Profitability on Amazon eludes the heavy majority of sellers. Either for a lack of knowledge on how to pull profitability, but then also with how to be profitable on Amazon. Because of Unauthorized 3rd Party sellers, many big brands punt on Amazon as a profitable channel; so many sellers are breaking MAP (minimum advertised product) which puts their entire catalog as a loss leader to get volume on their DTC.com website or retail channels.
We’ll break down each type of fee, where to find the cost, and then do an example product: Bamboo Toothbrush that consumers spend $8 on.
Let’s start with the Cost of Goods
Raw Materials – The actual ingredients of the product. You’ll negotiate this with your manufacturer. For our example product, the bamboo toothbrush is made of bamboo wood ($.75 cost per brush) and bristles ($.20 cost per brush).
Labor – The time and cost associated with a worker or machine putting these raw materials together. You’ll negotiate this with your manufacturer. For the bamboo toothbrush, we’ll say this is a machine doing this for $.20 per brush.
Packaging – the container on the product. You’ll negotiate this with your manufacturer. For the bamboo brush, this is an eco-friendly box that costs $.20 per brush.
Labels – the UPC on the packaging. This normally is printed on the packaging itself. Sometimes, Amazon makes you apply a 2nd label on each unit.
Other costs – This could be anything like preparing for increases in raw materials to other fees like import duties. We like USA-manufacturing when you can, but that’s often expensive so we look to Mexico, India, Korea, or other places with affordable manufacturing prices while still maintaining quality.
Example Profitability so far: $8 selling price – 1.35 CoGs
Now for Amazon Fees
Referral Fee – for most products, this is a flat 15%. Some categories are higher and some lower, but going to low price points like this example change the math, as well. For the bamboo toothbrush, this comes out to $.56 per unit sold.
FBA Fulfillment Fee – This is entirely dependent on weight and size. Try your best to make your product as efficient for shipping as possible. You’ll create less waste and also get into smaller/lighter tiers of FBA fulfillment fees. For the bamboo toothbrush, this is $2.29 to offer 1-to-2-day prime shipping across the entire USA.
Shipping to Amazon Fee with Inbound Transportation – This is where Amazon has really changed drastically. You used to be able to essentially game the system to be able to ship where you wanted to (closest FBA facility as possible) to save money. Nowadays, Amazon has tacked on inbound placement fees and changed the rules to shipping in. For this example, we’ll ship in 5000 bambo toothbrushes in a pallet that costs $5k to get from the manufacturer to the FBA facility Amazon chooses for you. That’ll come out to $1/unit to get to FBA. FBA has over 70% better conversion rate than MFN, so it’s a no-brainer.
MFN Shipping Fees – If we were fulfilling out of our own facility, then we’d have to use USPS, UPS, Fedex, etc. to ship in. Let’s assume this is around $2.75 for the bamboo toothbrush.
Inventory Fees: Monthly and Longterm – if your inventory is sitting idle at FBA facilities, the fees ramp up QUICKLY. You can go from a perfect IPI score (inventory score from Amazon) to not being able to ship in if your inventory is sitting too long unsold or if Amazon deems you overfilling their facilities. You then have to spend more money to bid on more space to ship in; this is a huge headache during Q4 every year.
SC Account Subscription Fee: This is typically $39.99/month.
SnS Fees – If you’re doing Subscribe and Save, you’re going to be offering 10% off for getting this product to customers on a repeat basis. It’s a gamechanger for businesses as repeat purchases don’t require endless PPC costs to achieve. You can get up to 7% repeat customers on SnS which is an insane amount of repeat business.
Example Profitability so far: $8 selling price – 1.35 CoGs – $3.85 Amazon Fees including FBA
“With the average Amazon Seller seeing more than 50% of all sales coming from Amazon PPC (pay-per-click ads in search), a winning system for managing Ad Spend and investment levels is more important than ever before.” – Stephen Noch of the AdLabs Team
Refunds
Refunded Amount – Customers are going to order your product and try to get a refund or return the product. No matter how good you are, people are just so picky. In apparel, this as high as 20% for some products. You need an iron-clad product page explaining details of the product to help reduce this. Amazon also lets you do returnless refunds now to avoid shipping fees. For the bamboo toothbrush, this comes out to 1% of products returned, so expect ads to be 1% less effective and we can equate the refund costs to be $.08 per unit sold.
Refunded Referral Fee – Amazon gives you back the referral fee, typically, when a refund occurs.
Refund Commission – Amazon also has more refunds they do to sellers
Value of Returned Items – Most products will not be sellable after a return, so if some of the returns are sellable, great, we have our money mostly back and can ship in again.
Example Profitability so far: $8 selling price – 1.35 CoGs – $3.85 Amazon Fees including FBA – $.08 to cover refunds
Promotions
Promotions/Deals/Discounts/Coupons – You will frequently use coupons, lightning deals, 7-day deals, Prime-exclusive discounts, and all of Amazon’s discounting tools to get new-to-brand customers to come to the brand, then to remarket them, so they come back in the future. Amazon even released brand-tailored promotions so that you can discount those that almost bought your product, but left it in the cart without checking out. For the bamboo toothbrush, we’ll run sales 9 days out of each month, so let’s say that 15% of our orders that come in have an additional 20% off. We’ll equate this cost to $.24 per unit as promotional tactic.
