Can you actually make a 300% ROI on Amazon? Sure. It’s totally possible. But it’s probably not going to happen with your first project, and it certainly isn’t going to happen without lots and lots of hard work.
You probably already know that selling on the #1 e-commerce platform of all time isn’t going to be a free ride. But how much does it really cost to sell on Amazon? At some point, every entrepreneur has had this idea strike, “Wow, I can manufacture that widget for $20, and I see similar products selling on Amazon for $80! That’s a 300% ROI, let’s do this!”
There are hundreds of “Amazon Gurus” out there touting these kinds of ideas. It’s a great equation to get you salivating over those $5,000 courses that teach you how to make millions of dollars by only working 2 hours a week from your couch.
We’re taking a look at the true costs of selling on Amazon. For this example, you are planning to sell 500 units within 6 months of your product landing in an Amazon warehouse.
Let’s break it down into a few categories.
Development, prototyping, and manufacturing costs deserve a book of their own, so we won’t do a deep dive into these in this breakdown. Take a look at what kinds of costs you can expect for different product categories here [link to development costs article].
There are so many variables at play here, so for this example, let’s include the cost of development and prototyping in your per-unit cost. Let’s set your total cost per unit to $20, making your spend $10,000 to manufacture 500 units.
Inventory cost: $10,000
Great, you’ve made your product. Now you need to get your inventory from the factory in Shenzhen to an Amazon warehouse in California. Each unit weighs 450g and you’re shipping via sea freight (28-45 days). The factory packs your product into 10 cartons of 50/pcs each and sends them out the door.
- Origin Charges: $403
- Ocean Freight: $88
- ACI USD: $35
- Handling & Documentation: $50
- Dock Fee: $45
- Delivery: $85
- Duty: $327
- Insurance: $100
Total Shipping costs: $1,133
Amazon has built a first-class fulfillment network, Fulfillment By Amazon (FBA), that can get your product to your customer’s door in record time… at a cost. FBA shipping prices actually aren’t too bad, but final costs will depend on where your customers are, how quickly they expect to receive the product, and the size of your product. All things considered, though, FBA usually comes out on top for speed and price.
For this example product’s dimensions, the shipping costs to get from the Amazon warehouse to your customer’s doorstep is $4.95/unit.
FBA shipping cost: $2,475
Amazon Referral Fees
Amazon didn’t become the highest valued company in the world by letting people sell on their platform for free! It depends on the category, but they’ll take anywhere from 6% to 25% (an average of 13%) of each transaction. For this example, let’s use the average referral fee of 13%, which works out to $10.40 per unit sold… Ah, so that’s why Jeff Bezos is so damn wealthy.
Total Referral Fees: $5,200
Let’s assume you’re going with Amazon’s professional plan. The Professional plan costs $39.99 and comes with all of the bells and whistles. The individual plan charges $0.99 per unit sale, so unless you’re selling fewer than 40 units/month it doesn’t make much sense. Having a professional plan also unlocks benefits such as top product placement that have a massive impact on your rankings and conversion rates. If you don’t get the professional plan, you will not be have access to nearly as much data to make informed strategic decisions. If you’re serious about selling on Amazon, the professional plan is a must.
Total cost: $240 ($40 x 6/mo)
In order to sell on Amazon, you need a UPC code. The recommended way to get your hands on a UPC code is to purchase directly from GS1, the top global provider. This will set you back $250 to register and $50/year to renew up to 10 bar codes. There are cheaper ways to do this but taking the easy way out might come back to bite you if it causes issues on the logistics side of things with Amazon. They don’t like seller-created errors and will punish you for any delays you create.
UPC Cost: $250
You’ve gotta pay to play in the Amazon game, and their Pay-per Click program (PPC, or “Sponsored Products”) is no longer an option. It’s a necessity.
If you want to be successful on Amazon, you need to buy clicks. The exact numbers for PPC depend on a lot of variables. It can cost anywhere from a few cents, to $5 per click. For argument’s sake, let’s say your ad is operating at a 10% conversion rate (1 sale per 10 clicks). Your cost per click is $1, so to get one sale you need to spend $10. If you’re wanting to sell through your full 500 units in 6 months, you’ll need to sell 2.7 units per day which brings your PPC spending to $27.70/day. That’s $831 per month with a total of $4,986 spent on PPC at the end of your 6 month selling period.
Yes, this is a gross oversimplification of PPC, but it gives us a ballpark figure to get an idea of what costs lie ahead.
PPC cost: $4,986
- PPC cost: $4,986
- UPC Cost: $250
- Amazon Account: $240 ($40 x 6/mo)
- Total Referral Fees: $5,200
- FBA shipping cost: $2,475
- Total Shipping costs: $1,133
- Inventory cost: $10,000
Your total cost of selling 500 units in 6 months on Amazon FBA is $24,284.
The total per-unit cost of goods sold = $48.57 / unit
If we stick with the original target selling price of $80 you are making $31.43 in profit per sale.
You’re looking at pulling an ROI of 64.7% with total profits of $15,715.
Hey, that’s not so bad! But it’s a far cry from the initial 300% ROI projection.
There are a few costs that were not included in this breakdown. Many Amazon sellers give away a number of units when they launch a new product to generate product reviews to increase their ranking and conversion rates.
We did not take taxes into account because these are very much subject to how you structure your business as well as your location. You should speak to an accountant to see how to best structure your business.
This might sound like an awful lot of work for a somewhat decent payday. It is! Learning how to successfully sell on Amazon is a massive undertaking with no guarantees. Selling on Amazon is a long process with dozens of variables to manage and hundreds of ways it could all go sideways. The first time around isn’t going to be smooth. You will run into issues at every step of the way, but you’ll be learning.
Imagine what you could accomplish if you went through all of these steps yourself and really learned the ins and outs of selling on Amazon. If you learn how to make an Amazon store profitable, you’ll have the ability to grow. Start small, work hard, and scale aggressively. If you can make that 64.7% ROI on just one single product, think of the wealth you could generate with 5, 10, or 20 products selling on your store. Build your brand and scale it in the golden age of e-commerce on the biggest store the world has ever seen.
Just don’t expect that 300% ROI pot of gold at the end of the rainbow.