37% of sellers are not profitable in their first year of selling on the Amazon marketplace, according to a 2022 seller report by Jungle Scout. Many Amazon FBA sellers are out there killing it and making great money, but there are also many others making big mistakes that separate them from the profitable sellers. While there are relatively few ways you can lose money renting out virtual real estate through the local lead gen online business model, there are quite a few ways that you can lose money with Amazon FBA. Below we break down some of the most common mistakes sellers make that cause them to lose money with Amazon FBA and some tips to avoid them. One of these made 93% of sellers lose money in 2021!
1. Quitting too soon
Just like Amazon Prime members expect to get their products delivered quickly, many new FBA sellers think they will start making money right away, but that usually just isn’t the case. If you get started with retail arbitrage or online arbitrage, you can start making money pretty quickly. However, if you use any of the other common Amazon FBA business models like wholesale or private label, it can take a year or more before many sellers see some returns because there is a substantial upfront cost associated with those business models that leads to more cash going out than in.
Amazon FBA guru Dan Rodgers explains how a cash flow pinch can take many new sellers by surprise and cause them to assume their business has failed prematurely, when in reality they just haven’t planned accordingly and waited out the cash flow pinch. A cash flow pinch occurs when you have already purchased a bulk order of products and they are starting to sell, but you need to purchase your next order before receiving the revenue from the first order in order to keep your inventory in stock.
If you’re using a business model that requires a large upfront investment, go into your Amazon experience with realistic expectations about when you’ll be profitable so you don’t end up quitting too soon. As mentioned, a large portion of Amazon sellers aren’t even profitable in their first year, and many are likely to quit. By sticking through the right opportunity when others are too scared to do the same, you can win in the end.
2. Sending too much inventory into the Amazon fulfillment center
Buying your Amazon FBA products in bulk is a great way to optimize your per unit cost. However, if you send too much inventory into the Amazon fulfillment center and it doesn’t sell fast enough, you can incur some hefty storage fees. The standard Amazon FBA monthly storage fees are reasonable for most of the year, being charged at $0.83/cubic foot for standard-sized items. However, from October through December, those fees nearly tripled to $2.40/cubic foot. Even worse, if you leave items in Amazon’s fulfillment center for at least 271 days, you’ll receive an aged inventory surcharge on each item of $1.50 per cubic foot for items in Amazon’s warehouse between 271 - 365 days and then after 365 days that goes up $6.90 per cubic foot! This long-term storage fee can quickly wipe away your profit margin if you’re already operating on slim margins.
Create a removal order for items that aren’t selling from Amazon’s warehouse to avoid the surcharge. Before the removal order, you can try to lower the price of the item on Amazon to try recouping as much of your investment as you can.
3. Miscalculating the full cost of Amazon FBA
The Amazon FBA revenue calculator is extremely useful for getting an idea of whether or not a particular product will be profitable on Amazon, but it does not tell the whole story. After plugging in the price you will sell the item for, shipping cost to Amazon’s fulfillment center, number of units stored, and the cost to obtain the product, Amazon’s calculator will analyze your fulfillment fee and profitability. However, it does not account for things like extended time in storage, Amazon PPC advertising, money spent on product listing optimization, and defect items that customers will return and you won’t be able to sell.
Use the Amazon calculator with caution and if the margins are too slim, as in 15% or less, reconsider selling the product because unexpected factors could easily eat right through your margins.
4. Not adequately preparing products
Amazon FBA has fairly strict requirements for product packaging, and if you don’t do it exactly how Amazon’s guidelines stipulate, they will update your packaging for you and charge you the unplanned services fees. You need to check the specific packaging requirements for each product category you’re selling in and package your products according to those guidelines if you want to avoid unexpected packaging fees. If your product falls under multiple categories, you’ll have to prepare it according to all applicable prep types.
Make sure to review and follow the Amazon product packaging and prep requirements before sending your products into Amazon if you want to avoid unexpected seller fees that can cut through your profit margins.
5. Blazing through product research too fast and not using the right tools
Amazon is extremely saturated with products, so finding one worth selling can take a bit of time. Amazon FBA product research is a comprehensive process that an FBA seller should spend anywhere from 1 to 4 weeks on before committing to a product. If you choose a bad product that doesn’t sell because it’s in a highly competitive niche or lacks sufficient data showing consumer interest, you could be down thousands of dollars on your investment.
You should analyze many products until you find one that has a good potential for success. A product research tool like Jungle Scout or Viral Launch is a necessary expense for sellers who are serious about being successful Amazon FBA sellers. Product research tools enable you to analyze product data quickly to find opportunities you wouldn’t otherwise be able to see.
6. Choosing high risk products
There are many potential products you can choose to sell on Amazon, but some are better left alone because they come with high risk. High return and product defect rates can destroy any chance of profitability. Amazon can take your product listing down and restrict your selling privileges if your order defect rate is below the acceptable threshold of 1%. According to Movely, a reasonable return rate on Amazon is around 10%. However, some categories like consumer electronics or clothing and jewelry have return rates well beyond that, with up to 35% and 40%, respectively.
