You already deserve credit just for clicking on this article. Being aware of the fact that you need to think about (and create) a competent and actionable business plan already puts you miles ahead of most Amazon FBA sellers.
In this article, we will help you craft an Amazon FBA business model business plan by providing you with the most important aspects and considerations you should make. We will also discuss their benefits and risks as well as explain the ramifications each choice has for your business going forward.
Features of a good business model
Before we jump into viable Amazon FBA business models, let’s first put in our minds the best features an e-commerce business model can possess. You will be able to identify the presence (or lack thereof) of these features in the business models we discuss. Always keeping these in mind will help you distinguish the best one for you:
- A clear product roadmap: An actionable business model will provide a clear and easy to follow the trail from the producer all the way to the end-client. You should be able to easily follow who pays who and hands over what to whom in which stage of the merchandise journey.
- As few core operations as possible: A good business model will not be muddled with plenty of unnecessary steps. A simple business is also usually one that operates with low overhead. Additionally, with healthier profit margins.
- Be able to transform into a business plan: If you are struggling to lay out your business plan, it might indicate a problem with your business model.
Amazon FBA business models
The Amazon marketplace and FBA platform immensely simplify the online e-commerce game. However, there are a few established business models to choose from. You can always have a combination of some or something completely new. In general, these five models are the most common because they work:
- Own product
- Warehousing and wholesaling
Each of these models has their pros and cons. Thus, it’s essential that you understand them. It will help you choose the best one for you and your business. Let’s look at them in more detail.
Private-labeling business model
Private-labeling has probably become one of the most popular forms of starting an Amazon FBA business. That’s because it’s based on a relatively simple model that still gives the entrepreneur a good measure of control over their product and their brand.
In its simplest form, this model consists of ordering:
- the manufacturing a generic product in bulk
- labeling it according to your brand
- selling it on at a marked up price
You can find out more in our article here. Usually, you’ll order these products from manufacturers (usually China/India via sites like Alibaba) at very low costs and import them to sell on Amazon.
The obvious benefits are the very low cost of sourcing the product, not manufacturing your own products, and having relatively flexible contracts. In case the manufacturer doesn’t come through, the risks include communication problems and the quality of the products.
You will also need to deal with the hassle of importing the merchandise.
Most people that make use of this business model spend a minimum amount of time handling their own products. They either ship it directly to an Amazon warehouse from the manufacturer or do it themselves as soon as possible.
With this type of business model, coming up with your own branding is important to appeal to consumers. The upside is that most manufacturers can add the branding themselves if you send them the designs.
On the face of it, white-labeling sounds very similar to private-labeling. In fact, they do have a lot in common. The key difference is that you source a product that is already branded, has an established market with measurable demand, and from an established producer.
Let’s say the owners have chosen to make white-labeling options available for their products. This means you will need to do some research on whether the product you want to sell can be white-labeled and approach the owners. If the product can be white-labeled, it means that you can buy it from them in specific quantities.
Furthermore, you can replace the branding with your own and sell it at your own price. Some terms, like further white-labeling, will be retained and withheld by the original seller.
The logistical benefits and drawbacks of white-labeling and private-labeling are pretty much identical. However, with white-labeling, you might operate at slightly lower margins as the products will cost more. The benefit of having a tried-and-tested product with very measurable success significantly makes up for this.
With this business model, you will need to make sure that you don’t end up competing directly with the brand. In most cases, they will only sell to someone in a different location targeting a separate customer base.
That often means buying from a brand in another country. The slight segregation of Amazon marketplaces (e.g., UK, US, Japan, etc.) and the difficulty of selling them make this even more appealing.
Drop-shipping is the most minimal-effort model. If you want to make money while barely lifting a finger after the initial effort, this method is for you. In this business model, you are the proverbial middleman that does little more than connect sellers to products.
This makes it a popular choice for those who run their own online stores.
Someone else manufactures, brands, prices, and ships the product. All you do is list the products online where the customers buy it. Drop-shipping is relatively rare on Amazon as it is effortless for these companies to list their products themselves. Regardless, if you have an excellent separate online store with plenty of traffic, it might be tempting for a business to let you take over all of their online sales.
