The Fetcher blog is quickly becoming synonymous with the messiest and most convoluted facets of Amazon seller life. So be it! We like to grapple with the hard stuff. Have you heard the ancient proverb: “A chain is only as strong as its weakest link?” Where is the chink in your armor?
What is the Weak Link in Your Amazon Game?
I played baseball in college, and my coaches always pushed me to focus on my weaknesses first. This is counterintuitive in a lot of ways. People naturally prefer to focus on the stuff they are good at. If you have a thin frame and excel in distance running, you will probably choose to go for a five kilometer jog instead of lifting heavy weights for your daily exercise. If you studied marketing in college, you would probably prefer to focus on honing your Pay Per Click campaigns instead of running Profit and Loss calculations.
Here at Fetcher, we think it is critical that Amazon sellers aim to be well-rounded. That means focusing on weaknesses! Maybe the runner should cut down on the jogging and lift more weights? Maybe the marketing graduate should leave the Pay Per Click campaigns on autopilot for a while and focus on the finances?
The aim of this blog is to tackle the tough topics that sellers are weak on, and break them down into simple, actionable takeaways that sellers can immediately apply to their Amazon businesses.
A few weeks ago, I made an observation that bookkeeping is the biggest weakness for 80% of Amazon sellers. If that is true, which components of Amazon bookkeeping are the hardest to comprehend? I would guess that Amazon fees are near the top of the list. Consider this post a guidebook to Amazon fees. The good, the bad, the ugly.
Why Should Amazon Sellers be Experts on Amazon Fees?
Amazon fees can be a headache. To start, they have weird names like “Variable Closing Fee” and “Inventory Placement Service Fee.” Not fun! When I first started selling on Amazon I ran the other way. I had no interest in learning the ins and outs of Amazon fees.
I thought of Amazon fees as a necessary cost of doing business, but I mostly ignored them. I told myself, “hey, it is not like Amazon would take advantage of me with outrageous fees? And every seller has to pay them so there it is not like I can avoid them?”
Those were lies of laziness. The truth is that I did not want to put in the time and effort to learn how fees work. That all changed for me when I studied my first month’s profit and loss statement and learned a hard truth…
Amazon Fees are the single largest expense for FBA sellers!
I was shipping full containers of products from China to the United States, yet my Amazon fees were twice as costly as my shipping expenses. Wow! That brings up the all important question: Can you still make good money using Amazon’s FBA services?
To answer that questions, let’s compare two of my Amazon products and evaluate the impact that Amazon fees are having on my overall business.
Product One (Standard Sized)
You can see that FBA order fees in August account for more than 50% of my total expenses for this product. FBA order fees are the fees Amazon charges sellers to perform fulfillment operations. Amazon shows you an estimate of the order fees on the Manage Inventory page of Seller Central. Here is the breakdown of FBA free for Product One.
Order Fulfillment Fees
The referral fee is the standard fee every seller has to pay for using the Amazon marketplace. The standard referral fee is 15% of retail price, however fees can vary slightly depending on the product category.
The variable closing per item fee is charged per item in addition to the referral fee for any seller not paying the monthly subscription fee to Amazon. The dollar value of the variable closing fee varies depending on product category. Serious sellers should all join Amazon’s Professional Selling Plan ($39.99 per month) to avoid the variable closing fee per item sold.
The order fulfillment fee is the accumulation of three separate costs.
- Order handling per order: a standardized rate based on the product size tier that your product falls into
- Pick and pack per unit: a standardized rate based on the product size tier that your product falls into
- Weight handling per pound: a rate charged based on the weight of your product, and the product size tier your product falls into.
I do not love the idea of spending $8.21 in FBA fees for every product that I sell. Obviously, this affects my margins tremendously. However, a quick look at profitability inside the Fetcher Product Breakdown page will quickly tell us if the fees are killing this product.
Nope. Even though the Amazon fees are taking a big chunk of change, Product One is still performing satisfactorily In this case, the cost of paying Amazon for it’s FBA services is totally worth it. Thanks Amazon 🙂
Product Two (Oversized)
This oversized product cost even more to ship from China, yet FBA fees still account for 56% of the product’s total expenses. Generally, the ratio of each expense is similar to Product One. Can we assume the profitability is also in good shape? Let’s see.
Nope! Product Two might have twice as many sales as Product One, but Product One is earning twice as much profit as Product Two. Bottom line – the FBA fees for Product Two are destroying profitability.
Product Two is still generating profit dollars, but it takes a lot of capital investment to produce a minimal amount of money. Plus, the margins are weak. At this price point, Product Two has a high financial risk, and low yield. An investor’s nightmare.
Hopefully, this product comparison clarifies two misconceptions.
- Profitability is achievable even when Amazon fees make up 50% of business expenses.
- It is possible to lose money per product sold due to Amazon fees.
