How to Start A Profitable Amazon FBA Business in 2018... Even If You Are Clueless! (Part 2/3)

Chapter 4: Successful Financial Strategies To Win The Amazon Game.

Home Runs Vs. Singles

There’s a myth that has circulated for years among Amazon sellers that in order to make millions of dollars you only need to hit a home run on Amazon.

But the truth is that hitting a home run is easier said than done.

Newbies have been lied to. They’ve been told that they only need to look for the best sellers in any category and launch an exact similar product, after that they’ll instantly open the floodgates to unlimited sales and profits.

Unfortunately, nothing could be further from the truth. Don’t get me wrong; I believe that there’s a chance to hit a home a run with a new product on Amazon, but it’s just not that easy.

And just to be clear, when I say home run, I’m talking about a product that sells 100 -150 units a day, and that makes you a net profit of $5 – $10 per product.

That means $15,000 – $45,000 per month.

I know these amount sounds awesome for someone who is just starting out, but the question is, what do you need to do to reach those numbers?

Just so you know money and knowledge play a huge role here.

A single would be a product that sells 20 - 50 units a day and makes you a net profit between $3 and $5. That means $1,800 – $7,500 per month.

So, instead of looking to hit home runs, I think it’s safer to hit multiple singles and some doubles, and maybe a home run from time to time.

Moreover, having a more diversified inventory will reduce your risk exposure and prevent you from putting all your eggs in the same basket.

In this chapter, I’m going to share with you some sure-fire strategies that will help you understand if you’re really turning a profit and not to wait until you’re filing taxes.

4 Easy Financial Strategies

Pricing Strategy

Let’s assume that you’re selling a product that has no differentiation whatsoever, and all of your competitors sell the exact same thing.

Under those conditions, the only way to make your customers interested in your product is by bringing the price down.

For private-label products, there are indeed other things we could do to attract more customers than our competitors.

Simple things, actually, like adding a brand, changing packaging, offering some sort of bundle no one else is offering, telling a story, etc.

But in spite of all that, the price will always be king.

Picture this: you visit a store, and you’re planning to purchase a bag of coffee beans, you have 3 choices, none of them seems to be different in any way shape or form than the other, but the one to your right costs $5, the one in the middle $10, and the one to your left $35.

Which one would you buy?

According to Dr. Robert Cialdini, renowned persuasion expert, if there’s no other information available we use price to estimate quality.

So, in that line of thought, if you would want a quality product, you’d choose the one that sells for $35.

But on Amazon, things are slightly different, first because there’s some differentiation among the products (pictures, copy, brands, etc.)

Although what seems to play a bigger role are reviews, and also keyword ranking (people buy the first thing you show them).

That means that they higher your product shows up when someone types some keyword, and the higher your review count is, the more likely it is that people will accept paying a higher price.

But you may be wondering, what would someone who’s just starting out do in terms of pricing?

Well, as we’ve already discussed, Amazon’s algorithm ranks your product in relation to a keyword depending on your sales record over time.

So, the secret to getting higher rankings is simply to sell more.

And the secret to selling more is to give tons of value for cheap.

So, if you can offer a better product than the competition for a slightly lower price your product will get a better rank over time.

And once you have reached certain ranking, you might as well increase your price and see what happens.

If there’s no drop in sales that’s a good sign.

To test higher prices I recommend keeping them at that level for at least one week, and then evaluate.

And that is how you do it, of course, this not a linear process, so be prepared for bumps in the road.

Also, consider that if no one finds your product, your chances to get sales are slim to none, and that’s why you’ll need to consider running promotions, but we’ll talk about that in detail in chapter 6.

Shipping Strategy

Waiting sucks; here’s what you can do about it.

I was not patient at all when I started on Amazon, honest to God!

But in order to win the Amazon game you need to grow patience; otherwise, you’ll end up broke.

I bring this up because when we’re about to decide what means of transportation we’ll use to ship our stuff, you may make the mistake I did when I was starting out on Amazon.

I didn’t know back then that’s there’s something called dimensional weight.

Air freight companies use that to determine their fees, and if your items are kind of bulky but light, and you’re doing the math using regular weight, you are going to find yourself with a huge air-shipping bill.

It happened to me because I was so excited to start selling that I couldn’t wait one more month.

