Amazon Business Model Guide

Interesting Fact: 58% of Amazon’s total sales actually are derived from third-party merchants

Amazon are onto a winning formula. Not only do they sell their own products on the Marketplace, but also allow third-party sellers a piece of the action. For a price, of course…we are talking about business models, after all!

But the above fact is an interesting one, as so many entrepreneurs have jumped aboard the Amazon train to make their fortune, too. And there is plenty to go around.

IO Scout have prepared a couple more facts for you:

71% of Amazon sales are made from Private Labels
26% of Amazon sales are made from Wholesale
20% of Amazon sales are made from Retail Arbitrage
25% of Amazon sales are made from Online Arbitrage
8% of Amazon sales are made from Drop Shipping
6% of Amazon sales are made from Handmade Sellers

Take a look at some of these business models in more detail.

Amazon Handmade

Similar to competitor sites like Etsy, Amazon Handmade exists for Amazon sellers to sell their own, handmade products.

Amazon Sellers who craft their own jewellery, for example. These unique and bespoke items sell well as they are generally one-off items, which are not easy to replicate, and also have low competition from other sellers. Often, you will find that these items can demand higher prices as there’s not often something similar on the market already = more profit!

Items which fall into a niche category are often successful, as it’s extremely unlikely that Amazon itself would start investing in these categories. Therefore, you probably wouldn’t have competition from Amazon with these niche items.

Listings for Amazon Handmade are free, with a percentage of the sale reduced by Amazon.

Retail Arbitrage

Retail Arbitrage is a reasonably simple thing to achieve.

A retail shop (Walmart, for example) sells a product (either online or in-store) for a specified price. You, as the Amazon seller, go right ahead and buy this product, and sell it on Amazon’s Marketplace, hopefully for a higher price!

The statistics for selling on Amazon via the retail arbitrage route is low-entry point, but it is also fairly low in profitability, too. Typically, retail arbitrage merchants earn under $5,000 a month. Retail arbitrage is a nice easy way into selling on Amazon, with not much risk or initial investment in money terms.

Online Arbitrage

Online arbitrage works in a similar way to retail arbitrage, however goods are purchased initially online, instead of in a bricks and mortar store.

According to Amazon merchants, 59% of sellers who choose online arbitrage experience profits of over and above 16%, and it doesn’t take a long time to get going with this method, roughly five weeks’ of research and sourcing products to get started.

Retailers who dabble in online arbitrage commonly choose these categories:

Home and Kitchen – 63%
Toys and Games – 59%
Kitchen and Dining – 43%
Baby Products – 40%
Beauty and Personal Care Products – 40%

Wholesale

Typically, wholesale goods already exist as listings on Amazon’s Marketplace. There are a lot of Amazon entrepreneurs who deal solely with wholesale goods, buying them in bulk often from liquidation distributors.

It makes sense to navigate carefully when negotiating with a liquidation distributor, as it’s very easy to spend a lot of capital on a lot of stock, only to find out it is not what you were expecting, and therefore losing a lot of money in the process. Some top tips to maximise your profits are as follows:

Obtain a Resale certificate (very often a requirement from liquidation distributor businesses)
Carefully scrutinize the manifest and obtain as much detail as possible about your shipments
Be aware of manifest differences – if you end up with liquidation pallets that are wildly different from the original manifest, you have cause for complaint, and potentially, your money back
Liquidation stock requires a lot of time to sort and categorise, so factor this time into your costs
Understand the liquidation distributors’ grading system. Once you’ve worked with a liquidation company a while, you will have a feel for the quality and features of the products
Check dates for expiration of products
Don’t throw all your capital at liquidation stock instantly. It’s best to build up, investing in small amounts of liquidation stock at a time, until you can be confident with your liquidation distributor and the quality/types of products you can expect to receive

When it comes to sorting through your liquidation stock, check if the goods are:

Discontinued
In good, sellable condition
Packaged in good, sellable condition
An authentic brand (if that’s what you were expecting)
Included with a warranty

Sort through the stock, and set aside those goods which do not meet your criteria for re-sell on Amazon. If they are broken, faulty, or need re-packaging, sort accordingly and categorize.

Refurbished or used goods have a lot of interaction on Amazon by shoppers. Shoppers who are driven by price, and not so much on delivery times.

