Oh, what is FBA? Fulfilled by Amazon. It is a program where you can list products on Amazon’s site, ship inventory to Amazon’s warehouses and then Amazon will sell the product and ship it to the customer. Pretty much what you have to do is keep inventory in stock at Amazon and spend the money that you earn. It is that easy.
Well, is it really that easy? Probably not. It is work, and the work is getting harder as more and more people enter the program.
Maybe it used to be as easy as sending inventory to Amazon and spending the money, but as I say, that was years ago when the program was just getting off the ground. Now there is a lot of competition.
Two big ways of selling through FBA
Really, there are two ways that a LOT of people are selling using FBA. Neither of these methods is ideal in my opinion.
Retail Arbitrage is a very popular strategy, and it can make money. It can also lose money. Readers who are not familiar with FBA or with Retail Arbitrage are probably wondering what Retail Arbitrage (RA) is. Well, basically it would mean that you are buying from one retailer and re-selling the item through another retailer for a higher price.
For example, when using FBA, maybe you would go to the local Target store and go to their clearance aisle. in that clearance area, let’s say that they have a package of sponges that sell for $7.99 on Amazon, but Target is discontinuing the item and is offering them for $1 per package. So, you buy up all of the packages of sponges at Target, let’s say they have 100 packages available. So, for $100 you have just bought up all of the sponges at Target near your house. You go list them on your FBA account, ship them to Amazon and you decide to offer them for $6.99 to beat the going price of $7.99. If you can sell all of your sponges at $6.99 per pack, your gross income was $699, less the $100 that you paid, you will get $599 from the deal. Of course, you have other costs like shipping, gas to go to Target, etc, but this is only an example.
You already bought all of the stock of sponges from the Target near your house, but now that they sponges have made you a nice profit, you take a day trip and go to 20 other target stores within a 3 or 4-hour drive, and you buy all of the sponges at those stores too. You are going to be filthy rich by cornering the sponge market! Or.. are you?
The problem with RA is that there are a lot of sellers on Amazon FBA. They will figure out what you are doing. They will even figure out where you are getting your supply of sponges. So, maybe you live in Sacramento, CA and you have bought up sponges from within 100 miles of your home, there must be a ton of Targets within 100 miles of Sacramento. But, think about it… suddenly the guy who lives in Tampa, FL has seen that you are making a killing on sponges and he starts looking for those sponges himself. He finds them for $1 at Target and he buys all he can get at his Target and 25 other Target stores within driving distance. He sends them to Amazon and says he will sell the sponges for $5.99. He wants to beat your price so that people will buy from him and stop buying from you!
Mr. Tampa’s strategy works and suddenly you have a ton of sponges that you have tied up your money into, and they are no longer selling. What are you going to? Well, you drop your price to $4.99. You will still make a profit at that price! But, Mr. Tampa sees what you are doing, so he goes down to $4.50, and the market is his. Oh no, something terrible happens next.. a guy in Chicago has been watching you and Mr. Tampa and he wants to go in big time, so he buys sponges from all of the targets that he can find, and he lists them for $1.49. Super deep discount and he is barely making any money when he sells at that price after considering his costs of things like shipping, his time, etc. Now you and Mr. Tampa are both stuck with a ton of inventory that is not selling. Those nice profits are a thing of the past, and the money you spent to beef up your inventory is all sitting in an Amazon warehouse and not flowing back into your bank account.
So, yes… retail arbitrage has its dangers.
The Buy Box
You see, who sells the sponges (or any other product) depends on who gets the buy box. That means that when a customer clicks the button to buy the sponges, Amazon chooses which seller gets the sale! How does Amazon decide who gets the buy box? Well, it is not random. It doesn’t go to the best looking seller. It is a combination of different factors, such as:
- Who has the lowest price
- Who has the best track record of customer satisfaction
- Who has been selling through FBA the longest
These things and others, really a combination of all of the factors work together to determine who Amazon gives the sale too.
You can just bet that if you get into a popular product where there are a lot of sellers competing for the buy box, you probably are on the losing end of the battle. Only one person (or a few) will be the winner, and it is unlikely that it will be you. Or, if you go down so low on the price just to win the buy box, you might actually be losing money instead of making money. Not a good position to be in.
I said previously that there are TWO big ways that people are (or were) using FBA to make a ton of money. Maybe you should try the other way! Tune in next time for my next article when I will explain the other way that a lot of people make money on Amazon.