But I didn’t learn my lesson, because next time I also used air shipment, and it was delayed because the freight forwarder I hired, Shapiro, made a mistake, and it took as much time as if I had shipped it via ocean.

So, every time you want to ship something to Amazon, always ask for a quote.

Compare air and ocean shipment, and remember that you can wait one more month, that won’t change your results in the long term.

Now, sometimes, depending on the product margin and the shipping cost it makes sense to ship it via air.

Otherwise, you’ll end up losing more money, even when air shipping is more expensive.

Let’s assume the following to get my point across:

• You’re selling an item for $25;
• Amazon takes $7 in the form of FBA and selling fees.
• It also costs you $5 to manufacture, and air shipping costs $3 per item and takes 2 weeks until you are back in stock.
• While ocean shipping cost $1 and takes 6 weeks until you’re back in stock.
• And finally, let’s assume you’re selling 30 units per day of this item.

Table 3. Per Unit Profit Comparison

So, as we can see in table 3, it makes sense to ship via ocean because it is cheaper and results in a higher profit.

Table 4. Lost Sales Comparison under and out-of-stock scenario.

But if you’re out of stock, you need to look closely at your numbers to determine if it makes sense to ship via air or not.

In the example shown in Table 4, if we ship via ocean, even when it’s cheaper, it’ll cost more in the form of lost sales.

If we subtract $4,200 from $15,120, we have the maximum amount we can afford to pay as Air shipment cost, anything lower than that amount will make us a profit.

Order Size Strategy

Deciding on the right order size is crucial to your financial success. Lots of Amazon sellers only realize this when it’s too late.

And again, it all comes down to the waiting time until production is finished and until your product is available to sell on Amazon.

For the first order, that’s rather simple; you want to order their minimum order quantity as a test order.

The tricky part comes when you need to reorder. Should you reorder one thousand, two thousand or even five thousand? We all know that we’ll get a better price when buying in larger quantities, and also shipping will be cheaper (via ocean), but you need to make sure that’s indeed a good move.

Amazon charges a monthly inventory storage fee that is $0.54 per cubic foot from January through September and $0.72 from October to December, and those charges add up if you order too many units.

So we need to determine what’s the optimal order size we need to place, and there are a few other things under consideration, like:

• Average units sold per day.
• Planned giveaways and promotions.
• Estimated sales growth.

Cash-Flow Strategy

Remember that I said that this was an ROI-producing type of business?

Well, that basically means that the more money you put in, the better.

But the idea is to not spend all your hard-earned money on tons of inventory that God only knows if it will sell!

But when everything looks good you don’t and shouldn’t lose momentum.

And that’s the moment when you need to bring out the big guns and be able to purchase enough inventory to cope with the demand that your product is generating.

So, the strategy here is really simple, look at Amazon as a one-year project, and reserve some cash to invest in this business.

Don’t take out any cash from this business during that year and consider the possibility of bringing an investor to the table.

In chapter 8, we’ll discuss growth strategies in greater detail.

Are You Really Turning A Profit?

I remember reading through my FB timeline when all of a sudden, I spotted a post from a lady fellow Amazon seller who was complaining about the business not being profitable at all.

She wasn’t making any money, but she didn’t know.

I mean, she was making sales and Amazon was paying her every 14 days, but after filing her taxes, her accountant had to break it to her: “Lady, you’re losing money.”

And that quick story brings us to this topic: Are you really turning a profit?

You don’t really need to be a financial geek to understand what’s going on with your business.

You just need to elementary math and some common sense.

Return Over Your Investment (ROI)

The first thing you always need to keep in mind is that the price of your product and even your profit margin is not as important as you ROI.

Just to make sure we’re both on the same page when I talk about ROI, I’m referring to this:

So, let me give you a self-explanatory example:

You have 2 products selling on Amazon:

• Product A makes a profit of $5 per unit
• Product B is making a profit of $3 per unit.

Which one is making you more money?

According to popular belief, higher profit is better, so the most profitable product should be Product A, right?

But actually that’s completely false, because you need more information to be able to answer this question.

First, you need to know how much you invested in product A, and how much of product B.

What if I tell you that adding up all the expenses, product A cost you $10, and product B cost you $3?

What would be your answer now?

