INTRO: Amazon has become the go to place for convenient
online shopping around the world. It usually only takes a few clicks to place an order and
the item will be delivered to your doorstep within 48 hours if not 24 hours. Amazon’s relentless push
to perfect their logistics and bring down delivery times has put them a league ahead of all of the
competition. Not to mention their customer service which is generally top of the line. Considering
Amazon’s convenience, speed, and variety it’s not surprising that Amazon is able to pull in nearly
$500 billion worth of revenue on an annual basis. This makes them the third largest company in the
world by revenue only beaten out by Walmart and Saudi Aramco. And honestly, it’s just a matter
of time until they become #1. With all that being said though, Amazon has a serious quality control
issue. Now, I’m not trying to hate on Amazon. I’m actually a massive fan of Amazon stock,
and if you’re strictly buying branded products from Logitech or Corsair through Amazon,
the experience is perfect. If you’re buying unbranded or private label products, however,
it’s a completely different story. More times than not, these products are simply low quality
Chinese products sourced through Alibaba with insane markups to make up for Amazon’s fees,
shipping, marketing, and profit. One of the worst offenders on Amazon is cheap electronics and
notably dongles. Personally, I’ve experienced this first hand with USB C dongles. I’ve gone through 4
of these dongles within the past 21 months. They simply stop working after couple of months, and
judging by the reviews, this is not an uncommon problem. This is honestly super frustrating when
you’re shelling out $20-$30 every 6 months just so you can plug in your keyboard and mouse to
your computer. But, when you take a look at how much it costs to produce these pieces of trash,
it’s not suprirsing that they’re so garbage. This USB C hub on Amazon, for example, costs $25. The
same product on Ali Express only costs $10. And an even better hub on Alibaba only costs 10 to 20
cents. And I’m not cherry picking a dongle either. There are dozens of dongles on Alibaba that cost
just 10 to 20 cents. Now granted, you do have to make a minimum order of 200 units on Alibaba,
but at 20 cents a piece, that’s only $40 total. Even with international shipping,
you can easily get your hands on 200 of these for less than a 100 bucks which is a net unit cost
of less than 50 cents per unit. If you were an Amazon seller buying thousands of these,
you could probably source them for 25 cents per unit. So, when customers are paying $25
for a product that only costs 25 cents, it’s no wonder why the product doesn’t stack up to
their quality expectations. Efficient market hypothesis would tell you that excess profit
margins usually disappear with time as more competitors enter the market. These dongles,
however, have plenty of competition yet all of them cost $20-$30. So,
where in the world is all this money going if not into the quality of the product itself.
THE FBA ABYSS:
One of the biggest issues plaguing Amazon’s private label business is simply how the entire
service is structured. Usually, most private label businesses use something called Amazon
FBA. This is when you source products from Alibaba and then ship the inventory directly to Amazon.
Amazon will take care of sorting the products, distributing them across America, and shipping
them to customers within their insane timeframes. Honestly, the fact that Amazon is able to handle
so many products and ship them to so many people so quickly is truly a logistics marvel,
but it’s also extremely expensive. Not only does Amazon charge us the customers for Amazon Prime
or shipping fees, but they also charge sellers an Amazon FBA fee. Right now, the absolute smallest
fee that Amazon charges sellers is $3.07 per unit. And that’s for extremely small and light objects.
To be categorized as a small standard-size, the shortest side of the given product has to be less
than 0.75 inches. Fortunately, the USB C cable that we were looking at would fall under this
definition. But, there’s plenty of small items that don’t. Take this tiny pot, for example which
only measures 2 inches on every side. Most of us would classify this as a small item,
but Amazon would actually classify it as a large standard item. And if the product has some heft to
it as in 2-3 pounds, sellers can easily end up paying $6.08 per unit. And that’s simply for a
small item. If you’re actually selling a medium sized item, it’ll be classified as an oversize
item for which Amazon will charge a minimum of $10 per unit. Sellers pay these fees for every unit
they sell from the backend, and they of course just pass on these fees to us the customers. So
really, we’re paying for logistics twice. For your average $20 product, $3 to $6 goes to paying the
Amazon FBA fee. And given that most products do not fit within the small standard size,
the average fee is skewed towards $6. For simplicity, we’ll call it $5 on average.
Spoiler alert, that’s just the first fee. Amazon also charges sellers a referral fee. The reason
that Amazon FBA businesses are able to get off the ground so quickly is because Amazon already
has a massive customer base. And to gain access to this customer base, you have to pay Amazon 8-15%
of your total sale price. So, for a $20 product, this works out to anywhere between $1.60 and $3.
We’ll estimate in the middle and call it $2.30. Tack this onto the FBA fee and now we’re looking
at a total of $7.30 per unit. Moving on, we have inventory storage fees. This fee is pretty self
explanatory. Amazon charges sellers to be able to store their products at Amazon warehouses.
Between January and September, this fee isn’t too bad coming at 83 center per cubic foot. But,
during the holiday months, this fee triples to $2.40 per cubic foot. On top of all this,
Amazon also charges a $40 per month fee for simply being a professional seller on Amazon.
