When I started building my Amazon FBA business back about five years ago, I remember how my friends looked at me and were puzzled. They all knew Amazon. Most of them ordered pretty much all their stuff from it. But they had no idea how you could take advantage of the platform as an entrepreneur and build a solid business around it. When I told them about it, they all asked me the same: “What is Amazon FBA about?”
Maybe you are in the same situation. You have heard about Fulfillment By Amazon somewhere on the internet and would like to understand, how individuals like you and me can build a thriving business around the well-known consumer platform. In this article, I want to explain what Amazon FBA is in a nutshell, how the business model works, how “passive” the business is, and what the pros and cons are. In the end, I will give you my final opinion with five years of experience as an active Amazon FBA business owner if it is a business model I would recommend to you if you are starting out.
Let’s find out!
Fulfillment By Amazon in a Nutshell
Fulfillment By Amazon (or Amazon FBA) is a business model, that, at its very core, revolves around the idea of
- finding good product opportunities on Amazon,
- creating your own version of said product, ideally by finding weaknesses in what is currently available and improving it,
- having the product manufactured in low-wage countries,
- then shipped to an Amazon warehouse
- and finally, sell it to paying customers.
That sounds like there is a lot to learn about the individual stages and a lot of work that needs to be done. And it is! Amazon FBA takes a while to get started with, especially as it takes a decent amount of money to get started, as you will need to actually manufacture goods in China, Africa, or other rather low-wage countries. If you want to learn more about it in greater detail, please make sure to check out my full breakdown of Amazon FBA as a passive income business here (when published).
That also means that it can get you in trouble relatively quickly, especially when you are just starting out and decide to put your savings into it and fail. I don’t want to be negative here, but as in any other business, there’s ALWAYS a chance to fail! It may happen because you made a mistake when choosing your niche, or the product you want to sell. Maybe you miscalculated your profit margin or have to spend too much on advertising.
How “Passive” Is It?
The upside is that once you have found a decent product and set up everything, sold your first hundred units, have product reviews flowing in and so on, the business will pretty much fly on autopilot.
If everything goes by the books, the only time you see your own products is during the initial phase of testing. Later, your manufacturer will ship your stock directly from his factory to an Amazon warehouse. From there, Amazon will handle the entire process of fulfilling your orders, which means that, hands down, from this point forward it is pretty much the exact definition of passive income.
You will mostly spend your time managing ad campaigns, customer support, checking and managing stock, reordering, and making sure that everything runs as expected, as well as, ideally, expanding your business by adding new products to your portfolio.
I used to build my own Amazon FBA business with great enthusiasm back in 2016 and I’m still running it today. It’s still contributing to my passive income without me having to deal with it on a daily basis. However, for me personally, it is no longer the business that is near and dear to my heart.
So let’s take a look at the pros, the cons, and my verdict on Amazon FBA as a passive income opportunity.
- Proven Business Model: Amazon FBA is a proven business model that many entrepreneurs have successfully incorporated into there business mix, so much so that many of them use it as their only source of income
- Amazing Feeling: It’s hands down one of the most amazing feelings when your very own product, manufactured in a factory halfway around the globe, arrives and you hold it in your hands for the very first time; when all your product research and development pays off (especially when you went the extra mile and put some engineering efforts into the product)
- Giant Customer Base: Amazon has a giant customer base, many of them access the platform on a regular basis to buy almost anything here. Think about it: When you want to buy something, what is your initial instinct. Where do you go to get the first idea if something is available and at what price? For most of us, that is Amazon. And with an Amazon FBA business, you can immediately tap into that amazing source of traffic.
- Trusted Platform: Finally, Amazon is a very trusted platform, and you and your business can profit from that. Amazon’s reputation, to some degree, will somewhat “rub off” on your very own business. The rationale of many customers is: If Amazon allows this seller to sell their products here, it must be legit. But that is also why Amazon doesn’t hesitate to shut down sellers they don’t like for some reason…
- High Upfront Investment: As suggested above, having your products manufactured requires a decent upfront investment that most likely will, but not necessarily have to pay off.
- Amazon Can Shut You Down: If Amazon doesn’t like you, your product, or the way you run your business they can shut you down without giving you any kind of notice in advance. Ultimately, it is their marketplace and they make the rules.
- No Own Customer Base: As you build your storefront primarily on Amazon, you do not really build your own customer base. Amazon actively prevents sellers from collecting customer’s email addresses etc., so it is hard to really build a long-term relationship with your customers.
- Very Competitive: Amazon, especially Amazon.com has turned into a highly competitive marketplace over the last 5 years. That doesn’t necessarily mean that there is no opportunity and no room for you and your business. But it is getting a lot harder to stick out of the crowd.
- A lot Of Distraction: When you are dealing with physical products, especially your OWN products, then there are many other things that you will want to familiarize yourself with to set up your business for success: Things like patents, registering designs, insurances for your business, etc.
Amazon FBA as a business model does work, even though it is getting more and more competitive. In my opinion, though, it is not the ideal business I would suggest to people that are just getting started. Simply due to the high upfront investment involved, and therefore the high stakes: Making a critical mistake in the early stage of your journey can easily mean that you are wasting a lot of money without realizing it until it is too late.
Also, you will always be dependent on Amazon. They are an incredibly huge and powerful company and if they decide to shut down your storefront on their platform, you are ultimately out of luck. They can shutdown your business any given day without notice, and the web is full of story from people who experienced exactly that…
- Upfront investment (more stars = less investment required)
- Time until “First Dollar Earned” (more stars = less time until first dollar earned)
- Tollerance for making critical and expensive mistakes (more stars = better for beginners)
- Competition (more stars = less competition or less impact of said competition)
- Satisfaction and ethical qualities (more stars = higher satisfaction and more honesty)
- Overall Rating (more stars = better)
Great! That was a lot, right? I do hope, however, that I was able to give you a brief overview of what Amazon FBA is all about and how Fulfillment by Amazon works as a business model. I hope you have a clearer picture now what it is like to produce and sell your own products on the Amazon marketplace and what the up- and downsides of doing so are.
To wrap it up I would say that if YOU are just at the beginning of your journey as an online entrepreneur and do not have several thousand dollars sitting in your bank account that you are okay with losing if things go wrong, I would not recommend starting an FBA business as your first step into the world of passive income. I did it myself, I build a successful Amazon FBA business. I was dedicated (and also to some degree fortunate enough) to be able to push through the struggle that comes with it every now and then and I managed to get it working.
But I did also see many, many others fail and struggle!
If you are just starting out and are looking for a low-risk and rock-solid business model that you can literally start with NO money down, I highly encourage you to take a look at my getting started guide on affiliate marketing (when published) or go ahead and read my review about Wealthy Affiliate, which is a training platform and success community centered around becoming successful with affiliate marketing.
If you have anything to add, would like to share your own Amazon FBA story, or have any questions, please let me know in the comments below. I’d love to hear from you!