According to the numbers in Table 5, Product B yields a higher ROI, which makes it the most profitable one.

Table 5. Explaining ROI

But there are also a couple more important variables that we need to factor into this equation, and they are sales velocity and inventory size.

Imagine that every day you sell 10 units of product A and 30 units of product B and that you have an inventory size of 1,000 units for both of them

Table 6. Factoring in Sales Velocity and Inventory size.

Let me read Table 6 for you, because even when this may look like high-level stuff, it’s really simple:

• For product A, you need to make an investment of $10,000 to restock your inventory, and even when you make an ROI of 50%, you need to wait 3.33 months to get your money back and generate those profits.

• For product B, you need to make an investment of $3,000 to restock your inventory and make an ROI of 100% every 1.11 months.

• So, if product A produces 50% ROI every 1.11 months, and product B generates ROI of 100% every 3.333, then it is safe to say that during the next 3.33 months, product A will generate 50% x 3 = 150% ROI while product B will generate 100% x 1 = 100%.

So we can conclude that product A is actually more profitable than product B, under these conditions.

But if you look, you could play a little with the inventory size and the restocking time to increase your ROI to balance out the two.

Also consider that it could have an effect on the investment you’ll need to make to restock.

PnL, or P&L, stands for Profits and Loss account, or income statement.

It’s a financial statement that lets you know if you’re turning a profit or not.

And it looks like this:

Table 7. P&L Statement Example.

You should make a new P&L Statement every month just so you know how you are doing in terms of profits.

When you take the time to create this statement, you’ll be in a better position than 95% of the people who are trying to make money online.

Why?

Because it all starts with knowing your current situation, from there you can map out a plan to get you where you want to be.

Also, having a business is not only about making money but managing it, if you can’t measure it, you can’t improve it.

There’s also a simplified version of the P&L statement that you can create for your individual products, and it looks like this:

Price
(-) Product Cost
(=) Contribution Margin
(-) FBA fees per unit
(-) Marketing expenses per unit
(-) Other expenses per unit

(=) Net profit per product

I recommend you have a product PNL for each one of your products, and to fill out a monthly PNL to keep track of how well you are doing.

Please don’t wait until you do your taxes.

Financial statements are like the compass on your business.

You can investigate further and find out what could be the cause of the poor results you’re having.

• Maybe you’re spending too much on sponsored ads
• Maybe you’re paying too much in shipping
• Maybe you’re selling too little

And for each and every one of these problems there’s a solution, but first, you need to find out what’s going on with your business.

A neat solution I found to understand my products’ costs, revenues, and profits was to use Helloprofit.

This web app still needs some work from the developers, but it’s a pretty good way of getting a complete view of your business’ performance.

When Is The Right Time To Give Up On A Product?

Chances of this happening to you if you follow this guide to the “T” are slim to none.

This is what happens to someone who doesn't know what’s they are doing, or when instead of investing, they are gambling; or when someone doesn’t want to follow all the steps.

If you know how to follow instructions and do these simple steps, you’ll be on course to success.

Still, I want to make sure you don’t make a huge mistake, so I’m going to go over some of the product types you should avoid.

Lots of competitors selling the exact same product.

This one goes without saying, because it’s just common sense.

If you’re searching for a product to sell and you realize that most of the products on the first page are the exact same thing, then you don’t want to do that product.

Example: Silicone Spatula

Fig. 11. Silicone Spatula Partial Search Results

I saw this product selling for $10 a couple of years ago, and now it’s selling for roughly 6 bucks.

It may be a high volume keyword, but I don’t see how you can make real money selling this one.

The main problem with this product is that it was used countless times as an example for a few other training programs.

And that’s why I don’t want you to make the same horrible mistake when following this course. Get it?

Amazon has millions of products listed, so why waste your time and money with a product that has so many sellers trying to make a couple of bucks out of it.

Relative Low-margin Products.

This usually happens when a product type is being pushed by a ton of different sellers and the price drops because they want to sell their stuff.

Price wars are only good for the end customer, but not for us.

This also happens when you cannot make a significant return on your investment, so don’t focus on absolutes, calculate the relative margin and you’ll be way better off.

For instance, if you make $5 on a product that cost you $5, then you have a 200% product margin.

