Reasons Amazon FBA is a bad idea:
- The Amazon Marketplace is oversaturated with products
- Chinese sellers have taken over Amazon
- Amazon has a history of corruption
- Your Amazon product inventory will be mismanaged
- You can get punished because of another seller’s bad product
You don't need to look very hard to find reasons why Amazon FBA is bad. There are pros and cons to any business model, and Amazon FBA is no exception. Even so, there's a reason that millions of sellers and popular household brands like Crocs and Calvin Klein continue to sell through Amazon FBA. These businesses are making money while outsourcing some of the most difficult aspects of Ecommerce to Amazon's efficient systems. In fact, there are tens of thousands of Amazon FBA sellers bringing in at least 6 figures per year from their business. So, does the income potential of an Amazon FBA business outweigh the list of reasons why it's a bad idea?
1. The Amazon marketplace is oversaturated with products
Over 350 million products are sold on the Amazon Marketplace, according to Repricer Express. That’s more than the 310 active customers of the platform! In order to find selling opportunities, most Amazon sellers employ the assistance of a product research tool like Jungle Scout. Although these tools have certainly helped many sellers find the right product opportunity to start selling on Amazon, they have started to lose their effectiveness over the years. Many of the hidden opportunities that these tools were able to discover before have since been filled with seller competition. Furthermore, because most sellers are using these tools now and see the same recommendations, the few opportunities that remain are quickly discovered and competed over.
Not only are there many products on Amazon, but there are also often many sellers on the same product listing competing for sales of the same product. Amazon only allows one ASIN per product on its platform, so brand name and generic product listings are filled with multiple sellers.
2. Chinese sellers have taken over Amazon
The opportunity that third-party sellers had previously to make a profit by serving as the middleman between Chinese manufacturers and domestic Amazon customers has essentially evaporated. Since the mid-2010s, Amazon has been on an aggressive recruiting spree in China, hosting regular summits across the country, like Amazon Global Selling in Shanghai. Amazon set Chinese sellers up for success by hiring Chinese speaking support staff, implementing a Chinese version of Amazon Seller Central, and even offering end to end ocean freight services to Amazon warehouses. Chinese sellers now make up approximately 63% of all third-party sellers on Amazon, according to EcomCrew.
Chinese sellers have many advantages over domestic third-party sellers, including:
- Better access to the Chinese manufacturing system and connections throughout it
- The ability to quickly inflate their product listing with positive reviews while filling competitor listings with negative reviews, called review bombing, by working with other Chinese sellers and creating fake accounts.
- The advantage of bypassing US taxation while US sellers must report everything over $600
- Access to stolen proprietary platform data from China-based Amazon employees from services like ASINSpy, a Chinese-only ASIN report generator
3. Amazon has a history of corruption
Amazon sells its own products alongside third party sellers on the Amazon Marketplace, but it doesn’t always act in a fair manner like you would expect. A 2020 investigation by the Wall Street Journal found that Amazon used data from third-party sellers to create and sell its own private label products. Although this was an apparent violation of company policy, Amazon executives did it anyway. This is one of the reasons why Amazon is unethical in the eyes of some sellers.
Even worse, findings from nonprofit technology-focused newsroom, The Markup, found that Amazon often gives preferential positioning to its private label brands in the marketplace. Amazon brands typically appear higher in organic ranking than competitors, even when third party seller competitors have higher review ratings and more sales. Therefore, Amazon has not only mimicked the success of third-party sellers by directly targeting the same products and niches, but the company has also proven that its willing to brush those competitors aside to promote its own products.
4. Your Amazon product inventory will be mismanaged
Participating in the Amazon FBA program entails sending your product inventory into an Amazon fulfillment center and trusting they will handle your products without issue. Unfortunately, many sellers have learned the hard way that this isn’t always the case. For example, Amazon seller and YouTuber with over 120K subscribers, Marketing Food Online, experienced just this. After sending his product inventory into Amazon, he realized Amazon had miscalculated his inventory levels by nearly double. This can be a major issue because buyers may try to buy products from you that aren't actually available, which could negatively affect your Amazon ranking and sales.
