Have you ever wondered how Amazon merchants selling $2 items can possibly make a profit? The truth is that they are not.
In fact, most sellers fail to calculate all of the fees associated with selling on Amazon and end up losing money as a result.
To make matters worse, Amazon doesn’t exactly make it easy for you to tabulate all of your costs associated with selling on their platform and there are many hidden costs that Amazon doesn’t tell you about.
Because I’ve been selling on Amazon for many years now, I wrote this post to help you understand all of your costs including all unexpected fees.
I’ll also show you how to use Amazon’s fee calculator and enumerate all of your Amazon FBA costs.
Editor’s Note: If you are interested in learning how to start your own online store, click here to take my FREE 6 day mini course on ecommerce.
How Much Does It Cost To Sell On Amazon?
Amazon charges a variety of fees for the privilege of selling on their platform and when you first sign up as a brand new seller, you must choose between 2 plans, Professional or Individual.
An individual seller account does not carry a recurring monthly fee. However, you must pay a $.99 closing fee for every item you sell on their marketplace in addition to a referral fee of 8-45% (The exact fee depends on your product category).
A professional seller account costs $39.99 per month but you don’t have to pay the $.99 per item fee like an individual seller. As a result, if you sell more than 40 items per month, it’s always cheaper to get a professional seller account.
Professional sellers also have to pay a referral fee that ranges from 8% to 45%. Most product categories, however, will cost you 15%.
How Much Are Amazon Referral Fees?
Amazon’s referral fees are based on the product category you sell into and some categories also carry a per-item minimum referral fee.
For example if you sell jewelry, the referral fee is 20% for the portion of the total sales price up to $250 and then 5% after that. There’s also a minimum referral fee of $.30.
When you sell on Amazon, you will always get charged at least the minimum per-item referral fee.
But in practice, the percentage referral fee (which ranges from 8% to 45%) will almost always be higher than the minimum per-item fee unless you sell extremely cheap items.
Because most product categories carry a 15% fee, many new Amazon sellers incorrectly assume a 15% fee by default.
Make sure you check the referral fee table below because some categories have fees as high as 45%!
Here is a chart provided by Amazon to help you determine referral fees for your specific product and category.
(Note: I’ve only listed categories that don’t fall under the standard 15%)
Depending on what you sell, certain product types may carry variable referral fees as well.
For example books, music, videos, DVDs, video games and software have fees that vary based on category, shipping destination and the type of shipping service.
How To Save On Amazon Referral Fees
The referral fee that you pay Amazon is more or less set in stone and you can’t do very much to reduce it.
However, I’ve heard some Amazon gurus out there who recommend purposely miscategorizing your items in categories with lower referral fees to save money.
Please do not do this!
If you categorize your item improperly, you may never ever rank in Amazon search.
For example, if you try to sell designer headphones in the jewelry category, then you will never ever rank for headphones because Amazon does not expect to see “headphones” in the jewelry category.
How To Use Amazon’s Fee Calculator For Amazon FBA
If you sell on Amazon, it’s in your best interests to sell on Amazon FBA. Not only will your conversion rate be 3X higher than merchant fulfilled listings but your product will have far greater visibility in the Amazon marketplace.
However calculating the exact Amazon FBA fee can be extremely confusing and new sellers often drastically underestimate the true cost of Amazon fulfillment.
To help make the math easier, Amazon provides a handy FBA calculator which can be found here
To use the calculator, you must first do a search on Amazon and find an item that closely resembles what you are trying to sell.
Amazon will then use the dimensions and weight of this item to help calculate your fulfillment costs.
Here’s the calculator in action using a garlic press as an example.
Once you’ve chosen a similar item, enter in your selling price and product costs and hit calculate.
Amazon’s calculator will then output the approximate cost of Amazon fulfillment using FBA.
While this calculator is simple and easy to use, it is by no means 100% accurate. In fact, Amazon full on discloses that the calculator is there for approximation purposes only!
In reality, there are a number of factors that you must consider that are NOT factored into this calculator.
How Much Does Amazon FBA Really Cost?
The place most new sellers screw up is that they don’t take into account the size of the item or the extra bulk that Amazon adds when packing the product.
First off, Amazon always adds a packing weight of at least .25 lbs depending on the size of your product (Amazon will add up to a 1 lb more if your product is large and falls under the oversized category).
As a result, if your product weighs .76 lbs, Amazon will always round up to over 1 lbs in their shipping calculations which will increase your costs.
You also have to take into account the dimensional size of your product as well. For example, Amazon charges a lot more money for oversized goods and you have to take this into account in your calculations.
Below is a table of Amazon’s oversized item fulfillment charges for your review.
In most cases, the extra dimensional fulfillment fees are NOT covered in Amazon’s fee calculator so you have to cross check your package dimensions with the table above to get an accurate cost assessment.
How To Save On Amazon FBA Fees
The best way to save on your Amazon FBA fees is to plan ahead and be paranoid about everything.
