5 Hidden Costs Associated with Amazon FBA Hardly Anyone Talks About

I made $124K through Amazon.com in 2022, but I had no idea about these costs when I started this business.

Reflecting on my five-year journey as an Amazon.com seller, I aim to share valuable insights rather than boast about successes or lament failures. This post offers a personal exploration of a business model that has piqued the interest of many globally.

For those unfamiliar with FBA, it stands for Fulfillment by Amazon. It is a service through which any seller can outsource order fulfillment to Amazon.

The seller sends the goods in bulk to one of many Amazon warehouses, and Amazon fulfills the order as and when they arrive. This frees up time for the seller to focus on production and sales without worrying about order fulfillment.

In 2018, I started my Amazon selling journey from India. Shipping a few boxes to Amazon’s warehouse in the USA, I initiated ads to boost traffic to my listings and drive sales.

Five years into this venture, I’ve encountered many conceivable twists and turns in this business — experiencing both highs and lows. From fruitful months to challenging ones, the lessons learned over these years are what I aim to share in this article.

Why I Wrote This Story

While the internet is flooded with stories of FBA success stories claiming millions in earnings, the truth often diverges from the glossy surface.

In reality, there are concealed costs that seldom get the spotlight. My objective is to explore the unspoken expenses associated with operating a private-label brand on Amazon.

To offer a tangible glimpse into the intricacies, let me open the curtains to my sales dashboard, revealing the actual transactions of 2022.

While my sales on Amazon.com for 2022 amounted to $124k, the actual take-home figure tells a different story for the reasons I cover in the following sections.

5 Hidden Costs Associated with FBA Worth Knowing

I’d like to break down some hidden costs that no one talks about:

Hidden Cost #1 — FBA Fee

While it may seem like a straightforward aspect, the truth is that many traders new to Amazon selling find themselves bewildered by the charges, making it an often overlooked hidden cost.

Let me simplify this for beginners.

Amazon charges two types of fees: referral fees and fulfillment fees.

We are going to club both these fees fee together to simplify it. Across all my products, I have seen that this ranges from an average of 35–40% of the selling price.

This means that if you sell a product for $20 on amazon.com, you only get around $12 once a customer purchases your item.

While it’s possible to mitigate this fee by handling order fulfillment independently, I discourage this approach. Scaling an FBA business becomes challenging when you take on order fulfillment yourself, and scalability is a critical factor in achieving success.

Hidden Cost #2 — Total Advertising Cost of Sales

One of the most overlooked fees associated with any product-based business is the cost of acquiring a customer.

TACOS (Total Advertising Cost of Sales) simply means the % of the product price that goes into acquiring a new sale. Here is the formula:

This cost varies and depends on how well you’re running the ads on the Amazon platform. I have worked with several agencies from different countries, and on average, this figure comes down to around 20% TACOS, which is not bad.

This means that if you sell a product for $20, you must account for $4 for advertisements.

Hidden Cost #3 — Supply Chain Management

This is another less-known cost. With any Amazon FBA business or any product-based business, for that matter, the more you sell, the more stock you need.

If you’re selling in the USA, usually, the stock (products) you are sourcing will come from Asia. In my case, all my products are sourced from India.

The most cost-effective way to ship products is via Sea. However, the transit time associated with ocean freight is really long. My products take around 45–70 days in transit time (sometimes more due to the unpredictability of the current global logistics system).

I usually take the transit time as 90 days door-door to be on the safer side. This means I must plan the production and the purchase orders 4–6 months in advance. Remember, your supplier will take some time to produce the goods for you, too.

Why is this a hidden cost?

It's because a lot of the money that you receive needs to be reinvested in the business to maintain this supply chain smoothly.

In my opinion, this is one of the most difficult aspects of running an FBA business.

Even a slight problem in sourcing, production, transit, logistics, world affairs, weather, and other factors can disrupt your entire business, and most of these factors are beyond our control.

Hidden Cost #4 — Reinvesting Profits

This is another cost I did not understand when I first started. With every physical product-based business, the net profit that you get is actually not the profit that you take home.

This is because much of this needs to be reinvested in the business. This is, in fact, a hidden cost because you cannot ignore or deny it. You need to reinvest the money to keep the ship afloat.

The more you reinvest, the smoother the business operations get.

You need to reinvest a large portion of your profits, which is why having a large profit margin (60–70%) is imperative when selling any physical product.

Hidden Cost #5 — Low-Gross Profit Margin

As I mentioned in my previous point, the biggest killer for any physical product-based business is a low gross profit margin. When I say low, I don't mean 5–10%. That’s terrible.

A profit margin of even 30–40% is terrible. Ideally, you want a gross margin of 50–60% because only then you end up with a decent net profit of 20–30% (don't forget you need to reinvest part of this too).

Some might say these kinds of margins are impossible on Amazon. Well, yes and no, depending on the situation. It is possible, but it's challenging.

The only way you can achieve this is by differentiating your product and building a brand instead of competing on price.

That is why product sourcing can make or break your business.

Conclusions

These represent just a handful of the concealed costs I’ve encountered in my pursuit of establishing a private-label brand on Amazon.com.

I want to clarify that this article doesn’t aim to dissuade anyone from venturing into Amazon selling. Quite the opposite, I wholeheartedly endorse this business, acknowledging Amazon’s role in providing opportunities globally.

Nonetheless, understanding all the covert costs of operating such a business is essential for strategically planning your path to success.

With Amazon’s user-friendly platform, anyone from anywhere globally can commence selling and cultivating an online brand. Amazon streamlines the intricate process of order fulfillment, facilitating seamless scalability.

However, it’s crucial to acknowledge that it’s not an entirely trouble-free journey. In this article, I introduced and explained the concealed costs linked to Amazon FBA — information imperative for anyone contemplating investing substantial amounts to initiate their brand.

I also wrote an article about starting the Amazon FBA business for beginners.

Thank you for reading my story.

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