Amazon FBA Costs And Pitfalls You Should Know About
Thinking about giving Amazon FBA a go? I’m not surprised – it sounds like a decent way of turning a profit online without having to run a fully-fledged business.
Before you go rushing into any business decision, you need to make sure you understand the costs of doing business to ensure you’re correctly pricing your products and making profits as opposed to losses.
Because here’s the thing: Turning a solid profit on Amazon is possible but only if you understand the various costs involved. If you don’t get your head around the fees that are affecting your bottom line, you’ll be left scratching your head, wondering why on earth you’re not making a profit.
In this article, we will take a look at issues such as the cost of Amazon FBA, how to calculate Amazon FBA fees – and we will also take a look at ways how you can avoid painful long-term storage fees so that the benefits of selling on Amazon FBA outweigh the costs.
How Much Does FBA Cost? (An Overview on Fees)
Nothing in life is free, and this is especially true of Amazon FBA. But hey, Amazon is the largest online marketplace in the world, so it’s only fair that they take a cut of your profit, right? The main thing is to understand the costs and then work out how you can beat them by turning over a decent profit.
There are different fees involved and different guidelines for each country. The main types of fees associated with Amazone FBA are Account Fees and Storage Fees.
Amazon FBA UK Account Fees (Per Month)
The first fees you need to be aware of are the monthly seller account fees charged by Amazon.
When you first start to sell on Amazon, you have to make a choice between a Basic account and a Pro seller account.
The Basic account is for sellers who expect to sell infrequently. Which to amazon is if you expect less than 35 sales per month. The account itself is free monthly and doesn’t cost anything to renew. However, in reality, it’s not completley free: For each item sold, you’ll need to pay Amazon £0.75 (plus VAT) charge every time you sell a product on Amazon.
The Pro seller account costs £25 + VAT ($39.99 in the US) to renew each month. As part of this deal, you don’t have to pay anything extra each time you sell an item.
This means if you are selling more than 34 products a month you should look at signing up for a professional account as 34 * £0.75 = £22.5 + VAT (which for most items is 5-20%) is greater than the monthly Pro seller account charge of £25 + VAT by Amazon.
Amazon Monthly Storage Fees and Long Term Storage Fees
In addition, Amazon typically charge two types of storage fees. The first storage fee is a monthly storage free for storing your products held in their fulfilment centre.
Monthly storage fees are based on the daily average volume (measured in cubic feet) for space your inventory occupies in Amazon fulfilment centres.
The volume measurement is based on unit size when properly packaged and ready to ship in accordance with FBA Policies and Requirements.
The amount you pay in monthly storage fees differs according to the average daily volume of space that your inventory takes up in an Amazon fulfilment centre. Amazon base the volume measurement on unit size after an item has been properly packaged and is ready to be shipped.
Usually, you will be charged for your monthly inventory storage fees between the 7th and 15th of each month.
Amazon.Co.Uk. Monthly Storage Fees
Presently, if you’re an Amazon.co.uk FBA seller, you’ll be charged £0.48 per cubic foot between the months of January and December, and £0.68 between the busier periods of October and December.
To find out about the latest Amazon.co.uk & Euro monthly storage fees visit login to your seller central and visit the current link here.
Amazon.com Monthly Storage Fees
Alternatively, if you’re an Amazon.com FBA seller, you’ll be charged as much as $0.64 per cubic foot between the months of January and December, and $2.35 between the more hectic periods of October and December.
To find out about the latest Amazon.com monthly storage fees visit Amazon here.
The second type of storage fee that Amazon may charge you is long term storage fees in addition to monthly storage charges.
Long Term Inventory Storage Fees
Long Term Storage Fees apply only to units that are kept in an Amazon fulfilment centre for over six months. For .com seller’s, any unit that has been in an Amazon fulfilment centre for between six and twelve months will incur a charge of $11.25 per cubic foot.
Any unit that has been kept in an Amazon fulfilment centre for over twelve months will incur a charge of $22.50 per cubic foot.
In the UK, the prices are a lot higher. If your unit has been kept in an Amazon fulfilment centre for over twelve months, you will be liable to pay £882.50 per cubic foot.
How To Avoid Long Term Storage Fees
The easiest way to avoid long term storage fees is to only purchase small test order amounts when first buying an item in order to make sure that they will sell before going all in and placing large shipments.
If you do intend to send large shipments into Amazon, because Amazon calculates their fees on February 15 and August 15 each year, there is a small window of opportunity for you to game the system, so to speak.
If you wait until just after February 15 before sending in items that will possibly be in holding for over six months, you could escape being charged.
What should happen is that, when Amazon calculates their long-term storage fees in August, you will only be charged for items that were placed in storage before February 15.
