If you already have, or you’re contemplating, a start-up with an actual physical product to sell, then you have probably heard of Amazon FBA – but what is it exactly and what are its advantages and any potential drawbacks you need to know about?
Well, as a budding mature-age entrepreneur myself I’ve been very interested to follow the progress of one of my friends, Georgina, who has been steadily building a very successful business in high quality skin care products, emulating the well-known and pricey Aesop’s range, but with some extremely creative additions as well.
Like so many other successful start-up businesses, Georgina’s was initiated in her garage, where she worked hard to experiment with bases and herbal ingredients (some of them very expensive) and the mixing, matching and blending processes to create not just practical but alluring fragranced skin products – from hand-wash, to body wash, to nourishing body oils, and later on perfumed candles and aroma diffusers.
The design of packaging (again very expensive) was a major challenge. Logos and branding took time and creativity. The initial sales (obviously on a loss basis for quite a while given the development costs) were to family and a network of friends. But there was a vision. The vision held firm and the viability grew. Finally there was proof of concept as the sales took hold online and some great exposure was achieved when a major Melbourne homewares brand with several suburban stores agreed to stock some of the range.
By now the garage was completely outgrown. It was time to lease a bigger space just for the production itself, and the rental was a significant expense. Georgina took on a couple of university student casuals to help her – but by now the real problem was storage, managing inventory and delivery. Packaging and posting individual orders and hand delivering the store orders had become unmanageable and Georgina was completely out of storage and handling room.
Amazon FBA (Fulfilled by Amazon) entered the Australian market space just 12 months ago – at exactly the right time for Georgina. As a great example if IaaS (Infrastructure as a Service), Amazon FBA manages every aspect of the pick-up, storage, inventory management, order shipping and even customer returns.
It’s useful to clarify that your product does not need to be sold on Amazon itself (although of course it can be). The winning point of differentiation for Amazon FBA is that it’s an end-of-the-line system which saves your business time and money because Amazon stores your products and manages their delivery in your direction. The fulfilment fees are extremely competitive, given Amazon’s vast network of storage, delivery and inventory management systems. Their advanced data management systems allow you to monitor and track all inventory, orders and deliveries as they are happening.
The fulfilment fees include all packing of orders, inner packaging and delivery, even including the management and accounting for any returns. Separately there is a monthly storage fee, based essentially on your cubic metres of stored product. It would be impossible for a small start-up company to access its own rented storage facility in an equally cost-effective way.
All of Georgina’s products are classified by Amazon FBA as ‘standard-size’, but companies with large physical products such as craftsman-made tables and furniture are also accommodated on a different storage fee schedule. One potential financial hiccup to be aware of, is that Amazon FBA storage fees have a price hike (literally tripled) in October-December because of the premium on space in the lead-up to Christmas, but this applies to the storage fee only, not to processing and delivery fees.
Obviously, costs will depend on the kinds of products being handled, but as an indication in Georgina’s case, her typical $30-$40 product has a per-item cost of under $3 for picking up, packing and shipping, plus around $30 each month per cubic metre of stored products. In the case of her business, that’s a lot of product she doesn’t need to store, package and handle for shipping, allowing her and her couple of part-time assistants to concentrate on what they find more interesting and enjoyable – developing and actually making their product range.
For a small business, there are really very few drawbacks in using Amazon FBA. Initial account set-up, including business and individual identity verification, and learning the system for preparing product for FBA collection is a bit complex initially, but once managed it’s plain sailing. It’s also sensible to check out the very large number of order fulfilment alternatives to FBA offered by many companies now for Australian-based businesses. Few can rival the economies of scale of Amazon, but the best deal for your business may depend on exactly what it is you’re selling and your own production or sourcing processes.
In this article, I’ve concentrated on Amazon FBA for Australian-based businesses creating physical products for sale. However, it’s important to remember that there is a massive growing global enterprise in third-party selling. This is where the trader sources products from an original supplier literally anywhere in the world, and then markets it with a price markup, often at a huge margin. Using Amazon FBA the third-party seller can create a highly profitable business without ever actually handling the physical merchandise at any point at all.
A variation on this, and one that is often highly successful is the ‘Private Label’ approach. This is where an already existing product is sourced, usually from a low-cost producer overseas, and branded with the third-party seller’s own logo and brand name.
Now that’s a completely different scenario from Georgina’s business, but a very interesting one to explore in a separate discussion another time along our journey.