Lots of readers wanted to know more of the nitty gritty details on How to Make Money on Amazon.
A reader Joe, asked:
So what kind of stuff are you buying that you are able to sell? Just looking for an example or two. I am unsure how easy it is to find deals that would make you profit without spending all day shopping. Also, does the cost of all the boxes add up quite a bit or is there a cheaper way for that?
Another reader Tommy added:
This just sounds too good to be true. Even if it were true, I would expect the free market to eventually eliminate the arbitrage opportunities over time. I would like to see some solid examples of how this works. For example, which items are you selling? Where did you buy the items? Etc. The devil is in the details.
Great questions Joe and Tommy! Let’s take a look at some specific examples for us to walk through to see it in action. These are some of the first few items I sold recently as an Amazon FBA Seller.
Example 1: Online Purchase
iPhone Speaker Dock. The speaker dock was a one day deal on Woot.com. It was one of the first items I purchased while trying out Amazon selling.
- Purchase price: $81.66
- Selling price: $118.00
- Amazon fees: -$13.29 (Commission: -$9.44, FBA fulfillment fee: -$2.00, FBA weight fee: -$1.85)
- Inbound Shipping: $1.97
- Overhead: $0.50
- Net profit: $20.58
- Profit margin on costs: 25%
Observations. Ironically, I bought the items at Woot, which is owned by Amazon, right? The profit margin on these speaker docks was on the low side, however, since it was a higher priced item, I was able to make a quick $60 (I bought 3). I wanted to show you this item since it was bought online.
Example 2: Local Large Toy Purchase
Hot Wheels Batman Wall Tracks. The wall tracks were purchased at Target (in a bricks and mortar store) in the clearance section of the toy isle. These sold within hours of arriving at the Amazon warehouse.
- Purchase price: $10.24
- Selling price: $33.18
- Amazon fees: -$12.46 (Commission: -$4.98, FBA fulfillment fee: -$6.00, FBA weight fee: -$1.48)
- Inbound Shipping: $1.14
- Overhead: $0.50
- Net profit: $8.84
- Profit margin on costs: 86%
Observations. Here’s an example of an item that was oversize. Amazon will charge the $6 fee instead of $1 plus the variable fees on anything with a side over 18 inches. Something to keep in mind, as it cuts into the profit of an item. This toy sold immediately after arriving at the warehouse.
Example 3: Local Electronics Purchase
35 Watt Car speaker. The car speaker was purchased at Target in the clearance section of the electronics.
- Purchase price: $14.80
- Selling price: $39.00
- Amazon fees: $6.60 (Commission: -$3.12, FBA fulfillment fee: -$2.00, FBA weight fee: -$1.48)
- Inbound Shipping: 1.97
- Overhead: $0.50
- Net profit: $15.13
- Profit margin on costs: 102%
Observations. I don’t know anything about car speakers, but it had a 70% off clearance sticker, so I scanned it with my app and was pleasantly surprised! My selling price was higher than the others, but I was the only one offering FBA (or Prime shipping). I saw the buyer bought it and paid the extra $3.99 to overnight it, so it’s clear people are willing to pay more when they want the item asap.
Hopefully, the examples help to show exactly how it works. Here is some more information that will help explain it all:
Inbound shipping. Amazon has a negotiated deal with UPS to ship the items to the Amazon warehouse for a very discounted price. Right now I’m averaging about 40 cents per pound, but hoping to improve on that.
Tax Exempt. I got a sellers permit and a tax exemption so that I can purchase items for resale without paying sales tax when I purchase the items.
Ratios. I use Profit margin on costs (profit / cost), because that’s what I care about. How much money am I making on my investments? I realize some people prefer to calculate other types of margins and markups, but this is the way I like to compare all the items across the board. These examples were some of my first items; now I aim for items that will net me 100% or more to make it worth my time.