As you are developing your products for sale, make sure that you design your package size to fall well below the oversized item category to avoid paying the extra fees.
You also have to take into account dimensional weight when designing your packaging as well.
What is dimensional weight?
Dimensional weight is a formula that UPS, FedEx and other major shipping carriers use to gauge shipping costs. Typically dimensional weight is calculated as Weight x Length x Height /139 (The number in the denominator is negotiable).
Shipping carriers (and Amazon) will compare the weight of your package to your dimensional weight calculation and charge you the higher of the two costs.
If you aren’t paying attention, you can easily screw this up and I’ve had colleagues pay ridiculously high shipping costs because a 1 lb item was housed in an irregularly shaped box.
Once you’ve planned ahead with your packaging, you still have to be paranoid.
Make sure that you send your product to yourself for inspection before doing a bulk shipment to Amazon’s warehouse just to make sure that the dimensions of your product and weight match what you expect.
Then, once you make your first shipment to Amazon, make sure that the dimensions that Amazon measures match up with your measurements.
Amazon often screws this up and unless you are paying close attention to your Amazon bill, you may not discover that you’ve been incorrectly paying oversized FBA fees until a few months have passed.
In the event that you find a discrepancy, make sure you contact Amazon support immediately and have them re-measure your items BEFORE you start selling them.
How Much Are Amazon’s Storage Fees?
In addition to Amazon’s fulfillment fees, you also have to pay Amazon for the privilege of storing your goods in their warehouse.
And when it comes to fees, Amazon has drastically increased their storage costs every single year.
What’s confusing about Amazon storage fees is that they change depending on the time of the year and it’s difficult to time your inventory storage needs.
For example, over the holiday season from October to December, Amazon’s storage fees can increase by up to 3X. Here’s a table of storage fees for your review.
The size of your products have a dramatic effect on Amazon’s storage fees. In general, oversized items will cost you a significantly higher amount for Amazon to store in their warehouse.
How To Save On Amazon Storage Fees
Because Amazon has a monopoly on Amazon FBA, there’s not much you can do to save on storage costs and they have you over a barrel because you pretty much have to use their warehouse to get the “Prime” label.
Note: You can still get the Amazon Prime label for your product through a program called Seller Fulfilled Prime, but you must be extremely careful because there is a high risk of account suspension if you don’t deliver your goods on time.
The best way to save on your storage costs is to accurately predict your inventory levels and make sure that you aren’t storing too much product at any given time, especially during the holidays.
You also have to take into account Amazon’s long term storage fees as well.
If you store inventory at Amazon for longer than 6 months, you will get penalized an egregious amount of money.
Long term storage penalties are calculated by the cubic foot and are outlined in the table below.
Overall, it’s in your best interests to store no more than 6 months worth of inventory and use LTL shipping to Amazon’s warehouse to save money.
Costs Of Selling On Amazon That Most People Do Not Consider
Most of the costs discussed above are fairly straightforward and most sellers are able to account for these costs in their calculations.
However, the following costs described below are unexpected fees that most people really don’t think about until they actually experience selling on Amazon.
Cost #1: Shipping Goods To Amazon’s Warehouse
Whereas most people account for Amazon’s fulfillment fees, very few new sellers consider the costs of shipping goods to Amazon’s warehouse.
Getting your goods to Amazon can actually be quite expensive!
What makes matters worse is that Amazon often forces you to send your goods to multiple warehouses across the country.
For example, when you create a shipment on Seller Central, Amazon may ask you to ship your goods to California, New York and Texas!
To combat these costs, you want to avoid shipping goods via UPS or other courier services because it’s super expensive.
Instead, you want to ship full containers and LCL freight directly into Amazon or use LTL if you can.
There is one quick tip that I’d like to share that will save you on costs when Amazon asks you to ship to multiple warehouses.
Instead of splitting up your shipment for each warehouse, simply send all of your inventory to a single warehouse in the beginning. Then, once you get your next shipment in, send it to the next warehouse and so on.
In general, Amazon doesn’t care when you ship to all of their warehouses as long as your product eventually reaches each one.
Cost #2: Returns And Damaged Goods
Because Amazon makes it so easy for a customer to make a return, you will experience a much higher return rate selling on Amazon as opposed to your own online store.
For example, our Amazon return rate is easily 3X that of our ecommerce store.
Also, certain product categories on Amazon have a much higher return rate than others. If you sell clothing, you should expect over 20% of your sales to be refunded.
What sucks is that no matter what, you still have to eat the Amazon FBA and referral fee for the sale!
In addition, you may not be able to re-sell the returned items as “new” if the customer opens or tampers with the product before returning it.
One year, an Amazon customer purchased many dozen napkins from us, used them for a party and then returned the soiled napkins for a full refund.
Well guess what? We had to eat the Amazon referral fee, the Amazon FBA fee and the cost of goods since they could not be resold!
