The risks and disadvantages of selling on Amazon include:
- Amazon controls your small business.
- Amazon has strict customer service guidelines.
- Amazon guidelines lead to a distant customer relationship.
- Amazon withholds your funds.
- Amazon brand gating and category restrictions.
- Amazon charges big fees.
- The worldwide Amazon market is highly saturated.
- Someone can hijack your Amazon product listing.
- You might need to fight in a price war.
- Amazon advertizing is expensive.
Selling on Amazon can boost your income, but it has some risks and downsides. According to RevenueGeeks, over two million active sellers use Amazon Marketplace. In 2023, 45% of these sellers made $1,000 to $25,000 per month. Additionally, 47% of small and medium-sized business sellers earned over $100,000 in total sales. However, inventory logistics are complex, and Amazon can remove your listing anytime or deny your product. Additionally, a single negative review can slow or stop your sales. Also, Amazon strict rules can lead to sudden account suspensions or closures because of policy violations, causing major disruptions. It's important to know these risks and disadvantages before you sell on Amazon.
Reddit user Sm00th_syllable shared his experience selling on Amazon, highlighting the high Amazon costs involved. Redditor notes that Amazon charges fees up to 40%, which can significantly reduce profitability. The platform also requires adherence to strict listing rules and substantial advertising spending to gain visibility. Sm00th_syllable pointed out that even without active campaigns, charges can accrue, and customer service was not helpful in resolving these issues. You will feel more like an employee than an entrepreneur. He suggests that investing elsewhere might offer better returns.
This article will feature the 14 risks and disadvantages of selling on Amazon. It also has real-life insights and stories from people who have experienced these risks firsthand. At the end, we will introduce you to a business model that lacks the risks and disadvantages associated with selling on Amazon.
1. Amazon Controls Your Small Business
Through strict rules and strategic actions, Amazon strips your control of pricing, inventory, and brand identity. Yes, you make your own decisions along the way. But, any decision you make will be within the parameters set by Amazon. These parameters can change in an instant.
Here are just a few ways Amazon can bring your business to a screeching halt:
- If you receive too many negative reviews, you can get suspended/banned.
- Your product might CRaP out, and Amazon will simply refuse to sell it. CRaP stands for “Can’t Receive a Profit”.
- Registered brands can request the suspension of a wholesale or arbitrage seller. Or, they can request the suspension of a copycat brand. Amazon can suspend or entirely remove these sellers without warning.
- Keywords like “fake”, or anything that suggests you’re selling a pesticide/weapon, can trigger a bot to halt your account. During this period, Amazon still charges you FBA fees.
- Amazon has been increasing their fees over the years
Remember: Amazon does not exist as a platform to serve third party sellers. They care about their own brand first and foremost. They can change their terms, fees, and services without warning and however they want. Their customers are theirs. They keep all the customer information, not you. They do not allow you to take their customers off their platform. If they suspect such, they can shut you down anytime, even for an honest mistake.
Account suspension is a real threat with the FBA business, although you can request reinstatement. It can still take weeks or months. Losing out on precious revenue.Follow their guidelines as carefully as possible.
Tim Jordan and Norm Farrar host a show called Legion Live, where they discuss the risks of selling on Amazon. Tim and Norm say Amazon controls small businesses on its platform because of its dominance and secretive nature. This lack of transparency makes it hard for sellers to get advice from others because experienced sellers don't want to share their strategies and risk being copied. They also warn that Amazon's algorithm is unpredictable and hard to understand. This makes it difficult for sellers to optimize their listings and improve visibility. The constant changes in Amazon's policies and algorithms can cause frustration and financial losses for small business owners.
Additionally, Amazon's focus on scalability and efficiency can lead to a loss of personal touch with customers. This can make small business owners feel disconnected and less in control, as they value building relationships with their customers.
2. Amazon Has Strict Customer Service Guidelines
The Amazon messaging service between buyer and seller is extremely limited. The seller can request reviews from their customers, but only neutrally. And, the seller can't provide links that take the customer away from Amazon. Amazon's Customer Service Guidelines are crucial for sellers to ensure a positive customer experience and maintain high seller feedback ratings. Ignoring these guidelines can lead to serious risks, harming a seller's account health and success.
These risks include incentivizing positive reviews, not responding to customer messages on time, poor communication, giving inaccurate information, not following Amazon's communication rules, and not providing high-quality customer service. Breaking these rules can result in account suspension or termination, damaging a seller's reputation and success.