Understanding Amazon Fulfillment Fees
The next type of fee you need to worry about are Amazon fulfillment fees.
Fulfillment fees are the cost of fulfilling your order and are determined according to the weight and dimensions of a packaged item.
The Amazon FBA Calculator
How much does Amazon FBA cost exactly? A great way to work out how much you will be charged when you use the Amazon FBA service or the cost of fulfillment by Amazon is to use the Amazon FBA calculator.
This tool also comes with a comparison feature which allows for you to crunch your numbers and compare both FBM (Fulfilment by Merchant) vs FBA, fees to see which is a more cost effective option for your business.
How To Calculate Amazon FBA Fees Using The Amazon FBA Calculator
Using the calculator is simple enough to get the hang of;
1. First, you need to locate the Amazon Listing of the product you intend to sell. If you are launching a product for the first time and you are still in the product research stage, my advice would be to compare a product of similar size and weight.You can do this by scrolling down the page until you find the Amazon Product ASIN (ASIN is the Amazon Standard Identification Number) on the Amazon product listing. This looks like the image below:
2. Next, you need to choose the appropriate Amazon platform you wish to sell on in order to correctly calculate the costs.Naturally, the exact cost will depend on where you are based. Below are links for the Amazon FBA Calculator for some of the major countries:
3. Next, paste in the ASIN number into the calculator and hit search
4. Next, enter a price you want/hope to sell your product for and hit calculate.
As you can see below Amazon will now tell you the different costs associated with selling a product through Amazon FBA versus doing self-fulfillment or Merchant Fulfilled. For self-fulfillers, you need to enter your average prep and shipping costs, too.
Overview Of The Major Amazon Fulfillment Calculator Cost Line Items
➤ Amazon Referral Fee – Each time you sell an item, Amazon takes home a 15% commission. It’s only fair; Amazon is after all the biggest online retailer who’s letting you trade on their marketplace. In the above example, this is £1.50.
➤ Fulfillment Fee is comprised of the Monthly Fee for storing a unit of product in an Amazon fulfillment centre. Calculated based on the volume of the product in cubic feet.
In this example, we can see what the £4.48 fulfillment fee breakdown is by clicking on the question mark.
£4.18 for Amazon fulfilling the product and the 30p Monthly Storage fee, Amazon charges you for letting you store your goods in their warehouses.
Cost of Product -This is where you can input the cost of acquiring the product from your supplier, or the cost required to manufacture/produce a single unit.
Finally, you can see that the Amazon calculator spits out the profit of the product after all fees based on the numbers you have inputted.
FBA is super popular among those who want to run an online business because it makes it so damn easy to start selling!
Before you dive in it’s important that you work out the cost of Amazon FBA to see if the benefits actually do outweigh the costs. Otherwise, if you can’t answer the question: How much does amazon fba cost? You risk a profitable opportunity quickly turning into a loss making opportunity where you will end up paying consumers to buy your products.
If you want to know more about selling on Amazon then feel free to subscribe to our free Amazon Email Arbitrage Course which teaches you how to start your own on Amazon Arbitrage business.
What is a Good Profit Margin for Amazon FBA?
Before we get onto the kind of profit margin you should be aiming for, let’s first have a recap of the fees. Why? Because there are two types of profit margins on Amazon:
- Operating margin
- Gross margin
Operating margin includes all fees and expenses, and it’s the money you can put back into your Amazon business after all the sales have been totted up.
Gross margin, on the other hand, counts everything single fee from start to end.
As you’ve already learned, there are a number of Amazon FBA fees you need to be aware of because they can bring your profit margin right down if you don’t know what you’re doing. These include monthly storage fees and account fees. A few more fees we haven’t gone in-depth with so far include:
- Referral fee – Amazon charges a fee on every single item you sell. Exactly how much depends on the category. For example, books command a lower fee than DVDs.
- Variable closing fee – This is essentially the shipping fee that you have to cover
According to the experts (and I agree with them), you should abide by the ‘3 times rule’ when it comes to working out a good profit margin on Amazon FBA.
What does the 3 times rule mean?
It means that you should aim to sell an item for three times what you bought it for.
In other words, if an item costs you $1 to buy from a wholesaler, you need to sell it for $3 in order to get a 100% ROI and make a solid profit margin.
Why three times?
Well, the first $1 covers the cash you spent on buying it in the first place.
The second $1 covers those fees I’ve talked about, while the third dollar is your ROI – which, in this case, is 100%.
The problem is that you’ll find it very hard to generate the kind of consistency that means you’re always generating a 100% ROI. Especially if you sell the wrong items.
One way to ensure consistently high profit margins is to sell the right products. In other words, products people actually want to buy. You can check out my free mini course here to help you pick these kinds of high-selling products.