When you’re doing product research, always consider the likelihood of the product breaking in transit or malfunctioning for any reason, including user error. There are plenty of products new sellers should avoid and many that even veteran sellers are already avoiding. It’s best to stick with products that come with low risk so you can ensure your profit margins stay intact.
Pro Tip
If you do decide to go with a more fragile product and it breaks in the Amazon warehouse or during order fulfillment, you can file an Amazon reimbursement claim in Seller Central to protect yourself from absorbing the cost if the fault is on Amazon.
7. Amazon advertising without optimizing
Amazon advertising is one of the most efficient marketing channels you can use as an Amazon FBA seller. With Amazon PPC, you advertise directly on the Amazon search engine where purchase intent is high. Amazon advertising is essential for generating an adequate sales velocity in order to move up in organic rankings. Sales velocity is a major ranking factor for Amazon’s algorithm, so it’s not uncommon for sellers to spend more on Amazon advertising than they make in profit for a short period as a tactic to position their products well in Amazon search. Because Amazon is so saturated, there are many sellers competing for the same premium advertising space. Sellers who don’t manage well their advertising campaigns can spend much more money than they need to for the same or inferior results.
Successful marketing requires a well thought Amazon PPC strategy and optimization plan if you want to make the most efficient use of your money. Use the data you receive from your Amazon marketing activities to adjust and tweak your campaigns in order to get the most out of your marketing budget.
8. Operating against Amazon’s policies
If you don’t run your Amazon business according to Amazon’s terms of service, they could suspend your account. Suspensions can be short term or forever, and if the latter, the cost of having Amazon ship your items back to you could demolish any profit margins you expected from those products. Also, you’ll definitely have to find another place to sell them other than Amazon, which may be challenging.
If you want to maintain good standing on Amazon, you should avoid:
9. Working with a bad supplier
Finding a supplier for your Amazon sourcing needs isn’t too difficult with the help of B2B supplier marketplaces like Alibaba and ThomasNet. These marketplaces make product sourcing for Amazon FBA simple, as you can filter through thousands of relevant suppliers to find the best fit for your needs. However, you need to be careful with who you decide to work with because often you are entrusting your supplier with a large sum of money to make your products in bulk. If you don’t follow best practices for working with suppliers, you could end up with a bulk order of malfunctioning products that no one wants to buy and that you can’t get your money back for.
If you want a great supplier experience, it’s best to:
Fun Fact
Amazon Handmade products have the highest profit margin of any product category at 32%! If you're artistically gifted and enjoy working with your hands, skip the hassle of working with a supplier and make your products yourself.
10. Supply chain issues
If you haven’t noticed, there’s been a lot going on around the world the last few years that has resulted in major disruptions to the global supply chain. In 2021, 23% of large brands and 11% of small businesses reported losing the coveted Amazon buy box as a result of global supply chain issues, according to Freight Waves. Considering that 82% of Amazon sales go through the buy box, the supply chain disruption absolutely destroyed sales for many businesses, with 93% noting that they had lost revenue in 2021 because of the issue. Unfortunately, it’s impossible to predict when there will be global supply chain issues because of major international events like pandemic or war.
The best you can probably do here is consider alternative sourcing options outside of affected areas if your supplier is in an area affected by whatever is causing the supply chain slowdown.
Less ways to lose money with local lead gen because it’s less complicated
Any online business model requires a fair bit of risk and can cause you to lose money. However, not all online business models come with such an array of ways to lose money as Amazon FBA. Local lead generation is another online business model that is more straightforward than Amazon FBA and allows extraordinary potential for passive income.
The local lead generation business model can be summarized as creating a website that targets a local business niche, optimizing the website so that it ranks on the first page of Google for a local search, and then selling the valuable leads your website generates to local businesses for hundreds to thousands of dollars per month. Aside from the cost of running the website and a tracking phone number, which are incredibly cheap nowadays, there are essentially no other overhead costs. Investing in the initial site ranking process and time between “tenants” for your piece of digital real estate are really the only ways to lose money with a local lead generation business. However, the ability to generate stable passive income makes the investment worthwhile for many.
Conclusion
Heading onto Amazon Seller Central to start your journey as a third party seller on Amazon’s marketplace is an exciting opportunity for many and a proven method of generating online income. As with any business, there are certainly some drawbacks like paying the Amazon seller fee or FBA fee, but the help Amazon provides with order fulfillment and customer service are well worth those costs for many. Even though there are a lot of ways you can lose money with Amazon FBA, if you follow the tips in this article and maybe take some time to learn from those who have already had success selling on the platform from one of the many Amazon FBA courses out there, you may just find yourself a best seller!
