The risks and disadvantages of selling on Amazon include potentially losing your listing to a negative review, losing thousands of dollars via an accidental copyright infringement, and more. Amazon fees, the cost of advertising, and lack of control, and more increase these risks.
What are the Cons of Selling on Amazon as a Small Business?
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.
2. Amazon 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.But, Amazon holds sellers to a strict 24-hour response time for customer messages, even on weekends and holidays. Sellers must do this to avoid suspension.
3. 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 a customer buys your product, you won’t get that money right away. Often, sellers wait around 14 days for funds to hit their bank account.
An Amazon Reserve can withhold your balance even longer. Amazon reserves funds to ensure you have enough money to fulfill any refunds. Sometimes reserved funds take 7 days to clear from the EDD (estimated date of delivery). These rules change according to venues and sellers.
Finally, if Amazon suspends your account, they can withhold your funds for 90 days or longer.
5. 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.
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.
7. The Worldwide 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 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
Even if you are an established seller, a new seller can disrupt your sales by providing a better price. Soon, the two of you are in a price war. You force each other to go lower and lower until profit margins are minimal.
Amazon still collects the same fees from you, so they don’t mind that these price wars lead to better prices for customers.
Some product categories have become impossible to compete as more suppliers begin selling on FBA.
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.
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.
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.
3 Horror Stories of Actual Amazon 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.
More in-depth article on this here: Why 83% of Amazon sellers fail
Do You Need a Trademark to Sell on Amazon?
No, you do not need a trademark to sell on Amazon. Though, if you are a wholesaler or arbitrage seller, you may need a reselling license depending on the brand you wish to sell or your location.
However, while not required, a trademark can protect private sellers from copycats. If you have a trademark, you can register your brand with the Amazon Brand Registry. And if you’re registered, you can request assistance from Amazon. This is especially helpful if another seller steals your trademarked logos or name.
Do You Have to Be a Business to Sell on Amazon?
No, you do not need an LLC to sell on Amazon. But, it adds a layer of protection between your business and your personal assets. An LLC does not cost much, and you do not need to pay a lawyer to complete it unless you’d like to.
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.
Another online business with a high success rate is local lead generation.
What are the Benefits of Selling on Amazon?
Benefits of selling on Amazon include access to trusting customers that's growing exponentially every year (100 million Amazon prime users in 2018 grew to 200 million in 2021) leverage Amazon's strong logistics infrastructure, and leverage the fact that 50% of all online sales happen on Amazon.
Conclusion: How Do You Decide if Amazon is the Right Option For You?
Research the risks and disadvantages of selling on Amazon. Learn strategies to combat them, have the right mindset that building a truly sustainable Amazon FBA business takes time and persistence. There's a lot of moving pieces and ultimately you're a guest in Amazon's domain, you have to play by their rules.
If you're living paycheck to paycheck and you can't afford to lose out on the initial investment of starting a FBA business which is at minimum $5000, then maybe this is not for you. What causes most people to fail is fear & panic when any issues arise and they quickly throw in the towel because they're so scared of losing money.
If these risks have not scared you too much, then I would go learn more about all the different Amazon FBA business models and consider which one serves the lifestyle you want most.
My Online Business Portfolio in 2022
Amazon FBA: $15K NET per month (After 50% split with a partner)
Local Lead Generation: $52K NET per month
Amazon FBA is a great business model but like all businesses it has its challenges, particularly how competitive it's becoming as more big brands & suppliers began selling on FBA themselves 2-3 years ago.
Another business model I've had a lot of success with is local lead generation. It's simple and less competitive. It might be a better fit for some people.
Click here to learn all about it: Local Lead Generation vs. Amazon FBA