It’s also possible for Amazon to outright lose product inventory after it is sent into the fulfillment center. Fortunately, there is a process in Seller Central to report lost inventory by showing Amazon proof, like an invoice from the manufacturer, shipment ID, and proof of delivery. It can take up to 60 days for Amazon to provide a verdict on the request. However, many sellers these days are reporting that Amazon is pushing back on these requests and making it difficult to get compensated for the lost items.
5. You can get punished because of another seller's bad product
Amazon’s inventory management system works by pairing the same products in the fulfillment center. If you share a product listing with other sellers of the same product, Amazon can co-mingle your FBA inventory with all the other sellers in the same storage bin. The problem with this is that not all sellers may be selling the same quality of product. Some sellers may even send fake or counterfeit products into the Amazon warehouse. However, if the Amazon customer complains about the product's quality by writing a bad review, all the sellers on the product listing share the blame.
6. Amazon takes a major cut of your sales
A 2022 study by Marketplace Pulse found that Amazon takes over a 50% cut of its third party sellers' sales. Although Amazon advertising fees play a role, most of the charges come from Amazon FBA fees, which a seller pays to outsource fulfillment-related tasks to Amazon. The primary FBA fee charges include:
- Amazon referral fees - Amazon takes an 8% to 15% cut of each item sold.
- Inventory storage fees - Amazon charges between $0.56 and $2.40/cubic foot per month for items stored up to 180 days or less, depending on the size of the product and month it’s stored in the Amazon fulfillment center.
- Fulfillment fee - Amazon charges between $2.47 and $158.49+ for shipping, depending on the weight and dimensions of the product.
FBA sellers are also subject to additional FBA Amazon fees like aged inventory surcharge fees, removal order fees, returns processing fees, and unplanned services fees. As the data shows, these Amazon fees can eat into your profit margin by a substantial amount.
7. You will have more refunds
As an FBA seller, you must abide by Amazon’s customer-friendly return policy and have no input on whether a product is accepted as a return. Amazon typically allows for a 30 day return policy, but often makes exceptions for customer returns that exceed this limit. According to SellerApp, 12% of Amazon products are returned on average. However, some product categories like electronic good and fashion apparel experience return rates as high as 35% and up!
If high returns aren’t enough to dismay you, you should also know that Amazon often forces third-party sellers to foot the shipping bill even though the transaction didn’t ultimately result in a sale. According to Amazon’s refund policy, if a customer returns a product that is still in sellable condition, Amazon returns the product to the seller’s inventory but does not reimburse the seller for the FBA shipping fees from the initial sale.
8. Amazon can remove your listings in an instant
Amazon has the right to remove your product listing and effectively freeze your sales at any time, even if you already have your product inventory in the Amazon warehouse. This is exactly what happened to Amazon expert and YouTuber, Dan Rodgers. Dan had $70,000 worth of product inventory, half of which was already stored at the Amazon warehouse, when he visited his product listing on Amazon and realized it had been removed.
After reaching out to Amazon, it turned out that a larger company in Dan’s niche had filed a complaint to the platform, alleging that his product listing contained the competitor's mark. Without contacting Dan to confirm this allegation, Amazon removed his listing. Dan effectively lost his income source, the high organic ranking he achieved on the product listing, and over 400 customer reviews, just because another company alleged he did something. This can happen to anyone selling on Amazon.
9. Amazon can suspend or ban your seller account
Besides just removing your listing, Amazon can also revoke your selling privileges and potentially ban your Amazon account from selling on the platform. Your Amazon seller account can get suspended for a variety of reasons, including:
Therefore, Amazon has the power to end your entire business in the blink of an eye and won't hesitate to do so.
10. It will take years to build a stable business
If you want an online business that reliably cash flows you a liveable income, it will take you around 2 years to build such an Amazon FBA business. Although FBA sellers do make money with short-term opportunities available in retail arbitrage and online arbitrage, these business models are not optimal for building a long-term business because profit margins are slim at between just 10% to 20% and you aren’t able to build something of value by ranking your own product listing on Amazon. The best way to build a long-term business on Amazon is to invest in creating your own private label product or doing Amazon wholesale. Although these opportunities typically require between $10,000 to $20,000 to get started because you need to buy product inventory in bulk, profit margins are much better, ranging between 20% to 40%.
