What is Amazon FBA? How it Works, Fees, & More

If you’ve ever ordered from Amazon before, there’s a good chance that you’ve purchased something from an Amazon FBA seller.

These are individual sellers who source the products and list them for sale on Amazon, and it can be a surprisingly lucrative side hustle for many of them. One of our readers made over $25,000 in extra money one year selling books on Amazon, and they did that while working their full-time job.

I know you’re probably curious now, so let’s get started. You’re going to learn exactly what Amazon FBA is, how it works, all about Amazon FBA fees, what to sell, where to source products, and more.

What is Amazon FBA? What you need to know before starting an Amazon FBA business

What is Amazon FBA?

Amazon FBA is when third-party sellers list and sell things on Amazon, but let Amazon process the payments, store and ship the merchandise, and manage the customer service.

But what does FBA stand for? Okay, this is the key: FBA stands for Fulfillment By Amazon.

Fulfillment is the selling and shipping part that Amazon manages. The seller is taking advantage of Amazon’s massive network and reputation to sell their own items or other kinds of goods (I’ll get into this further down). Technically, you have your own storefront on Amazon, but it’s part of Amazon’s network of sellers.

You can see the difference between Amazon and FBA sellers on the listings for items. Below are two of the same products, and you can see the arrow pointing to who sells it.

The first is Amazon:

This one is a third-party Amazon FBA seller, and it says right there, “Fulfilled by Amazon.”

If you look closely at those two listings, virtually everything else is the same. The customer still gets free returns, free shipping, and Amazon product support. And if the customer is a Prime member, FBA products qualify for the same perks.

My point is, there’s really no difference on the customer end.

How does Amazon FBA work?

Like I said, the Fulfillment By Amazon part is the key to how this whole thing works. Think about all of the most tedious parts of running an online store… you’ve got to store your inventory, process payments, package and ship things out, answer customer issues, etc.

Amazon takes care of those things. Here’s exactly their role in your Amazon FBA business:

• Manage their website so that your product can be listed for sale there
• Store your products in their warehouses
• Process payments
• Package and ship out the item when someone makes a purchase
• Manage any customer questions, comments, or concerns
• Process refunds, returns, and exchanges

That’s a lot of stuff, but running an Amazon FBA business as the seller still requires a lot of work. This isn’t a hands-off job for most sellers, but I’ll talk about some ways to minimize your effort further down.

Now, here’s your responsibility as the Amazon FBA seller:

• You have to find, source, or create a product to sell on Amazon
• Create listings for your products on Amazon
• Package the items correctly so they can be shipped – Amazon is pretty strict about packaging and prep requirements
• Ship the items to an Amazon warehouse

Does it cost anything to sell on Amazon FBA?

As you probably expected, yes, there are Amazon FBA fees. There are actually quite a few fees, and this is one of the main disadvantages of running an Amazon FBA business.

Amazon FBA fees:

• Your selling plan: The Individual Plan costs $0.99 per item sold, and you are limited to less than 40 items per month. The Professional Plan is $39.99/month for unlimited items. Professional comes with some advanced selling features that are practically necessities if you’re running an Amazon FBA business, like advanced reporting, on-site advertising tools, and access to an efficient selling interface. The Individual Plan is best for when you’re first starting our and still developing on your niche.
• Referral fees: You pay Amazon a referral fee on every item you sell, and the average fee is 15%. This fee depends on the category you’re selling in, and it’s based on the total price (item price, shipping cost, and gift-wrapping).
• Fulfillment fees: This fee covers picking and packing orders, shipping fees, customer service, and processing returns. It’s based on the weight and dimensions of the product.
• Storage fees: This is what you pay Amazon to house your FBA products, and it’s based on the amount of space your products take up in Amazon’s warehouses. You’re charged storage fees monthly, and it’s more expensive during October through December. For products that have to be stored for longer than 365 days, you pay long-term storage fees. These can get expensive, and it’s why it’s important to find things that sell quickly or go overboard on your inventory.

Fees aren’t unique to Amazon and it doesn’t make it a bad option. If you were to set up a Shopify shop, you are looking at anywhere from $29 to $299/month, plus payment processing fees.

