Is Selling on Amazon Profitable?

With the start of the new year, you may be motivated to build your first business on Amazon – or maybe you’ve been selling on your own channel and need to make a switch. Perhaps you’ve already set up shop and are wondering if it’s worth continuing.

The e-commerce industry saw an explosion of growth this past year, with a huge portion of US online sales coming from Amazon. With the right products, marketing, and margins, many Amazon sellers are set up for success.

Is it worth selling on Amazon in 2021? The short answer is yes, for the foreseeable future, selling on Amazon has the potential to be very profitable.

The State of the e-Commerce Industry

With COVID-19, online Sales have grown exponentially and are expected to continue to grow through 2021. Global e-commerce sales were predicted to reach $4.9 trillion in 2021. For comparison, that number was just $1.34 trillion, five years ago in 2014.

Today, more businesses are selling goods online. E-commerce businesses have several platforms to choose from – huge marketplaces like Amazon and eBay, as well as selling platforms like Shopify and WooCommerce.

New technology developments in AR and AI continue to shape the e-commerce industry. These advances will enhance the online shopping experience for customers and sellers.

Market Outlook

When looking at the e-commerce market, it’s clear there is a lot of competition amongst online sellers.

When making a choice on which shop to purchase from, customers will weigh several factors, including price, convenience, and online reviews.

An important factor in success will rely on the seller’s ability to communicate the product’s key benefits. Since individual shopping behaviors are difficult to predict, businesses also need to make sure they are keeping up with trends in consumer behavior.

Amazon vs. Other Online Marketplaces

40% of all 2020 US e-commerce sales were conducted online. In recent years, Amazon emerged as the dominant online retailer and last year was no exception. In 2017, Amazon already held 37% of the US e-commerce retail marketplace. This number is projected to grow to 50%.

Projected retail e-commerce GMV share of Amazon in the United States from 2016-2021

Many take advantage of Amazon’s large reach and customer base. They are a very welcoming platform for new sellers – it only takes a few minutes to sign up and list new products

The difficulty lies in knowing what to sell. Amazon offers nearly 400 million individual products. It can be difficult for seasoned e-commerce sellers to know what products will bring in a profit.

Amazon Business Margins and Profitability

When it comes to selling on Amazon, the sales numbers vary. Sellers could bring in $0 a month, $1,000 a month, or even more.

On average, most Amazon sellers bring in at least $1,000 per month in sales – where on the other end some super-sellers make up to $250,000 a month

Keep in mind the costs of selling on Amazon. When products are sold, Amazon takes a cut of the price for the seller’s ability to use their marketplace.

Fees will depend on the type of Amazon seller accounts selected. The main fees and account types are the following:

Monthly Subscription Fee

  • Professional Selling Plan: $39.99 per month; no per-item fee
  • Individual Selling Plan: No subscription fee; charged $1 per item sold on Amazon

Depending on whether your FBA (Fulfilled by Amazon) or FBM (Fulfilled by Merchant) there may be shipping and other fees.

FBA sellers – This comes with another set of fees to store, pack, and ship, fulfillment, storage, and optional services, products from the Amazon warehouse.

FBM sellers – This is used when sellers want to leverage their own logistics infrastructure. This lessens the fees to Amazon will miss out on FBA advantages.

Referral Fees – sellers pay a Referral Fee on each item sold, which is a percentage of the product’s price. Referral Fees vary by category – as listed on Amazon’s site.

Depending on your product and type of account, there are other costs that you may incur.

Amazon sellers are also accountable for any tax liabilities for their business. Sellers should be aware of all the tax rules. Confused about sales taxes? See my post on state sales tax for e-commerce sellers here.

Making A Profit On Amazon

Establishing all your fees and costs will allow you to take a realistic view of sales needed to make a profit on Amazon. After taking into account all your costs, setting the price for your product involves some strategy.

Keep in mind when pricing on Amazon:

  • Understand your industry
  • Calculate your product acquisition costs
  • Know your cost of goods sold
  • Account for additional fees
  • Try to maintain a profit margin of 50% or higher

A big part of success on Amazon, which I’ve seen firsthand with clients, is getting your product seen. You need to have a good product that people want. Experienced sellers will figure out which products are popular and likely to sell. Then you need to figure out how to get the inventory.

Many Amazon stores will be selling various items. You need to know the margins of every product you are selling. If you understand the profitability of each item you can get a sense of what is working and not working. Once you know your profitability you can make strategic decisions to grow the company and how to reallocate capital.

Not every seller on Amazon will become a success story. Success on Amazon will depend on factors other than profit margins like product competition, business reputation, search placement, and paid advertising.

As Amazon continues to lead in the e-commerce industry, there will constantly be more demand for products and sellers. Amazon can become a unique money-making opportunity for those who do the research and the work seriously.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER, at Applied Capital. Email him at [email protected] or fill out a contact form.

DISCLAIMER
This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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