But, if you make the same 5 bucks on a product that cost you 20, then you only have a 50% margin, and you’ll need to put more money into making the same relative profit per item.

So basic math is your main ally here.

High Return/Complaint Rate Products

Amazon hates returns. First, because it means customers are unhappy with their purchase, and second because they’re not making money off that.

And trust me, you don’t want to sell a product with a high return or complaint rate if you want to sell on Amazon long term.

Just so you know, Amazon’s acceptable defect rate is less than 1%.

That’s why you need to make sure that your product won’t break apart or break down, depending on the type of product.

And in case it happens, it shouldn’t happen very often or else Amazon can and will close your listings.

Stay away from electronics as your first product, and work with your supplier on some sort of agreement in regard to defect rate.

And finally, never order too many units in the beginning (100 – 500 is more than enough) and grow naturally (1,000 – 2,000 for your second order, and so on and so forth).

If you follow this guide and never pick a product with the characteristics mentioned above you should be fine, but just for your information the symptoms of a product that you’ll have to give up on are:

• Poor product performance: If the product is not good, you’ll have lots of complaints, lots of negative feedback and lots of negative reviews. If that ever happens to you and you care about your seller account, it’s time to give up on that product.

• Low conversion rate: This is something that could be fixed with great pictures and great sales copy, but if your conversion rate stays below 5%, it’s also time to stop selling this product. This scenario is related to a product with too many sellers in the same niche. You should be aiming for a 15% conversion rate and up as a good rule of thumb.

• Low view count on your listing: If no one sees your product, you won’t be able to sell it. This problem has a quick fix, which is basically putting some money towards marketing, but sometimes no matter how hard you try your product can’t get enough views to make it profitable. If nothing happens after spending $1k – $3k in marketing, it’s time to let that product go and move on to the next one.

Remember that for Amazon sales are king, and if you can’t sell more than 5 – 10 items a day and make a profit after all your expenses I don’t see any reason why you should keep trying to sell that product. Just move on to the next one and never look back.

Chapter 6: Zero-Risk Investments: How To Find Honest Suppliers And Make Sure You Won’t Get Ripped-Off Ever.

Finding An Honest Supplier

You can create as many spreadsheets as you want, project your sales and profits, add up, take away, and do math like crazy, but nothing is going to happen in the real world unless you get some orders going from your potential suppliers.

And here’s when most aspiring Amazon sellers stop dead cold in their tracks.

It’s like they feel the risk of losing is greater than the rewards, but there’s nothing further than the truth if you do the right thing.

A business is like any relationship.

You just can’t ask someone to marry you right off the bat.

First, you need to take her/him on a date, get to know him/her, see if you like each other and then you can go one step forward.

After some time moving in together may be considered an option, and if that works out, then you may or may not think about marriage.

So, when I’m interested in sourcing a new supplier I need to find people who can meet my requirements, so I go out on a date with them.

I don’t know about you, but I wouldn’t date a stranger that I just stumbled into while crossing the street.

And I definitely wouldn’t do business with any random guy or chick that I don’t know anything about.

I’ve been scammed countless times.

I can’t remember how many, so when it comes to business, my guard is always up.

So, the best “dating site” for Amazon sellers who are looking to source from overseas as you may know is called Alibaba.

There you can find lots of different “hot candidates” that match your criteria.

It works pretty much like Amazon, you just type in your product’s main keyword, hit enter, and you’ll open the floodgates to hundreds and maybe thousands of potential suppliers.

Fig 12. Alibaba’s Keyword Search

But I wouldn’t pick the first result if I were you.

Instead, I’d contact as many as I possibly can and get the conversation going.

It seems like you’re just looking for the best price in there, but in reality, you’re looking for a business partner.

Someone who really cares about your business and that’s willing to put some skin in the game.

You’d be surprised at the wide range of suppliers you can find, but it’s very easy to spot the ones who you want to work with.

Also, remember that you’re usually talking with a sales agent from the manufacturer.

Fig. 13. Alibaba’s Badges

Right now I’m going to give you a few pointers on how to find them:

• They have some badges on Alibaba: Alibaba has some badges like “on-site check,” “gold supplier” and others as you can see in Fig. 13. Make sure your supplier has some of them.