Amazon Seller University discusses some of the Amazon's communication guidelines:
3. Amazon Guidelines Lead to a Distant Customer Relationship
Brand recognition is essential for small businesses to flourish. However, most customers don't realize they are ordering from 3rd party sellers. Rather, they think they are buying from Amazon. When a customer buys your product, they don’t really see your brand on the box. Instead, they see Amazon’s logo. Also, Amazon controls the messaging you place within the box. Sellers can’t place ads that encourage a direct relationship. No way to collect emails, very hard to secure repeat business.
If you're wholesale, you can win the Buy Box, but even reordering from their history doesn’t guarantee a repeat sale.
Again, Amazon cares about itself above all. If a customer reports a problem with a product, Amazon can force the seller to provide a refund. The seller must pay, even if the problems were not their fault. This way, Amazon keeps its reputation as a trusted retailer and passes the blame and cost to 3P sellers.4. Amazon Withholds Your Funds
When selling on Amazon, one major risk is that Amazon can hold your money. When a customer buys your product, you won’t get the money right away. Usually, sellers wait about 14 days for funds to reach their bank account. Amazon can also hold your money even longer with an Amazon Reserve. They keep funds to ensure you can cover any refunds. Sometimes, these reserved funds take 7 days to clear from the estimated delivery date. These rules can vary for different sellers and venues.
If Amazon suspends your account, they can hold your money for 90 days or more. This delay can cause cash flow problems and make it hard to manage your business expenses.
5. Amazon Brand Gating and Category Restrictions
To sell in restricted categories, you must provide more documentation and go through a lengthy approval process. Just some of these categories include:
- Automotive and powersports
- Certain sub-categories of baby products
- Collectible coins
- Entertainment collectibles
- Fine art
- Sports collectibles
- Video, DVD, Blu-ray
Note: These restrictions change depending on what country you sell in. You won’t be able to see the exhaustive list without an Amazon seller central account.
Some brands are also gated. Ungated brands can become gated without warning. These brands might take legal action against you for selling their product.
This website keeps a fairly updated list of current gated brands. Keep it handy to avoid purchasing bulk product from a gated brand.
In his YouTube video, "How to Find & Remove Amazon Generic and Misbranded Listings for Amazon Sellers," Jimmy Smith explains key points for sellers. He mentions that if a brand is not registered on Amazon's Brand Registry and a seller has no official relationship with the brand, they are out of luck. Even if a seller has legitimate products, they cannot sell them on Amazon without brand registration or an official relationship.
Jimmy also points out that when a brand becomes restricted, sellers have limited time to sell their inventory. If they don't sell it quickly, Amazon or the brand will take over the listings and lock them. This is a significant risk for sellers who have invested in inventory and may struggle to sell it in time.
6. Amazon Charges Big Fees
Here’s the breakdown of the minimum Amazon fees you can expect to pay as an Amazon seller:
- Seller fee: 15% of each product sold (for Amazon referring customers)
- Pick & Pack Fee: 15-20% (for Amazon fulfilling the order & managing inventory)
- Professional Seller Account: $39.99/month
- Shipping charges (amount varies depending on the product and category sold)
- Referral fee per item sold (amount varies by category)
- Closing fee: $1.80/item in certain categories
- High-volume listing fee: $0.001/SKU after the first 1.5 million SKUs.
- Refund administration fee: If you refund a customer, Amazon returns your referral fee, minus the cost of the refund administration fee. This amount is $5.00 or 20% of the referral fee, whichever is less.
Anyone selling on Amazon will pay these, whether you do Amazon Fulfillment by Merchant (FBM) or Fulfilled by Amazon (FBA). If you choose to sell with Amazon FBA, you will also need to expect these fees:
- Monthly inventory storage fees
- Long-term storage fees
- Removal order fees
- Disposal order fees
- Returns processing fees
- Unplanned service fees
The exact amount for each of these depends on the product you plan to sell. Amazon provides a good overview, but you won’t know exactly what you’re dealing with until you’re in the trenches.
It's safe to say you need products with at least 40-50% profit margin for it to make sense, selling on Amazon.
Don’t forget: YOU pay the shipping fees for any Amazon Prime orders, not Amazon. Only Prime-eligible products have a chance at the Buy Box. So, to stay competitive, you need to offer this option.