You should aim to establish a stable Amazon business by having at least 5 products generating sales. This helps to ensure that your business produces a satisfactory income and that it can continue generating income even if you lose sales because of a new competitor taking your market share or Amazon removing your listing for some reason. If you start with one product and continue to reinvest your profits, you should be able to establish 5 products after a couple of years. However, most people need to make money much sooner if they are making a substantial investment and committing hours each week to their business.
11. There is a good chance you will lose money
It is possible to lose money on Amazon FBA. 12% of Amazon sellers that have been selling for two years or longers are not profitable, according to the State of the Amazon Seller report by JungleScout. Furthermore, 24% of Amazon sellers quit before they ever turn a profit, according to SellerApp. The chances that you get it right on the first product launch are slim. You’ll most likely have to dump money into launching a handful of products before you find a profitable opportunity. If you're forced to give up too quickly before that happens because you don't have enough startup capital or just can’t wait any longer to actually make money, you will be another one of the Amazon FBA sellers that loses money.
Is Amazon FBA worth it still?
If you want to make money with Ecommerce and use Amazon as a sales channel, selling on Amazon FBA is still worth it. Although FBA fees like shipping costs can be expensive, it’s still a great deal. It’s cheaper to use Amazon FBA to fulfill your orders because Amazon gets the best shipping rates in the country and passes them on to their FBA sellers, according to Amazon Marketplace Manager Kevin Rodgers from the Data Feed Blog. You also sell more with Amazon FBA. According to Amazon, FBA sellers make 20% to 25% more sales than sellers that fulfill their own product orders. Some other reasons to consider Amazon FBA are that:
Is Amazon FBA trustworthy?
Amazon FBA is trustworthy. Amazon has been serving third-party sellers through the FBA program since 2006 and businesses continue using the service because of Amazon’s great reputation. Although Amazon has participated in some seemingly unfair practices, like our previously mentioned example of using customer data to create their own private label products, most Amazon FBA sellers can be confident that Amazon will treat them fairly.
Should you buy an Amazon FBA business or start one from scratch?
You should start an Amazon FBA business from scratch. Buying an Amazon business is extremely expensive for most people. According to Vinnie Wong from SellerApp, the average sale price for an Amazon FBA business in 2021 on the platform was over $1.2 million! Even if you did have enough money to purchase an Amazon FBA business, you probably wouldn’t know how to properly run it without previous Ecommerce experience. Therefore, if you’re able, it’s better to start your own Amazon FBA business and build it into a profitable asset that you can sell instead. However, if you have the kind of money to invest into income-producing assets, you could probably just hire someone to run the business for you and enjoy the income it produces.
What is the potential return on investment for buying an Amazon FBA business?
The potential return on investment for buying an Amazon FBA business is a 5x return. That’s according to a survey by Empire Flippers that interviewed 31 different Amazon FBA investors. Empire Flippers has helped facilitate the sale of hundreds of Amazon FBA businesses over the years.
What should you look for when buying an Amazon FBA business?
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Conclusion
Although some people don’t make money with Amazon FBA, the majority of people are able to avoid that negative outcome. People do actually make money on Amazon FBA. In fact, approximately 47% of the FBA sellers that Jungle Scout collected data from for its 2023 Amazon seller report divulged that they have earned at least $100,000 in lifetime profits from their business. That’s not the only incredible fact the 2023 State of the Amazon Seller report reveals, though. Around 1,748,000 people are successful with Amazon FBA. This figure comes from the currently 1.9 million active Amazon sellers and the 92% of Jungle Scout respondents that reported being profitable. Even so, the high startup capital required and extended timeframe until the business is stable and profitable aren’t for everyone.
An alternative business model with much quicker and higher profit potential is local lead generation. Local lead generation entails building websites to attract customers for local businesses. A single local lead generation website takes approximately 6 weeks to 6 months to start ranking on Google and can generate upwards of $3,000/month, depending on the location and service niche the website targets. The best part about these local lead generation websites is that they don’t require much maintenance after you set them up, so you earn passive income. Whether you decide to start up an Amazon FBA business or choose another online business opportunity like local lead generation, it’s better to get started sooner rather than later because these opportunities only get more competitive as time goes on.
