Dissecting the Fees, Structures, and Costs of Doing Business on Amazon
For most manufacturers of consumer goods, the decision to sell on Amazon makes clear strategic and financial sense. Based on the sheer numbers driving Amazon’s dominance in the marketplace, and a comparison of owned channels to Amazon’s, it can be a simple decision to get started. But even with the upside potential of huge sales numbers, it’s critical to know how the costs of Amazon selling will impact your net.
But the costs of Amazon Seller Central financials can be difficult to anticipate and calculate. Even though Amazon is transparent about their fees and structures, it takes experience to fully understand them in the big picture (and optimize your sales engine to be as efficient as possible).
This article breaks down some of the main categories for fees that will impact your profit projections. We do always recommend speaking to an experienced professional if you have questions and the desire to really dive into your numbers with confidence. But you can get started by considering account and overhead fees, fulfillment costs, and any advertising.
Pay to Play – What are Amazon’s Baseline Selling Fees?
If you aren’t set up to sell on Amazon yet, you must pay to join. The Professional selling plan is $39.99 per month to set up the Seller Central account for your business. Apart from this fee, all other charges are established on a per-item basis.
Amazon Selling Fees
Selling fees are baseline charges related to specific transactions. Some, like referral fees, apply to all sellers without exception. Others, like media closing fees, only apply to certain categories of items. We’ll also talk about high-volume listing fees and refund administration fees to explore whether they relate to your business and products or not.
Referral Fees are similar to a commission.
They are the cut that Amazon takes for helping customers find your product. The rates function as a percentage of the product’s price, ranging from 6% (e.g., personal computers) to 20% (e.g., jewelry). The average is generally around 12-15%; and you can check each specific categories in Amazon’s comprehensive Fee Schedule. Pro Tip: Some sellers choose to reverse engineer their pricing and categorization of products to find a more advantageous referral fee for their business.
In many cases, Amazon will establish a minimum referral fee (anywhere from $0.30 or more for certain categories) even if the percentage based on your price point is lower. For example, if you charge $5 with a rate of 15%, you might expect to pay $0.75. But, because of the minimum referral fee, Amazon could still charge $1.
Media Closing Fees are a $1.80 per item flat rate fee.
Amazon applies this to categories like books, DVDs, music, video and video games, and other computer electronics. This is on top of the referral fee.
High-Volume Listing Fees may apply to sellers with very large catalogs.
These monthly fees of $0.005 per eligible ASIN (Amazon’s SKU system, where each unique UPC has an ASIN assigned to it) to cover Amazon’s costs associated with cataloging and maintaining large numbers of ASINs. The first 100,000 ASINs waived. So, for example, if you have active offers on 300,000 eligible ASINs, then Amazon would charge you a monthly fee of $1,000, calculated as $0.005 on the 200,000 ASINs that are above the first 100,000 eligible ASINs. Most sellers don’t face this fee.
Refund Administration Fees apply to most products fulfilled by Amazon (FBA).
This includes any of your products with Prime shipping. Since Amazon also manages the return and refund process, these administrative fees can sometimes be cost prohibitive. When a customer requests a refund, Amazon will refund the referral fee you paid for that sale, but then charge you the applicable refund administration fee, which is the lesser of $5.00 or 20% of that original referral fee.
For example, if you refund a customer the $30.00 total sales price of an item in a category with a 15% referral fee, your Refund Administration Fee will be $0.90 ($30.00 x 15% referral fee = $4.50). For products that are more frequently returned (e.g., apparel and shoes), these refund admin fees can quickly add up.
So How Much Does it Cost to Fulfill the Actual Orders?
Beyond administrative fees on each transaction, sellers must also consider the cost of fulfilling each order and the logistical fees associated with storing products in Amazon’s warehouses.