The same goes if you were to set up a shop on Etsy. There are fees for listings, transactions, payment processing fees, advertising and promotional fees, subscription fees, etc.

I think you get it… fees for selling online are unavoidable. There might be some platform-specific ways to lower your fees, but the ultimate goal as the seller on any of these marketplaces is to sell quality and profitable products. This means happy customers, fewer returns, and higher profit margins.

Deciding what to sell on Amazon FBA

Most Amazon FBA sellers will tell you that what you decide to sell can either make or break your business. They’ll also all agree that you need to start small. That means don’t dump a ton of money into inventory until you decide if this is the best online business for you.

The best categories on Amazon have a perennial appeal. There’s always going to be a market for these.

• Baby stuff: People keep having babies, and first-time parents, especially want all of the right gear and clothes for their babies. I can attest to this as my wife and I are just a few weeks out from having our first baby, and I will buy pretty much anything that promises my wife and/or baby will be happy.
• Clothing and apparel: In 2020 so far, the top sellers have been exercise clothing – sports bras, joggers, yoga pants, basketball shorts, etc. But overall, clothing has always done well on Amazon, especially basic, essential items.
• Electronics: TVs, cameras, cell phones, streaming sticks, music players, chargers, video game systems, etc.
• Books: Yep, books! People regularly search Amazon for books, and the profit margins for sellers are fairly high if you buy used, popular titles.

You can easily see what’s currently trending on Amazon under the Best Sellers tab, where you can see the top categories and most popular items in each one. These change regularly, but it gives you an idea of what sells well.

Unlike some of the side hustles I talk about on M$M – blogging, freelancing, starting a YouTube channel, etc. – where you approach your niche based on your passion or knowledge. Selling on Amazon FBA is different. The most successful sellers choose their niche based on what sells well on Amazon.

Think about it this way… if you’re a blogger, you really need to love what you’re blogging about because the job requires that you write so much about it. That’s why I started a personal finance blog – I was passionate about helping millennials understand how to manage their money better.

If you love your niche or know a ton about it, it will be easier to come up with tons of great content and readers will keep showing up for your stories and experiences.

But on Amazon, there isn't room for storytelling. People come to shop. Most don’t even come to Amazon to browse – they know what they want. So your job as the seller is to list products people want. You can always research products to find the best ones and how to list them, but it’s vastly different than other online jobs that rely on your personal experience with the niche.

Sourcing things to sell on Amazon FBA

After you learned what sells well, the next question you’re probably thinking about is how do I find things to sell?

There are a few different approaches you can take, and most people who run an Amazon FBA business pick and stick with one approach.

Retail or online arbitrage

You may have heard the word arbitrage to describe buying and selling stocks or other securities – the idea is taking advantage of a price difference between two markets.

For Amazon FBA, the two markets are where you bought the product from and the market you’re selling it to now. This means you’re buying products at a lower price and selling them on  Amazon where the market is higher.

Retail arbitrage is buying things from brick-and-mortar businesses, and online arbitrage is buying things from online stores.

The goal is to find things at deeply discounted prices so you can flip them and make a profit on Amazon FBA.

You can start with things that are listed as clearance or buying off-season items that are discounted. Amazon FBA sellers use price scanning apps like the Amazon Seller App or Scoutify to scan items when they’re in the store to see what the item is being listed for on Amazon, best seller rank, approximate profits, and FBA fees.

This will help you decide if buying 12 discounted iPhone chargers will be worth your investment, for example.

The benefit of retail or online arbitrage is that it requires a lower upfront investment. You can buy a handful of the item compared to hundreds. That minimizes your risk and lets you get your feet wet before committing to a product.

The main downside is that your profits may not be as high.

Despite lower profit margins, most seasoned FBA sellers recommend starting with arbitrage.

Buy from wholesalers

You will need a sales tax ID number and some serious capital to buy from wholesalers, but the benefit is that you are buying at close to the same cost retailers pay for items. You’re also working with existing brands, building relationships with them, and can sell a nearly unlimited number of these items.