As result, if you sell a highly returned product like clothing on Amazon, you must take into account the return rate in your calculations!
As products are returned, you should track each SKU’s return rate and also the writeoffs related to inventory and Amazon fees.
Cost #3: Advertising And Amazon PPC Ads
Once you list your items on Amazon, they aren’t going to sell on their own. You have to advertise using Amazon PPC!
Editor’s Note: Make sure you check out my guide on How To Run Amazon PPC Sponsored Product Ads – A Step By Step Guide
When you first launch your product, your advertising costs may well exceed all of your revenues!
In the life of your Amazon product, you will be continuously spending money on Amazon PPC, Facebook ads, Google ads and other promotional mechanisms.
As you are calculating your Amazon fees, you should allocate at least 20% towards advertising your products for sale.
Here are some other posts that I’ve written on advertising
- Facebook Retargeting – How To Use Dynamic Product Ads To Generate A 12x Return
- How To Advertise On Facebook – Strategies The Pros Use To Generate Sales
- Google Shopping Explained In One Simple Step By Step Guide
Cost #4: Overhead For Running Your Business
When you run any business, there’s going to be some amount of overhead. The good news is that running an ecommerce business carries much lower indirect costs than a brick and mortar store.
The most common overhead associated with an Amazon business are as follows.
- Photography – You will need to take high quality photos of your products which may require the services of a photographer
- Sellers Permit – Because you will need to pay sales tax, you will need to pay for a Sellers Permit in every state where Amazon has a warehouse.
- Product Liability Insurance – While Amazon technically requires product liability insurance to sell in their marketplace, they are not enforcing this just yet. But it’s in your best interests to get insurance to protect yourself in case you get sued.
- Business Structure – To limit your liability, you should form an LLC or corporation.
- Trademarks – Once you start selling on Amazon, you will want to register your brand which will require a trademark.
- Intermediate Warehouse Costs – Even though you will be using Amazon FBA for fulfillment, you may want to have your goods sent to a processing center to label or to perform quality control for your goods before they are sent to Amazon.
To address the above costs into your calculations, you should add up all of your overhead costs for the past 12 months and divide that sum by the number of units you sold during the same period.
Then factor this number into your overall costs of selling on Amazon.
Cost #5: Amazon Will Screw Up And Cost You Money
The biggest downside to selling on Amazon is that they screw up VERY often and unless you are paying attention, you will lose money.
Below are some costs that 99% of brand new sellers never consider when they start selling on Amazon.
Note: I classify these “hidden expenses” under the cost of doing business on Amazon.
Because it’s so easy for a customer to make a return on Amazon, you will receive a bunch of them during your lifetime as an Amazon seller.
The problem is that when a customer returns one of your products to Amazon, Amazon immediately refunds the customer but sometimes they forget to pay you back!
Unfortunately, this happens all the time and you really have to keep track of your finances or use a 3rd party service to discover when this happens and recover your money.
The other thing that sucks about selling on Amazon FBA is that every now and then Amazon mysteriously loses your shipment.
Sometimes, parts of your shipment get damaged on the way to Amazon’s fulfillment center.
Sometimes, Amazon outright loses your products!
Even though Amazon will reimburse you for lost product, you have to be the one to point out a lost shipment because Amazon won’t tell you by default.
One time, Amazon lost several boxes of our goods and we were reimbursed for the inventory. However 3 months later, they finally found our goods and then promptly deducted the reimbursement amount from our account.
Meanwhile, we lost 3 months worth of sales and had nothing to show for it!
Overall, you have to watch Amazon like a hawk and you always have to check and double check that the quantity received at Amazon matches the quantity that was sent.
Is Amazon FBA A Ripoff?
With all of the Amazon fees that I described above, you are probably wondering whether it’s still worth it to sell on Amazon using FBA.
Most people blindly sell on Amazon FBA and assume that storing your products in Amazon’s warehouse is a huge bargain.
But unfortunately, that’s not the case.
Many years ago, Amazon was much cheaper but today, they have increased their storage fees so significantly that it now exceeds that of a 3PL.
For example, Whiplash Merch charges only a $.45 per cubic foot storage fee compared to Amazon’s $.68 per cubic foot (and $2.40 from Oct-Dec). The costs do not rise over the holidays either.
As you use the Amazon fee calculator, make sure you compare the numbers to a traditional 3PL to see if it makes sense to keep your inventory there and send your goods to Amazon in smaller batches.
Do You Know Your True Profit?
As you can tell from this post, there are many factors involved in calculating your true Amazon fees.
And one of the most important tasks to get right is to figure out your true profitability after all expenses.
Make sure you do your analysis BEFORE you start sourcing products to sell and BEFORE you start selling on Amazon.
Remember, most Amazon sellers are losing money because they don’t take into account the hidden costs.
Overall, the most common ways to save money on Amazon fees are to do your homework upfront and try to prevent yourself from storing too much product in Amazon’s warehouse at any time.
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