Amazon sellers need to pay very close attention to FBA fees.
Before we move on, it is important to note that we only discussed the fees Amazon charges for its fulfillment services. In Fetcher, we call those “Order Fees” and they are ASIN specific. We also track “Monthly Recurring Service Fees” that get charged to the overall business. Do not forget about these guys!
Monthly Recurring Service Fees
Professional Sellers pay a standard subscription fee for the right to sell on Amazon, regardless of account size. Storage fees, however, vary depending on the size of the product and the number of units stored within Amazon’s fulfillment center. Here is a look at the three Monthly Recurring Service Fees for Product One in August. Another common Fee you will see in this category is the Disposal Fee that Amazon charges you to trash unsellable or overstocked inventory.
Now that we have a feel for the impact of Amazon fees, let’s take a look at some actionable tips to manage Amazon fees…
Avoid Long-term Storage Fees
Managing inventory storage can be an effective way to keep Amazon fees down. Long-term storage fees take effect after a product has been sitting on the inventory shelves of a fulfillment center for more than six months.
Amazon implements the fees on February 15th and August 15th every year. Sellers are charged $11.25 per cubic foot of space that they take up. That rate doubles to $22.50 if your product is still in inventory after one year.
The key here is to manage inventory closely, and keep inventory levels functional. That means forecasting demand and only supplying the Amazon fulfillment centers with the equivalent supply.
But what if forecasting fails, and demand drops off leaving static inventory on the shelves? Consider executing a removal or disposal order for those products. In fact, Amazon is currently offering a pilot liquidation program that allows you to liquidate eligible units, and Amazon will reimburse long-term storage fees that were already charged. Sweet!
You may have seen this notification email from Amazon on September 13th. Learn more here.
With all that being said, the threat of an inventory stockout is far more costly to an Amazon business than overpaying on storage fees. There is a fine line between the dreaded inventory stockout and overpaying on storage fees. Walking the tightrope of inventory management is tough. I recommend the inventory forecasting and management tool Forecastly for all things inventory.
Monitor Weight Handling Fees and Price Products Accordingly
Earlier, we learned that Product Two was oversized and had higher FBA fees as a result. Specifically, the weight handling fee was disproportionately high. The heavier the product, the higher the weight handling fee.
Sellers really need to consider their profit margins when electing to sell heavy items. On that note, do not forget to account for the higher freight costs associated with shipping heavier products. Use this free FBA freight calculator to compare freight quotes between potential products.
Product Two is a prime example of failing to consider profit margins before investing in a heavy product with high weight handling fees. As a good rule of thumb, products should be priced proportionate to their weight handling fees. Let me explain.
Take the two products from my example. FBA fees for Product Two are 28% higher than Product One. However, both products are priced around the $20 mark. No wonder Product Two’s profit margins suck!
Let’s use my FBA fee proportional pricing rule to get Product Two back on track. Let’s assume both products retail for $20. I know the profit margin for Product One is 36%, and the product is performing well. The profit margin for Product Two is only 8% (28% lower than Product One), but it gets twice as many sales as Product One. That tells me that there is ample demand for the product, and room to increase my price to improve margins.
I need to raise the price of Product Two by 28% to drive profit margins to the same healthy level as Product One. The new retail price for Product Two to $27.50.
What You Need to Know about 4th Quarter Changes to FBA Fees
It is definitely time to be planning for the 4th quarter. Amazon FBA volumes, growth rates, and inventory levels grew last year. The U.S. fulfillment centers were very full in November and December of 2015.
Naturally, Amazon has adjusted the fee structure (starting on October 1st) to incentivize sellers to stock only the inventory that is expected to sell during the holiday period.
Basically, monthly storage fees are being reduced by 25% in October, and increased by 2x in November and December for standard sized items. They are being increased by 3x in November and December for oversized items.
Amazon is also reducing weight-handling fees in November and December by 10% to 25%.
So why the big increase in monthly storage fees, only to decrease the weight-handling fees?
Well, by increasing monthly inventory fees, and decreasing weight-handling fees, Amazon is incentivizing sellers to reduce, or sell through, their inventory before the new year. Plan accordingly!
The key to managing Amazon fees is knowing exactly what Amazon is charging you, and why. Do a proper cost benefit analysis like we did with my two products earlier in the post.
As we saw in the comparison, selling on FBA can lead to healthy, profitable businesses, but there are many sellers out there failing to turn a profit because they are not effectively anticipating and planning for their number one expense – Amazon fees!
If you have any questions about Amazon FBA fees please leave them in the comments section and I will get back to you.
Author: Shane Stinemetz
Jiu Jitsu fighter, Sci-Fi lover and Digital Nomad. After becoming an FBA seller, Shane left the tech scene in Silicon Valley to work on Fetcher and travel around the world.