• Fast response time: First off, remember that you’re going to be dealing with someone who is 12 hours or more ahead of you, still a fast response is always better than a slow response. At night may be a better time to judge that. You can email them or even add them on Skype. I prefer emailing them because more often than not I can’t really understand what they’re saying.

• Easy to work with: A sales agent who is easier to work with may be the difference between heaven and hell, I tell you. So look for the sales agent who has good communication skills and that understand your needs.

• Willingness to help: Even if you’re a power-seller of one product, you’re not going to purchase thousands of units for a product you’re just testing the waters with. So, it doesn’t matter the size of your business, you want to start a relationship with a supplier that’s willing to help you grow, and that will bet on you.

• Good prices: Keep in mind that I’m not saying low prices, what I’m talking about is value for money here. You don’t want just the lowest price possible; you also want the highest quality possible for that price, and the sales agent that can give you that is your guy.

As you can see, evaluating a supplier is not something you can measure with just numbers, here you need you gut judgment, as in any relationship.

Now, let’s talk about samples.

Asking For Samples

This part of the process is what I call “dating” because after you can see and touch the product, you can decide if you want to get this to the next level or not.

But before even considering asking for a sample make sure you ask a shipping company representative like DHL or Deringer what are the import requirements for this product, just to be on the safe side.

Asking for samples is rather simple, you just ask for their payment details, you send the money, and they give you a tracking number once they have got it.

But, I recommend you not go wild when it comes to ordering samples, you can easily filter out suppliers who took too long to answer or that just don’t feel like the right match for you.

I’d say that ordering 3 – 5 samples from different suppliers is more than enough to get some variety and help you decide what supplier you want to work with.

Now, never, ever, ever order a sample using services like Western Union or the like, even worst wiring money to some random bank account in China.

Instead, you want to cover your bases and send money only via PayPal.

PayPal is not just the safest way to send money online; it also covers you in the eventuality that you never receive the sample.

It has never happened to me, but I’ve heard horror stories from people being scammed when ordering samples, so just to be on the safe side, use PayPal.

Now, some of these potential suppliers may ask you for your DHL account number or the like.

That basically means that you have a business account with DHL, but you don’t need to open an account with them.

If your supplier asks you just tell them to use their account, so you get the advantage of the better shipping pricing they get and just include that when sending the money through PayPal.

Pretty straightforward, right?

OK, let’s take a look at your options when it comes to paying for your initial order.

Payment Methods:

So, right now you should have gotten your new samples, you’ve analyzed them, and you like what you see, so it’s time to place your initial order. Exciting times!

If you don’t love the samples, don’t panic: You need to either contact your supplier to ask for some changes and order new samples when changes are applied or find another supplier.

So, ready to move forward? Let’s walk through what you do now that you are ready to place an order.

Remember you don’t want to go crazy and order thousands of units; you just need to place a small order of, say, 100 – 500 units.

To place your initial order, you have 2 options, depending on your supplier’s availability: To use PayPal or to use Alibaba’s Trade Assurance Program.

PayPal is by far the easiest option, you do the same as you did when ordering samples: You send the cash, you get a tracking number, and then, depending on the means of transportation of your choice, it’ll get to Amazon in some days or in some weeks.

Now, most suppliers won’t accept PayPal, and that’s a fact. But the good news is that Alibaba has a great payment method anyone can use, called Trade Assurance.

You just need to fill out a few details, as you can see in Fig. 14, include your supplier’s email and voila!

Fig. 14. Trade Assurance Process

Alibaba’s trade assurance will protect you from any scammer guaranteeing that you get what you pay for.

Of course, it all depends on the terms of the sale.

Usually, sellers will use the FOB term for ocean shipping or FCA for air shipping.

Just make sure they’re not using the EXW term or you’ll have to pay for the inland shipping from the warehouse to the port or the airport.

Here you can find a detailed list of International Commerce Terms (INCOTERMS)

It’s important to mention that you don’t need to wire all the money right away, most suppliers will only ask for a 30% down payment, and then when your order is ready you pay the remainder 70%.

Also, consider that if you are buying using FOB or FCA (as you will do 95% of the time), you’ll need to hire the shipping company to get your stuff to Amazon, but that’s pretty straightforward too, more on that in a few.

What matters is that you already know how to avoid being scammed when ordering from a supplier in China.

Awesome, right?