Tim Jordan and Norm Farrar mention that Amazon's fees can significantly reduce a seller's profits. Amazon charges various fees, including referral fees, pick and pack fees, storage fees, and other costs like shipping, packaging, and tariffs. Understanding and managing these fees is crucial for sellers to price their products correctly and stay profitable. Amazon sellers need to carefully calculate these fees and include them in their pricing strategy to avoid unexpected financial problems. Amazon's fee structure is complex, so sellers must understand these costs to make informed business decisions.
7. The Worldwide Amazon Market is Highly Saturated
2 new sellers join Amazon every minute. If you join this market, you will have a lot of competition from bigger, better, and more experienced brands and sellers. You'll also compete against Amazon itself. Amazon owns over 130 private label brands and over 470 exclusive brands.
Amazon Basics is one of them, but not all of them use the name Amazon, so you won’t really know just how powerful your competition is unless you do the research.
Here's one seller describing his challenges trying to compete with Amazon Basics.
8. Your Amazon Product Listing Can Be Hijacked
With so many competitors, it’s hard for your listing to win the Buy Box. Plus, competitors might hijack your listings with false negative reviews. Negative reviews on your product listing can affect your seller ranking, which may prompt Amazon to suspend your account.
9. You Might Need to Fight in a Price War
For instance, if you sell Bluetooth headphones and have been successful, a new seller might enter the market with a lower price. This disrupts your sales, forcing you to lower your price to stay competitive.
In this scenario, you and the new seller continue to undercut each other until your profit margins are very small. Despite these price drops, Amazon still collects the same fees from you. Amazon benefits because customers get better prices, but your profits suffer.
For example, the electronics category is competitive. Many suppliers sell similar products on Amazon FBA, making it nearly impossible to maintain profitable prices. This intense competition can severely impact your business, especially if you rely on higher margins to cover costs and grow.
10. Amazon Advertizing is Expensive
On average, you can expect 35% of sales to come from Amazon PPC. But, you might spend up to $381/day on average just to post relevant ads. That’s a hefty spend, especially since there is no guarantee that consumers will see your ad, click on it, and purchase your product.
These PPC campaigns are necessary for new product listings since it will not rank without real reviews. How much you need to spend in PPC is unpredictable.
Augustus Kligys of Orange Klik says that Amazon advertising can be costly if not managed well. It can eat into your profits. For example, running ads on high-ranking ASINs can lead to extra costs without an enormous increase in sales or visibility. This imbalance between PPC spending and organic reach means you might spend more without getting much in return. This can hurt your overall profitability on Amazon. It’s crucial for sellers to carefully monitor and optimize their advertising strategies to avoid overspending on ads that don’t generate the desired results.
11. Inventory Logistics are Complex
Managing inventory for Amazon involves:
- Finding a supplier
- Finding a warehouse or deciding to use Amazon FBA
- Determining how much inventory to purchase
- Deciding how often to purchase product
- When and where to send your inventory
- How to package inventory correctly
- Managing accidental orders, and more.
- Dealing with customs
- Dealing with delays sometimes Amazon or supplier can drop the ball and cause you to lose out on weeks or months' worth of revenue. You're the one responsible for talking to multiple entities to resolve it.
- There is a risk in never being able to see the products or inspect them yourself
Issues continuously arise from this process. Your manufacturer might get the order wrong. Extra product, or incorrect product, will arrive at the Amazon Fulfillment center. Amazon might miscount your inventory, tell customers that you have the stock to back up their orders, and then penalize you for being out of stock.
To correct situations like these, sellers must make multiple calls, submit tickets, and work hard to get the issue resolved. Meanwhile, they lose sales and money in storage and fulfillment fees.
There is a significant lag time between ordering your product and actually making sales. The product needs to be created (if you’re a private label seller), shipped, received, and checked in. The delay can reach weeks before anyone can buy it, or even longer if the product is coming from overseas.
SUMMARY
The biggest disadvantage to selling on the Amazon platform is the loss of control over your own business. You won’t be able to connect with customers or build brand recognition exactly how you’d like. You can't build an email list, so it's very difficult to get repeat business or build brand loyalty. Slow payout, gated brands, expensive fees, costly Amazon marketing, complex inventory logistics, and a highly saturated market only add to the risks you undertake when selling on Amazon.
Risks of Selling on Amazon (Real Stories)
Risks of selling on Amazon include locking up your investment in inventory and achieving no sales for months. If your product has too much competition (or you don’t know how to use PPC), it might be completely impossible to get sales at all. If you miscalculate all of those Amazon Fees, you could suffer from extremely low profit margins.