There is minimal risk involved with this type of business. The only thing at stake is your reputation as you are entirely dependant on the reliability of the supplier’s products and fulfillment. You will also need to establish whether the supplier will directly ship what you sell on Amazon to customers or ship to Amazon warehouses, which will complete the fulfillment.
If drop-shipping takes the least amount of effort, then selling your own product involves the most. For this kind of model, it’s assumed that you have your own product that is handmade by you or for which you have a manufacturer. You handle the branding and fulfillment once the merchandise is made.
Amazon and Amazon FBA is an immense boon for this kind of entrepreneurs. It relieves the massive burden of reaching a large audience, fulfilling orders, and handling customer service that stifles many small businesses trying to expand and scale up. These sellers are allowed to focus on their core business operation instead of licking stamps and making post office runs.
Unless you have been selling the product for some time and already have an idea of its mass-appeal and the demand for it, this model comes with a lot of risks. You never know how it will be received and the success you can expect.
Warehousing and wholesale
For 99.99% of you, this is most likely NOT the business model you want to follow using Amazon FBA. That’s because Amazon already takes care of the logistics needed for this, meaning there is not much warehousing for you to do.
This business model requires a substantial initial investment wherein the owner acquires large quantities of various merchandise. Usually, this is accompanied by warehousing locations as well as transportation infrastructure. Anyone familiar with the basics of Amazon FBA will already see how this kind of investment would be almost entirely unnecessary.
The Amazon marketplace is also a risky platform to bring so much capital investment to with little assurance of success. You will also be forced to compete with huge businesses who have already established themselves selling wholesale.
What about B2C, B2B, C2C?
If you do any research regarding business models online, you are bound to come across these popularized and recognizable acronyms. They easily define the relationship and role of both the provider/seller and the client/consumer.
However, the very nature of Amazon and Amazon FBA make them relatively meaningless for this industry. As an individual seller, you only really need to think about whether you want to take on a B2B or B2C role. In this instance, you will be the B (for business) selling to another company or customers. What’s different is that the customer will see you and Amazon collectively as the store they buy from.
What you need to decide is whether you would like to target businesses or individual buyers. Targeting business can have the benefit of selling more massive quantities at fixed intervals and dealing with professional customers. Targeting businesses have become more and more popular on Amazon. So much so that they even rolled out Amazon Business.
Amazon Business appeals to businesses because it provides them with special tools and options. With a professional seller account, you can enable business selling features and take advantage of this lucrative market. We have written an article on how to do that here.
Selling to business will mean that you need to prioritize having large quantities of stock on hand, contacting potential customers outside of Amazon, and making use of business selling incentives like quantity discounts, etc.
Only if you plan to run some kind of affiliate program on a blog alongside your Amazon business do you need to worry about the C2… the spectrum of business models.
Extra business model considerations
- Taking into account fees/costs: Amazon charges different referral fees for different categories of products. The size and shape of merchandise also determine the shipping and warehousing fees. Make sure to consider these and include it in your business plan.
- Product specific considerations: First of all, you should decide what you want to sell. Then, you should decide whether you are only selling a single product or multiple products in one niche. These two are by far the most common ways to do business on Amazon. Expanding beyond a single niche is usually only reserved for those who have had considerable success already.
- Marketing strategy: To create a business plan for your business model, you will need to develop a marketing strategy. This will include creating a brand with a unique voice, identifying a target market, and reaching them in the most effective ways with the highest conversion rates.
- Multi-channel: At some point, you may want to expand your brand and selling capabilities by branching out to your own online store. This move can really take your e-commerce enterprise to the next level if you have the time and money to invest in it. The good news is that Amazon can still fulfill your orders as usual with just a few extra steps through Amazon MCF.
- Employees: You need to be clear on the management structure of your business. This includes the top-level owners all the way down to the staff. Roles and decision-making power should be defined, and the type of staff acquisitions needed to be identified.
Ready to craft your Amazon FBA business model?
Armed with this information, we hope you are ready to undertake the all-important task of selecting the right business model for you and crafting it into your own. The devil’s in the details, and you should grind down every factor into as small chunks as you possibly can. A solid Amazon FBA business model will help you to keep running a tight ship and launch your business without any hiccups.