Packaging: What Amazon recommends plus what I recommend

Now, let’s talk packaging!

When you’re selling private label products you have a huge advantage.

Because you can literally customize the product you sell to match and even exceed your customers’ expectations.

But of all the changes you can make to the product you’ll sell on your Amazon store packaging is by far the most important one.

Packaging can make it or break it, actually.

So, first let’s check what Amazon says about packaging:

http://www.amazon.com/gp/help/customer/display.html/?nodeId=200243250#prep

At the end of that page, there are the prepping requirements for specific products, like fragile, baby, liquids, powder or granular products, etc.

Now, that’s just what Amazon needs from us. We have to run the extra mile to make our packaging excel and to make our product stand out.

Here are a few examples of packaging:

1. The Stylish Lunch Box: As you can see in Fig. 15 they’re not offering a regular lunch box like everyone else.

Fig. 15. The Stylish Lunch Box

Taking a look at what other competitors are offering, and the price point, this product differentiates from the rest just by using different packaging.

2. The Stylish Box: A nice cardboard box with a great design can do wonders for your product.

Here’s the link to the product you see on Fig. 16

Just make sure that everyone else and their brother is not doing the same. Otherwise, it’ll defeat the whole purpose of the nice packaging.

Now, if you find that lots of other sellers are using this kind of packaging, a way out is to offer something like a silk bag or a nice, high-quality sleeve.

I’m sure that you can come up with many more great ideas when it comes to packaging with these two examples.

Fig. 16. The Stylish Wine Decanter Box

Keep in mind that it’s not just about grabbing random packaging and putting your product inside of it.

The packaging has to make sense, and it should add value to your product, and you should be able to afford it, considering that adding packaging may help you charge a higher price.

Ready To Ship To Amazon!

So, time has come to ship your stuff to Amazon.

Up to this point you have a product chosen, a supplier chosen, and chances are that you may have even wired the down payment for your first order.

So while your product is being manufactured you need to decide what method of transportation you want to use.

Most of the time it’ll be ocean shipping, and you’ll only do air if it’s financially viable. Just go through your numbers again if you need to remember what your best option was.

In any case, you’ll need to get in touch with a shipping company to get things started before production ends.

Trust me, you don’t want to lose more time and money, so do this step as soon as you pay the down payment.

There’s a huge list of possible shipping service suppliers but to me that list boils down to only 2:

• DHL
• Deringer

DHL is faster, and they get the job done. The only downside is that they’re way more expensive, but sometimes it makes sense financially to ship via air. For example, when you’re a couple of weeks from selling out, you could avoid some lost sales using an express service, even when your profits can drop a little.

For the rest of the time, I recommend Deringer hands down!

Also, it’s very good practice to ask them about restrictions, taxes, duties, etc., of the product you want to import to the US even before you place your order.

Creating Your Product Listing.

Let’s create a basic listing and move on to the next step.

Step 1: Add a product. Log in to your Seller Central and hover over “Inventory” tab, then click on “Manage Inventory.”

Then click on the “Add a product” button.

As this is a product that’s not listed in Amazon’s catalog, click on the hyperlinked text “Create a new product listing.”

Step 2: Classify your product. Here you’ll need to categorize your product:

After doing your research you already know what’s the category of your product, so this step will be a piece of cake.

Step 3: Fill out vital info. Here you just need to write something really basic and fill out mandatory fields.

For now just fill out all the mandatory fields with generic text (e.g., use a generic name for the product name and your name as the brand) until the “Save and finish” button is available.

And that’s pretty much it.

You can give yourself a pat on the back for getting this far.

Creating Your First Shipment.

Once you have your product created, it’s time to create your first shipment to get the products you ordered to Amazon’s warehouse.

So, the process usually goes like this:

1. You place an order with your manufacturer.
2. Once the order is ready, you talk to a freight forwarder, and they make the arrangements with your manufacturer.
3. Your items ship and arrive at the freight forwarder’s warehouse in the US.
4. You create a shipment on Amazon and order UPS to transport it from your freight forwarder’s warehouse to Amazon’s warehouse.
5. Your stuff gets to Amazon, and you can start selling.

Here you can download the official guide on how to create your first shipment and send your stuff to Amazon.

Would you like to work with me?

You just need to click here to apply to see if we’re a good fit.

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