Another way to ensure consistent profit margins is to be aware with the subtle nuances and variable costs.
For example, let’s you’ve got two items that you’d really like to shift. One has a sell rate of just one, while the other has a sell rate of 80%. The former is a high-margin item while the latter is a low-margin item – so what do you do?
The best thing to do in this scenario is to focus on the low-margin items because they will pay off more in the long term provided you put together a strategy in place.
A strategy might include double downing on ads and marketing. You could take some of your profits and funnel them into a strong marketing campaign that will eat up a chunk of your cash in the short term. In the long term, you will get all that money back and more if your campaign hits the spot with your target audience.
How Much Margin Does Amazon Take?
Roughly, Amazon takes 15% from each of your sales. That’s not so bad but they also charge X amount depending on the type of account you’ve chosen (see above).
Then, of course, there are the monthly storage fees we discussed above, too.
It’s easier to apply the 3 times rule each time you make a sale in order to work out how much Amazon takes. To recap:
- You buy a product for $1
- You sell the same product for $3
- $1 covers the initial cost
- $1 goes to Amazon
- $1 is your pure profit
Of course, exactly how much Amazon takes will depend on variable factors, and referral fees are the most important thing you’ll need to get to grips with going forward because Amazon applies different charges for different product categories. Once you’re up to speed with everything, you can start strategizing so that your profits are up.
How Is Amazon FBA Profit Calculated?
When calculating your Amazon FBA profit, you need to calculate sales and your different costs. These include all the fees charged by Amazon, the initial purchase cost, as well as the cost of shipping.
To make sure you maintain a steady profit margin, though, you need to go further and bring into consideration indirect costs such as bookkeeping and tax, as well as returns-related costs. Think of these like hidden costs – hidden costs that many Amazon sellers unwittingly ignore but which impact their bottom line.
Here are some costs you should always be calculating:
- Initial cost
- Indirect costs, such as bookkeeping, tab, web development, ads etc
- Returns costs
Returns costs can be costly (sorry!) but to ensure they don’t hit your profit margins where it hurts, take a look at each returned product to see if you can’t sell it to another customer. If, on the other hand, a product is a complete write-off and can’t be resold, you’ll need to note it down as it will affect your bottom line. Bear in mind that Amazon’s return rate is between 5 and 15%.
Inventory stockout will also need to be considered because they can massively alter your profit. If a product is selling well but you keep running out of it, you’ll miss out on additional profit each year.
As well as costs and projected sales, knowing your key performance indicators (KPI’s) will help you evaluate your profit margins so that you keep reaching your targets. They will also help you understand your overall performance so that you can make any necessary changes going forward.
Here are some important KPIs to monitor:
- Inventory to sales ratio
- Inventory turns
- Gross margin on ROI
- Cash to cash cycle
- Days of inventory
Understanding more about your costs and products will help you calculate a better profit margin going forward, and it will also help you make better buying decisions in the future.
Once you understand your costs and sales, you can use an Amazon Profit Calculator to help you determine your profit.
How Can I Reduce My FBA Fees?
Fees can be a real pain in the butt. Fortunately, there are ways to reduce them.
Firstly, it’s important to remember that Amazon doesn’t charge storage fees according to the price of a product. Instead, they take into account a product’s specification – size and weight.
For this reason, it’s not generally a good idea to store items that cost under $15. Why? Because you might be paying the exact same amount to store a $15 item and a $100 item. That hardly seems worth it.
Another good idea is to try and focus on lighter items because heavier items cost more to store. Try to find lighter items that sell well, as well as smaller items that sell well, too.
You should also closely monitor your Inventory Performance Dashboard, as this is where you will see the fees that your items are incurring. This dashboard is an excellent tool provided by Amazon that gives you insights into your inventory activity so that you know how to put in place a strategy that will reduce your fees.
A final top tip is to sell items in bulk, or bundles. Let’s imagine you manage to sell 5 items. Whilst that sounds great in theory, the issue is that you’re paying fulfilment fees for every single item. On the other hand, if you sell items in bundles, you’re only being charged a one-off fulfilment fee.
Bundles work well as promos, too. Your customers love them – so why not give them a go?
Now if you have learnt from this article and want to keep up to date with more money-making tips, then do not forget to join our mailing list and we’ll even give you a complimentary enrollment into my Four Day Fast Starter Mini Course where you’ll learn the following:
Four Day Email Course
Day 1 – The Amazon money making system;
Day 2 – What to buy;
Day 3 – Where to buy; and
Day 4 – Scaling & Growing
Fast Starter Training Videos
Video 1 – How to make money selling on Amazon;
Video 2 – How to register your seller account;
Video 3 – How to list inventory on Seller Central; and
Video 4 – How to prepare Amazon inventory shipments