Redemption Fee – Amazon has fees when people use their deals, coupons, or promotions. Most of the time, this is $.60 per clip, for example.
Example Profitability so far: $8 selling price – 1.35 CoGs – $3.85 Amazon Fees including FBA – $.08 to cover refunds – $.24 for promotions
Advertising Spend
Sponsored Product Fees – Amazon used to be so simple. You run sponsored product advertisements for $.50 a click and with limited competition, your conversion rate is high, and things are wildly profitable. Today’s market is saturated with 1000s of sellers joining daily. You have to be different (bonus if you have a patent) and unique will also being affordable enough to make sure that customers can afford you in a world where the consumer price index has spiked since the pandemic. We’re going to assume that 75% of your Amazon advertising spend comes through Sponsored products and you have been able to get your total Amazon marketing spend to be around 15% of the gross sales as your product has thousands of positive reviews to make your conversion rate high. This means that $.9 of each unit sold goes to Sponsored Products.
Sponsored Brand Fees – Another way to advertise on Amazon. This type of placement can be a headline, video, image, or more. It can show up on search and on product pages. We’re going to assume that 15% of your Amazon advertising spend comes through Sponsored Brands. This means that $.18 of each unit sold goes to Sponsored Brands.
Sponsored Display Fees – Another way to advertise on Amazon. This type of placement can be a headline, video, image, remarketing, or more. It can show up off-amazon and on search and on product pages. We’re going to assume that 10% of your Amazon advertising spend comes through Sponsored Display. This means that $.12 of each unit sold goes to Sponsored Brands.
Amazon DSP Fees – Once you’ve gained healthy organic and paid rankings on terms, you begin to wonder how to remarket better and how to climb the marketing funnel. Amazon demand-side platform allows you to go off-and-on of Amazon to serve customers again and again. You can even remarket to increase repeat shoppers. Most brands are required to spend over $50k a month (if not higher) to gain access on their own. In this example, we’ll say we’re working with an agency who has a DSP seat (access) to let us spend 3% of product sales on DSP which is $.24 in this example.
Off-Amazon Advertising Fees – Your brand matters most. You need to be creating social content. You need a healthy DTC site to be gathering emails and gaining momentum. This all matters when you’re trying to get into retail or trying to exit the business. In this example, we’ll leave off the spend here to focus on Amazon profitability. When we’re primarily running Meta Ads, Google Adwords, Tik Tok Ads, Reddit Ads, or others, we’re trying to send over 90% of the traffic to the DTC Website to help it scale while sending some of it through Brand attribution links to get the brand referral bonus of 10% to increase our Amazon sales. Amazon loves off-amazon traffic, especially through email and social links.
Influencer and Affiliate links – Another brand-building tool is by getting an army of influencers and loyal followers to spread the products around their audiences. In this example, we’ll leave off the spend here to focus on Amazon profitability.
Example Profitability so far: $8 selling price – 1.35 CoGs – $3.85 Amazon Fees including FBA – $.08 to cover refunds – $.24 for promotions – $1.44 advertising
Expert Assistance
Agencies or Consultants vs In-House – Most brands do not have an extra $180k minimum to hire 3 FTEs to run Amazon as a channel. In this example, we’ll say this costs $5k a month.
Other Costs
Warehousing or 3PL – If we were fulfilling out of our own facility, then we’d have to have space to hold product, prepare shipping labels, and ship them out of. This is a variable typically you only see when a product is at scale and has large wholesale accounts and DTC.com website sales.
Content Creation – This could be as low as $99/video on Billo or $100/photo on Soona, but some brands hire in-house content teams to scale content. If you want to grow a brand, you need awesome content in the form of UGC and professional content. A/B test on Amazon to see what works best for your brand. You also need killer graphic design to make the best packaging and PDP possible.
Research and Development – You’ll want to be constantly launching new variations, sizes, colors, flavors, scents, and new product lines. Real brands scale their product catalog over time to increase market share.
In-House Salaries – You will have to pay yourself at some point. Unfortunately, you need to have money on-hand for inventory POs, shipping, and all of the above fees. E-Commerce is difficult and takes a lot of capital.
Final breakdown
$1.04 per unit in profit. That’s all that’s left after all of these costs. 13% profit margin. You have to sell 10k units a month to have enough to pay yourself $5k and your expert assistance.
Formula: $8 selling price – 1.35 CoGs – $3.85 Amazon Fees including FBA – $.08 to cover refunds – $.24 for promotions – $1.44 advertising
According to SellerAccountant, the average Amazon FBA private-label seller has 21% profit margin after all the costs. For us to achieve this in this bamboo toothbrush example, we’ll need to get the sales volume up significantly to negotiate the CoGS down with your manufacturer. You’ll want to launch new sizes, colors, and new product lines in order to be a brand large enough to be investable or sellable.
Amazon is difficult. You have to have excellent margins and be a superb product for Amazon to work for you well. Make sure to build your social media, other marketplaces, and especially your DTC site to ensure your brand is healthy and growing.