To find wholesale items, figure out what you want to sell (research top-selling Amazon items) and contact the brands directly. There might be local distributors, which is good for establishing a relationship with the wholesaler.

The best wholesale items to sell on Amazon are ones that have a high selling rank, a price above $20, and aren’t being currently sold by Amazon or the manufacturer.

That’s a tricky bill to fit, which is why this one is better for more experienced Amazon FBA sellers who know the market and have the cash to invest in wholesale items.

Private label selling

This is another advanced level selling strategy, because you have to know enough about the market to create a brand around the items you want to sell.

Many private label sellers look to Alibaba to source products directly from manufacturers, which you’d then list for sale under your brand. You’ll want to look for manufacturers who have been around for at least two years.

Others create entirely new products. This is even trickier and your results can vary widely. I watched a YouTube video about a seller who created a private label product, and made $25,000 in revenue but only kept $6,000 in profit.

They used a Kickstarter to fund the initial product purchase, but they overbought and the name of the product was misspelled on it. They were left with over 1,000 items with the misspelled word, and they’re now paying long-term storage fees.

The bottom line with sourcing your products is to start small. Retail arbitrage is really the way to go for new sellers. You can get to know Amazon’s FBA platform and find out which products sell well before making a big investment.

Tips for starting your Amazon FBA business

I explained what Amazon FBA is, the fees it has, told you which products sell well, and how to source things. The next step is getting started, and here are some best practices for starting your Amazon FBA business.

1. Research, research, research

Selling on Amazon FBA can be a lucrative side hustle, but it requires that you spend time researching what sells well on Amazon. This will help you decide what to sell, how to price your items, and how to create your listings.

The best way to research is to just spend some time on Amazon looking at the best sellers list, reading the listings, and then finding the best places to source your items.

2. Consider bundling products

When you pick a specific niche, it means you might be able to maximize your sales by bundling related items. You can see a list of items that are frequently bought together to come up with ideas for bundles.

For example, if you’re selling a baby wipe warmer, adding a package or two of wipes would make sense. Similarly, if you’re selling something that requires batteries, give the buyer an option to add the corresponding batteries to their purchase.

3. Keep it simple when you start

This has been mentioned a couple of times, but it’s important enough to bring up again. It’s so much easier to learn how to sell on Amazon FBA when you have a handful of items for sale. You can get better at creating listings and streamline your process before you add more products to your store.

4. Use good SEO practices

Amazon is a search engine, so you’ll want to make sure your listings (product titles and descriptions) are optimized with relevant keywords.

You can do some keyword research by looking at current product listings any by thinking about how people would search for this particular item.

In the example I used early on, the Bose headphones, I searched “Bose headphones.” Related keywords are “noise-canceling headphones” and “Bose QuietComfort.” A buyer might not know the exact product name, but related keywords will help them find what they’re looking for.

5. Fully utilize product listings

Most Amazon listings have bullet points that give a quick overview of the product and its features. Make sure those bullet points provide useful information, like features, sizes, why it works, etc.

You can add even more info in the product description that shows up further down on the page by adding more product photos, describing what makes this product better than the competition, and more.

A well-written product description tells buyers why they should buy from you instead of another seller.

The final word on making money with Amazon FBA

I want to make this clear: selling on Amazon FBA isn’t something that you can get up and running overnight.

However, here are some statistics from Jungle Scout that will give you an idea of how much you can earn and when:

• 22% of Amazon FBA average $1,000-$5,000 in monthly sales
• 13% of sellers average $5,001-$10,000 in monthly sales
• 15% of sellers average $10,001-$25,000 in monthly sales
• Two-thirds of sellers see profit margins above 10%, and 36% of sellers have profits margins above 20%
• 67% of sellers said they were profitable in the first year – 22% in the first 3 months, 22% in the first 3-6 months, and 23% in the first 6-12 months
• 57% of sellers spend less than 20 hours a week on their Amazon FBA business

I look at those numbers and see potential. Remember, the online world is big, and more and more people are going online to shop for everyday items.

That means there’s room out there for new sellers. Remember to start small, have realistic expectations, and put in the work.