In our last post about FBA selling fees, we provided a table estimating the breakdown of costs for owned channels v. fulfillment by Amazon. We don’t recommend fulfilling orders yourself unless your product is heavy and bulky, or you qualify for SFP (Seller Fulfilled Prime). If this applies to you, you’ll still need to estimate the cost of materials, labor/time, and actual fulfillment through your preferred shipping vendor. Sellers can set up shipping tier costs for their products, which Amazon will pass along; but if you offer free shipping, you will not receive any charges or subsidies to fulfill.
One of the major attractions of Amazon (especially to customers), is Prime shipping and the option for Fulfillment by Amazon, or FBA. This can take the burden off of you as well as give buyers confidence in buying your product; but it does come with a price.
The FBA method means Amazon handles the full life-cycle of getting your product to the consumer. From stocking it in their warehouses to packing and delivery, they carry the responsibility. And these areas are where the fulfillment fees accrue.
Pick, Pack & Weight Handling Fees
The “Pick, Pack & Weight Handling” Fee is the primary charge for the FBA delivery, including shipping costs. Amazon determines this fee by category and dimension of your product. Dimensions are broken down into standard size or oversized categories, and filtered by size and weight.
It’s worth noting that the margins between these can be razor thin. In some cases, it may be helpful to reimagine, optimize, and/or reverse engineer your product packaging to cut unnecessary weights or creatively fit your product into a smaller pricing tier. The savings by dropping to a lower cost fulfillment price can add up astronomically in the big picture, year over year.
In addition to the actual fulfillment costs, Amazon charges a storage fee to keep your product in their warehouse. This can create a delicate balance in calculating inventory to ensure you avoid running out of stock (we recommend to keep 2-4 weeks in stock), but don’t pay more than absolutely necessary in storage fees (especially long-term storage fees, which can be nearly $7 per cubic foot). In particular, note the dramatic price increase in inventory for Q4 and the holiday season. There are many ways to optimize your storage plan and save money strategically, which we discuss in more detail here.
Beyond the holiday rush, it is critical to consider the velocity (speed of sales) when you consider storage. If you anticipate a high volume of sales but increase your inventory too early, you could inadvertently overstock, and pay for it. It becomes a function of timing. That said, you can always have your products returned from Amazon if they are unsold (even setting up automated removals too), but this too has a cost. Removal fees are $0.50 per standard unit or $0.60 per oversized unit.
If you’ve got a quality product that is priced right though, the immense volume that Amazon affords in terms of sales potential should more than satisfy your sales goals. Our clients typically have more issues with keeping product in stock, rather than worrying about storage issues. If you are the latter though, feel free to reach out and start a conversation about how to better position your products on Amazon.
What About Advertising Costs?
Advertising is not a direct or set cost you incur by selling on Amazon, but it is a variable that must be considered. Projecting an ad budget requires an understanding of the competitive landscape and your target consumers; this will help you identify the likelihood that a buyer will find your product organically (e.g. without clicking on an ad). If your product is unlikely to appear in an organic search, it’s likely you will need some strategic advertising.
The most basic ad campaigns on Amazon are Sponsored Products, which allows a seller to promote their product higher in strategic places. This means a consumer may see your product when they search or when they browse similar items. What’s especially great is that this campaign can be set up as Pay-Per-Click, or PPC, which means you only pay for the ad if a user actually clicks on it. PPC ads can be served as a sponsored product that appears in the search results, a headline across the entire search page, or a right-rail display ad on related product pages.
Making Sense of It All
This dive into more of the financials behind Amazon is still not comprehensive, believe it or not. There are other ways Amazon can charge you as they work to optimize the machines and algorithms on their end, such as relabeling fees if your products are not considered to be labeled properly.
Consider this a starting point, and spend some time doing the math for your business. Fortunately, Amazon makes an effort to help you make the most for your business, like this handy FBA Calculator. After all, it’s in Amazon’s best interest to help their sellers have the most success possible.
When the numbers start to add up, however, and you’re looking at those nickels, dimes, and pennies on the margins that can translate to huge costs or profits over time, we believe you should never face those dilemmas alone. Feel free to reach out if you have any questions at all.