom line.
Now, if you contrast this with digital products, there is an unlimited inventory and giveaway doesn’t cost you anything.
Bootstrap with reasonable amount of initial capital
Physical products require initial capital by virtue of being physical. If you mess up your inventory management by buying too much, and if you’re unable to sell on Amazon, you may have to liquidate those products (we’re talking about 90% discount!).
In order to tame the beast, you need to make sure that it is the right business model for you vis-a-vis where you are in your entrepreneurial journey. If you are starting out, I’d recommend to tinker with digital products (if you’re a product guy or gal) or affiliate marketing (if you’re a marketer) first. Once you’ve some cash flow and savings, then you can expand into physical products with or without Amazon FBA.
In conclusion, there are two ways to build an online business, physical or digital. You can start with demand, and add supply side to it. If you are a marketer at heart, you’d prefer this approach (I know it sounds cliche but think of Dollar Shave Club viral video). Now, most folks start with supply first (working with suppliers right after choosing your niche market and product), and then add demand side to it (by signing up on Amazon for a seller account).
Last but not least, I invite you to come and join me on Private Label Mastery Channel where I teach these principles and practices including topics related to Amazon FBA, Kindle publishing and building your own private label brand, so you can realize your financial dream and begin to live the Life on your own terms.