In 2014, there was a company that made $89,000,000,000. Would you consider that a successful year?
If you’re like me, you probably would. That’s a really, really good year.
But what if someone told you that the company that made $89 billion also lost $241 billion?
When you make 89 and you lose 241, you’re not making money. If this continues, you will go into debt, and eventually the company will fail.
The irony of this lesson is that this company was Amazon.
In 2014, they came out with a cell phone and failed miserably with it and other similar efforts. They lost tons of money. This is why it is so important to know your numbers.
I’ve met plenty sellers who don’t know their numbers. They’re getting sales and seeing money come in, but they’re not aware that they are actually spending more on their product than they're making from sales. By the time the Amazon fees, supplier fees, and shipping fees are paid for, (not even taking into account soft costs, like time and labor) they’ll end up making nothing. They’ll lose money.
This is why it is so important you know your numbers.
Today, I’m going to take you deep on how to calculate Amazon FBA and merchant fees. I’ll show you how to record fees whether you're selling from Amazon’s warehouse or shipping from your home and will explain what every single fee is. If you’re a numbers person, you’re going to absolutely love this. If you’re not a numbers person, you’re still going to like this, because I’m making it very clear and simple. I believe this world needs more people explaining the little details so we understand exactly what to do.
This will teach you how to get very fast at calculating fees, so when you’re looking for a supplier on Alibaba or DHGate, you'll very quickly know if you're going to make money on it or not. You don’t want to take an hour to find out that you can’t make money on a product.
The first thing I want to make very clear is this: making sales does not equal making money. I can not overemphasize this enough. You can have a lot of sales. You can bring in 10 billion. But if you are losing 11 billion, you’re not making money.
The goal is not sales: the goal is to be profitable. That is why, to make money, you must know your costs. If you know your costs, you can make very good money.
Let me give you an example. A lot of very successful people who sell on eBay go out to hunt for products to buy and sell. They know that the most important thing to ask is “How much is this item going to cost me?” If they can get some really cool video game for $2, they can definitely make a profit. They don’t even need to know what the market is, they can make a killing profit off that one product, because the costs are very low.
The rule of thirds is also very important. I love this rule and it’s very simple. What is the rule of thirds? When you sell on Amazon, there are ultimately three entities involved: there’s you, there’s Amazon, and there’s your supplier. The supplier builds the product, Amazon posts and markets the product on their platform, and you sell the product. So each entity gets a third. If you can follow the one-thirds rule or better, you will do very well. Let’s say you have a product that is selling for $9. On average, you get three of those dollars, Amazon gets three, and the supplier gets three. That is success. It’s a simple way to keep your costs and prices working.
Some people complain about Amazon’s fees. At the end of the day they’re thinking, “33% of my product is going to Amazon? That’s piggish and selfish.” It actually isn’t at all.
If you were starting your own company, not only would you have to spend a ton of time marketing and strategizing on how to sell your product, but a third (and likely more) of your revenue is going to go just to marketing. Otherwise, you wouldn’t get any sales.
Amazon just takes care of that for you. The fact that it’s sitting in Amazon, where hundreds of millions of people buy from every year, is a huge help to you. Then, if you do want to go further and advertise it, it’s a quick and automated process. You can do it in under three minutes.
If you know your numbers, you can build wealth. You want to be rich? You want to make money? You want to build wealth? Then know your numbers. That’s why I’m going to take you through the specific details on how to do this and make it as clear as I can.
There are only a few types of Amazon fees: once you understand them, it’s not that complicated.
Referral Fees: Referral fees are simply the fee for selling your item on Amazon.
Imagine you sold houses for living. I know a guy named John who wants to buy a house, so I recommend John to you and he buys a house from you. You pay me a referral fee because I referred John to you. I helped you make that money; Amazon does the same thing. You’re paying for the privilege of putting your item in their store.
The referral fee is normally a percentage. Most of the time, it’s 15% of the retail price (what you’re selling your item for). So if you’re selling a product for $10, Amazon gets $1.50 through the referral fee.