That wraps all of the required fees that all Amazon FBA sellers have to deal with, but some
sellers may be subject to additional fees as well. For example, when you ship products to Amazon,
they want each product labeled and barcoded in a specific way. You can either pay your supplier to
do this which is definitely the cheaper option or you can pay Amazon to do this. If you want Amazon
to do this or if your supplier did it wrong, Amazon will charge you a minimum of $1.25 per
unit. Additionally, sellers are also subject to a product return fee, an inventory removal fee,
and other penalties. When you add all of this together, you realize that for an average $20
product, the seller is paying Amazon $10 off the top line for logistics and seller fees. In
other words, 50% of the products purchase price is not even going towards the product itself.
It’s going towards making the product available on Amazon and then getting it to you. Now again,
I’m not trying to bag on Amazon. Logistics, especially the way Amazon
does it is expensive. But, as a customer just know that this is what you’re really paying for.
THE MARKETING ABYSS: A
$10 fee for a $20 product is no doubt quite expensive, but that still leaves $10. The
seller should be able to spend $5 on the product itself and then profit $5 for themselves right?
That would be a win win scenario. Amazon gets their fees, the seller makes their profits,
and the customer gets atleast a decent product, but the thing that you’re forgetting about is
marketing. Now, some bigger private label brands go out and run Google ads, Facebook ads, and even
YouTube ads. But, by far the most effective type of marketing Amazon ads. Whenever you search for
something on Amazon, you know how the top search results say “Sponsored”. Well, these are Amazon
ads and they're extremely expensive because they’re extremely effective. If you were to
see an ad before this video, maybe 1 in a 1000 of you would actually go buy the product. But,
whenever you put a product at the top of Amazon search in front of people who are already
searching for the product and ready to buy, the conversion rate goes through the roof. The average
conversion rate across Amazon is 10-15% and the average conversion rate across Prime members
is a mind boggling 74%. To capture these insane conversions, however, you have to be at the top of
Amazon search. 60% of all Amazon sales go to the first 3 listings and 80% go to the first page. So,
if you’re launching a new Amazon product, you basically have to pay for Amazon ads to
get any sort of traction. The average cost per click across Amazon is $0.89. In other words,
everytime someone clicks on a sponsored listing, the seller has to pay Amazon 89 cents,
and that’s just the average. I used to sell on Amazon myself in moderately competitive niches,
and to secure the first spot in those niches, it cost $3 per click and that was back in 2019.
With the influx of online shopping due to the pandemic, I wouldn’t be surprised if that number
was closer to $5 per click today especially for something as competitive as USB C dongles. But,
even if we estimate conservatively and call it 89 cents per click, if you have a conversion
rate of 10%, it’s gonna cost you $8.90 to move a single unit. Combine this with the
FBA fees and you’ll be paying Amazon $18.90 per unit and that’s not even including the cost of
the product. Realistically though, there’s no way, you’ll only be paying 89 cents per click
especially when you launch. If you want your listing to appear within the top few spots,
you’re likely gonna have to pay $3 per click. Even if you have a 20% conversion rate, that works out
to $15 per unit. Combine this with the FBA fee and you’re up to $25 per unit, you’re $5 in the red,
and you haven’t even paid for the product yet. And this is why private label products on Amazon are
so garbage. Given how much sellers have to pay for FBA and how much they have to pay for marketing,
they have no money left to actually pay for the product itself. You can’t feel too bad for the
sellers though because if they do make it to the otherside and rank their product highly,
they end up making bank. At this point, they can substantially scale back on the Amazon ads
to maybe the average of 89 cents per click. If they maintain the 20% conversion rate, this comes
out to $4.45 per click. Combine this with the FBA fee and they’re up to $14.45 per unit. If we say
the product costs 2.50 cents per unit, they’re all in cost is roughly $17 per unit. At a sale
price of $20, they’ll be clearing $3 on every unit. And the top sellers in the popular niches
generally sell well over 10,000 units per month which works out to $30,000 per month in profit
off of just one product. If you replicate this success with 10 products, you’ll be making $3.6
million per year. I think you can see why Amazon FBA is such a popular business. But, in terms of
the quality of the product, by the time you finish paying Amazon and yourself, there’s nothing left
to spend on the product itself. And this is why private label products on Amazon are so garbage.
THE AMAZON: From all of this, the number one thing
that we can takeaway is that the vast majority of the purchase price goes directly to Amazon. For a
$20 product, it’s extremely common for 75% of the proceeds to go to Amazon between the selling fees,
the FBA fees, and the marketing fees. But, the funny part is that Amazon isn’t profiting from
any of this either. In fact, they’re literally losing money. Within the first 6 months of 2022,
Amazon lost $5 billion on their retail business. And the main reason for this is that it’s
extraordinarily expensive to pay for hundreds of thousands of warehouse workers, delivery drivers,
pilots, planes, trucks, ships, factories, warehouses, boxes, packaging materials, and
everything else that goes along with logistics. By the end of it, neither Amazon nor their employees
are left with that much money and customers are left with trash products. The only people
who come out on top are Amazon shareholders and the select FBA sellers who make it to the other
side. The obvious solution to this conundrum is to simply spend less money on logistics and more
money on the products themselves. But, with our increasingly short attention spans, this
is simply unfeasible. So maybe, the problem isn’t Amazon or FBA sellers or the products themselves.
Maybe, the real problem is actually just our insatiable desire for instant gratification.
But that’s just what I think. Have you had a bad experience with a private label Amazon product?
Comment that down below. Also, drop a like if you hope that Amazon does something about the
quality issue. And of course, consider checking out our discord community to suggest future video
ideas and consider subscribing to see more questions logically answered.