By Joe Waynick
In my previous articles, “Have You Heard Of FBA?” I suggested that as a local retail store owner, you could significantly enhance your sales using Amazon.com’s FBA program. In this article, we’re going to explore some of the costs of doing business using FBA.
One of the biggest reasons many store owners don’t take advantage of FBA is because they have a misconception about the fees. They think that merchant fulfilled orders are less expensive than fulfillment by Amazon. Unless you work for free, nothing could be further from the truth.
There are certainly fees associated with FBA. Consequently, you must price your books properly to cover those fees and still make a reasonable profit. Specifically, you have the following fees to consider:
Sales Commission: Amazon always subtracts a 15% sales commission from the selling price of your book.
Per Unit Fulfillment Fee: Sometimes called the “pick fee,” Amazon subtracts $0.60 from each sale to retrieve your books from the warehouse. The fee can be as much as $1.00 for other types of merchandise.
FBA Weight Based Fee: There’s a $0.40 per pound weight handling fee.
Variable Closing Fee: A flat $1.35 fee is also subtracted from each order. Initially, Amazon said this fee was instituted to support the A-Z customer guarantee program. Now it’s not so clear. Whatever the reason, you have to pay.
There’s also a shipping fee, but it’s cancelled out by the shipping credit of the exact same amount. Since the net effect is zero, I’m not sure why Amazon even bothers to show it in the order detail. It’s all part of their strange accounting methodology.
The same goes for Amazon’s “promotional fees.” Amazon offers discounts to certain customers and those discounts show up on your order detail as promotional fees. Later on in the detail it’s added back in. The net effect is zero, but it’s included in the calculations for Amazon’s own internal reasons.
Cost of Goods Sold
In addition to the Amazon fees, you have your own costs to consider. Your COGS must be added to the Amazon fees to properly estimate the profitability of your FBA sales. For example:
Book Cost: Just how much did that book cost you? Make sure you account for it in your profit picture.
Labor: How much time did you spend handling that book before shipping it off to Amazon? Did it walk through the door or did you find it at a sale? How much time did you spend inspecting, cleaning, listing, and labeling it before boxing it up and shipping it out? An accurate picture here can mean the difference between profit and loss on low priced sales.
Outbound Freight: Once your books have been properly prepared, they have to be shipped to one of Amazon’s distribution centers. If you’re lucky enough to live nearby one, your costs can be as little as $0.11 per pound. If you’re unlucky and the distribution center is far away, you can pay as much as $0.55 per pound.
Shipping Supplies: Unless you get your shipping containers for free you have to pay for them. Same thing goes for packing slips, shipping labels, and packing tape.
Understanding The Profit Picture
If you traffic primarily in low margin books you’ll find that FBA fees combined with your own costs will quickly eat up your profits. In fact, on low margin books you can’t afford to pay more than 25c – 50c per book to make a modest profit. However, once your sales price exceeds $8 you can pay up to $1 for books weighing less that a pound and still triple your investment.
You can expect to earn as much as 50% more profit selling through FBA than shipping individual books to customers yourself. The reason is because Amazon heavily subsidizes the fulfillment process by leveraging its enormous economies of scale. The two driving factors that help Amazon achieve those economies are labor and warehouse storage.
A fully burdened salary of even a minimum wage employee will cost you $10 or more. If you hire temporary help through an agency you’ll pay about $12.
Where are you going to find good help paying only $7.25 per hour? Good luck. If you want a reasonable chance of finding good help for your store, plan on paying around $10, plus your 30% tax burden. Agencies typically add 45% to the hourly rate. Consequently, a $10 employee will actually cost you $14.50 through an agency.
If you don’t have employees, then you have to pay yourself. How much is your time worth? If you’re not paying yourself a fully burdened salary of $20 per hour then why do you own a bookstore? Do you really love books so much that you’re willing to work for peanuts?
Where are you going to store tens of thousands of additional books? Even if you have the room, how much does it cost? Your typical mass market paperback book costs a mere $0.01 per month to sit in one of Amazon’s distribution centers.
Your typical hardcover will cost you $0.025 or less per month to store. That comes out to about $0.45 per cubic foot per book. Cheap, dirt cheap. What are you paying per cubic foot of space in your existing store or warehouse? Are you even utilizing the space above your head to lower your costs?
You won’t find a better bargain on warehouse space anywhere. Period. That being the case, you can expand your inventory to an unlimited number of titles so long as your sales pay the freight. And you can do it without the additional hassle of employees, storage, and packing & shipping.
Look Before You Leap
This all sounds well and good, but obviously there’s going to be more to it. You can really lose your shirt with FBA if you aren’t careful. On the other hand, you can significantly increase your profits by employing just a few simple techniques.
In my next article, we’ll talk about FBA strategies and how to use them to safely grow your bookstore sales an extra $500 to $5,000 per month.
Joe Waynick is author of “Internet Bookselling Made Easy! How to Earn a Living Selling Used Books Online” (ISBN 978-0983129608). You can reach him at: Internet Bookselling Mentor.