Right now I’m allocating the overhead evenly across all the items until I come up with a more sophisticated way to handle it. And I’m waiting to see if I decide to keep doing it after I meet all my sign up bonuses from my application spree. Overhead includes:
Sales tax. Even though Amazon isn’t collecting it in all states yet as Online Sales Tax Becomes A Reality, I’m required to pay sales tax in my home state and in any location that I have a physical presence. I’m covering that right now in overhead as a cost of doing business. You can also enroll in Amazon’s program to collect sales tax, which they’ll do for a fee. (I’m comfortable doing it myself though, since I have other tax obligations for my other businesses.)
Supplies. So far all of my boxes were free. I just reuse the boxes and packing materials that I get when I order things online. Tape is from Costco. I keep my eye out for deals, and then stock up in bulk when supplies are cheap. You can get UPS labels for free from UPS, set up an account and they’ll deliver them then next day.
Monthly Amazon fees. Selling on Amazon after the free trial is $39.99 per month.
Other costs. Another reader Joseph, threw out a reminder in addition to the boxes. Don’t forget to factor in automobile expenses like mileage, and perhaps higher administrative costs such as sales tax filings and a more complex tax return (although now you’d be able to take advantage of Tax Deductions for the Self Employed).
Finding & Evaluating Items
Profitability. To evaluate the profitability of the item, I use one of the apps I mentioned yesterday in How to Make Money on Amazon. If I can’t calculate it precisely for some reason, I’ve also used the rough rule of thumb of a selling price 3x the purchase price. Although, as you can see in the examples above, there are many variables that impact the overall profit. You can also use the Amazon FBA calculator.
Sales Rank. When I find an item, besides evaluating the profit potential, I also look at the sales rank. The sales rank is a good indicator of how fast the items are selling.
Where I’m Shopping. Last week I hit the 40% clearance sale at Tuesday Morning. I’d never stepped foot in that store before, but I was shocked to see the toy selection! And it doesn’t hurt that I bought the items all with potential profit margin on costs of 200% – 400%. In addition, I also scooped up a bunch of products at the 30% off + Kohl’s cash sale at Kohls going on now. I also make a weekly stop at Target. At Target a 70% off sticker is a pretty good indication that it’ll be selling for much higher on Amazon.
Time Spent Shopping. Obviously, time is limited. I decided that I can dedicate only 3 hours per week to this adventure. Ironically, it’s when my daughter is in preschool two mornings a week. So, I shop quickly while in the store. At home, I keep my eye out for deals online when I’m browsing after the kids are in bed. If you are interested in this for real, be sure to account for your time. Since I don’t have any interest in finding a real job, and only pursuing hobbies, I just do it as a time killer in between dropping off kids and picking them up from preschool.
Items That Don’t Sell. In the book I read, the author just returns the items to the store that don’t sell. I haven’t encountered that yet, as all the items have sold quickly. However, for the toys I’m happy to have a very merry Amazon Christmas and wrap it all up and give it to the kids for Christmas or their birthdays if items don’t sell.
How long will it last?
When I first stumbled on this idea, I was thinking the same thing as Tommy, “this just sounds too good to be true”! Which, is also the reason I had to test it out. I don’t know how long the arbitrage opportunities will last, but I do understand why it exists right now. When I think about when I shop on Amazon (which is quite often because of the convenience and Prime), I can order a gift for a birthday party this weekend, and get the item in 2 days if I don’t have time to run to the store. Even if I did, if the toy was on clearance at a brick store 2 months ago and 2 states away and there also happened to be a store coupon at the same time, none of that is going to help me right now.
In fact, I can see from the comments that some happy grandparents bought the wall tracks above and had them shipped as a gift to their grandson. They needed a gift now (probably for a birthday), and they had no idea Target just clearanced the same toy a few weeks ago.
In addition to the profits above, I definitely met my original goal of qualifying for the sign up bonuses from my $3,000 credit card application spree and finding a new way to meet the spending requirements!
Obviously, this isn’t for everyone, and there are plenty of risks. The FBA Forum is a great resource for finding out more about it if you are interested. I don’t want to make it sound perfect, but as a money making business, I think if you enjoy that sort of thing, it could be a profitable business.