These are just some examples. The best way to learn about the risks of selling on Amazon is to hear authentic stories about other 3P sellers.
In 2020, one Youtuber was making over $46,000 per month on a single listing. In July, the listing disappeared. $46,000 went down to $0.
After pushing for answers, Amazon told the seller that a big company claimed he was using their mark on his product. Amazon immediately removed the listing so that they were not liable for any infringement. The seller got his lawyer involved, but they did not win their case.
When Amazon took away his listing, $70,000 worth of inventory was stranded. For each month that the listing was inactive, he lost $30,000. To recover, he had to start from scratch.Amazon requires heaps of documentation for certain products. One seller went into a private label baby product without completing much product research beforehand. To prepare the product, this seller spent:
- FDA Testing: $1,706
- Product and shipping: $4444
- Professional photography and 3D graphics: $650
- Ship to Amazon: $30
- Pro seller account: $40
All of this took her in the hole $6,871, and she continued to hit roadblocks.
Roadblock #1: The product did not have the brand logo on it. So the seller had to list a completely different product that included the logo before bringing in the one she wanted to sell.
Roadblock #2: The seller set up Enhanced Brand Content, or A+ Content. It takes about a week for Amazon to approve this content.
Roadblock #3: Amazon threatened to remove the listing if they did not provide the proper documentation. The seller had everything you see above, except an instruction manual.
Roadblock #4: The seller had paid for some special packaging for her product. This included a large sticker around the product’s box. To add the instruction manual, the seller needed to tear the sticker, throw out the packaging, and completely repackage the product. This process would take too long to complete before Amazon removed the listing. So, Amazon sent the product back, and charged her a removal fee.
One eCommerce guru interviewed a seller that had:
Over 98% positive feedback rating,
Over 99% on-time delivery,
Above 99% tracking information,
A miniscule, .11% defect rate,
0% cancellation rate, and
A speedy response times to customer reviews and concerns.
This didn’t stop Amazon from banning his account after only 6 customers complained that their product was damaged. When the account closed, this third party seller had over $180,000 in liabilities and over $350,000 in merchandise that sat in a warehouse. Amazon also froze over $100,000 of his own dollars.
Why Do Amazon Sellers Fail?
Amazon sellers fail by choosing gated or poorly researched products, having their account suspended, trying to do everything themselves without proper instruction, and investing too little (or too much) in their business. Also, many sellers do not prepare themselves for the risk. They fail to protect themselves with legal assistance, trademarks, and licenses.
Even with a winning product or two, sellers take profits from their business too soon. Any number of unforeseen event could cause that product to not sell anymore and suddenly your monthly income could come to a halt. Sellers should reinvest their profits back into launching more products so that a strong foundation is built before going on vacations or buying things.
What Percentage of Amazon Sellers Succeed?
Despite the risks and disadvantages of selling on Amazon, According to Jungle Scout's survey 20% of sellers made $100,000 or more and around 10-15% of sellers make six figures or more. Amazon FBA success rate is still a lot better than most other business opportunities out there like MLM's or dropshipping.
Conclusion: Why Local Lead Gen Biz Is Better Than Selling on Amazon?
Local lead generation is a better business model than selling on Amazon because it has less competition and offers more passive income. According to JungleScout, nearly 2 million small and midsize businesses sell on Amazon. About 70% of them are independent sellers. These sellers face tough competition from each other and from Amazon's own products like AmazonBasics. AmazonBasics can sell products cheaper and has a bigger marketing budget, making it hard for small sellers to compete and make good profits.
On the other hand, local lead generation has fewer competitors. You’re usually only competing with 10-15 local businesses, making it easier to attract customers. Each lead generation website can make you $500 to $3,000 per month with little effort. This means you can earn a steady income without the constant work required to succeed on Amazon. Local lead gen is simpler and less stressful compared to the highly competitive world of Amazon FBA.
For years, I've consistently generated $500 to $3,000 per month from each of my local lead generation sites. Now, with multiple sites, my income has soared to $52,000 monthly. Join my local lead coaching program to learn our proven 3-step process and achieve similar success.
Thank you for the great information. I've found that having a Business License makes it way easier to get products to sell via Wholesale. I know that there are some companies where you don't need anything to get wholesale products, but if you're really serious, start a legitimate business.
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Thanks so much and glad to hear you liked the post. Keep reading and appreciate your comment.