The referral fee does vary category to category. Some, like jewelry, take out 20%, while others only take out 10%. I’ve even seen it as low as 6%, but as a general rule, 15% will go to Amazon when the product sells.
This applies both to FBM and FBA. FBM stands for Fulfilled by Merchant: this means that you ship the product out when the customer orders. One of my clients calls it “Fulfilled by Me,” I love it. FBA stands for Fulfilled by Amazon. This is when Amazon ships the product out after the customer orders.
Variable Closing Fee: A lot of people get confused about this: all it is is a fee for selling media items like a CD, DVD, or music.
Per Item Fee: This is a $1 fee you have per item that sells. This only applies if you have an individual seller account. When you first sign up with Amazon, you can become an individual or professional seller. A professional seller pays $40 a month and gets a lot of privileges and tools for it. If you’re selling at least forty items a month, it’s worth becoming a professional seller, because then you’re not having to pay that $1/item fee and it becomes worth it.
Fulfillment Fees: These are fees that are a result of fulfilling an order and getting it to the customer. You can have a product on Amazon, but if nobody buys it, you don’t have to pay a fulfillment fee. The next few fees I’m going to go over are fulfillment fees.
Order Handling (per order): This is Amazon’s flat cost, per order, for fulfilling your FBA orders. This only applies to when Amazon fulfills the order, or if you pay someone else to ship off merchant orders for you. If you do that make sure to calculate the cost based on how much time it takes them to fulfill each order. Remember, this is not the shipping costs to ship to the customer; this is the labor of actually packing it up, putting a card or note in it, and taking it to a shipment center. With Amazon, this fee does change based on the size of the product. You’ll only pay a fee of $1 if your item is “Standard Size Non-Media,” meaning it’s not Oversized according to Amazon’s standards and that it’s not media, like a DVD or CD. Keep in mind that this fee doesn’t apply if you are fulfilling the order yourself.
Pick and Pack (per unit): This is the cost of retrieving your item from Amazon’s warehouse. When Amazon receives your product, they have to take it out of the box, put it on a shelf somewhere, and then when someone buys it, they have to go locate it in their warehouse and pack it up. This is the fee for that. What if you’re fulfilling it yourself, FBM? This is when you are getting the product yourself from your own warehouse or house, so there is no fee for that. As a general rule of thumb, I keep my item under 16 ounces and smaller than the size of a shoebox. Any bigger than this and you’ll start paying a lot more for oversize charges and shipping costs.
Weight Handling: This is the cost of shipping your product to your customers. If you’re FBM, this is the cost you are going to pay to ship your item to your customer, depending on size and weight. This is really really important: shipping can get expensive. I love FBA because it is insanely cheap for them to ship items. If I have an item no bigger than 15x12x0.75 inches and under a pound, then it is only a $0.50 charge every time Amazon ships it. It goes up slightly when you have larger items, but it is still very cheap.
If you know your numbers, you will save yourself a lot of money. Even writing down certain weight or size guidelines to not go over, or only certain categories to sell in, can help a lot. I know this isn’t as exciting as going, “I sold this for $200!” But the truth is that for not only Amazon but also retail stores and companies, the profit margin is huge on accessories. Cords, trackpads, teaspoons, little things. The cost of shipping and storage is way less. Best Buy makes more money off the cables that plug into the back of their massive screens than the screens themselves. So remember that small is good, especially when you’re on the online retail world.
I hope this has been helpful for you. I will also include a spreadsheet that has a complete breakdown of Amazon fees and goes into even more detail. Just click the link below and it'll get sent directly to your email. Have an awesome day.
Know your costs so you can build your business!
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Married a pearl. Fathered 4 miracles. Fired his boss. Turned a single dime into $104,857. Today, a self-made millionaire, Seth and his team of 8 badass coaches teach entrepreneurs how to build passive income on Amazon.
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