The key message really when it comes to buying liquidation stock to resell on Amazon’s Marketplace is to start slow, and build from the ground up. Until you have confidence with your liquidation stock supplier, invest small and often, without risking too much capital up front.

Get this process right, and you really could see your Amazon selling business reaching new heights – as your consumers get more and more deal-friendly. You can expect to be able to offer your customers really competitive prices for products that you sell on Amazon, when you invest correctly into Amazon liquidation stock.

And if you find yourself in the situation where you need to sell some of your own stock to liquidation companies, is not that your online selling business is set to fail! Every merchant makes errors here and there in terms of the right products to buy and sell, and seasonality can play a big part, too.

Retailers who dabble in wholesale products commonly choose these categories:

Home and Kitchen – 55%
Toys and Games – 43%
Kitchen and Dining – 34%
Baby Products – 34%
Beauty and Personal Care Products – 35%

Private Label

More expensive to get going with, Amazon sellers typically report an investment of around $2,500 is required to set up a Private Label selling business on Amazon. This business model is essentially re-branding products, and is cited as the most common business model on Amazon’s Marketplace, with around 71% of sellers going down this particular business road.

Retailers who invest in Private Label products commonly choose these categories:

Home and Kitchen – 41%
Toys and Games – 15%
Kitchen and Dining – 16%
Health, Household and Baby Products – 19%
Sports and Outdoor Equipment – 19%

The simple model for Private Label business is like so:

Research Amazon’s item catalogue for products which are high in demand, yet low in competition
Get in touch with a manufacturer to produce the item in question
Build a new listing for the manufactured goods
Go forth and launch the product on Amazon, and promoting it along the way

Most Amazon sellers who go down the Private Label business model route enlist the assistance of Amazon’s FBA service, to take the pressure off.

FBA Method

The FBA method is a no-brainer for those Amazon sellers who are extremely successful on the selling platform, and who are selling ample volumes of products, every single day of the week. When you reach this level of Amazon success with your Private Label selling business, it’s not necessary for you to be spending a lot of time dealing with all the packaging, posting, and customer queries every hour of the day.

To have a successful Amazon FBA business, you need to have happy customers. Happy customers who come back and buy more from you, again and again.

This is how it works:

Organize how many units of products you plan to send to Amazon’s Fulfillment Centres
Your products are installed within Amazon’s Fulfillment Centres for storage until they are sold
Customers place their orders on Amazon’s Marketplace for your products
FBA receive the orders
FBA process the orders
FBA pack the orders
FBA arrange shipment of the orders
And if any customer service questions, complaints or queries come up along the way, FBA deal with that, too.
Oh, and FBA also handles customer returns

FBA Advantages

Save yourself a lot of time - time that can be spent on other business activities, rather than wrapping parcels!
Removal of stress over order issues
Removal of stress over complaints from customers
Prime delivery for your customers, meaning they receive their orders quicker
Removal of stress over shipping and delivery issues
No order errors
Reassurance of Prime logo on your product listings
Increased presence on Amazon, as FBA sellers are ranked higher, so your products are guaranteed to reach a wider audience

This service, of course, comes with a fee accompanied with it. And they can be significant fees, indeed. It pays to investigate the FBA fees, so you can calculate an accurate profit margin.

FBA Fees

Relating to the items’ size and weight - think little, and light!

FBA Storage Fees

Your goods are warehoused within Amazon’s Fulfillment Centres, so these are the expenses linked with this storage charge.

Drop Shipping

Drop shipping is another popular method of selling, and works by the Amazon merchant not actually holding any physical stock, but rather enlisting a manufacturer to ship orders directly from themselves to the customers.

51% of Amazon drop shippers report profit margins of between 11 and 25%. Getting started with drop shipping is not the quickest route, as it does take a substantial amount of time to source the right supplier or manufacturer initially, and ensure a good working relationship. Good shipping methods need to be in place, too.

Retailers who drop ship commonly choose these categories:

Home and Kitchen – 50%
Electronic Goods – 26%
Kitchen and Dining – 25%
Garden and Outdoor Items – 25%
Beauty and Personal Care – 25%

The key elements to a drop shipping Amazon business are:

Source the right product that is relatively high in consumer demand, yet low in current competition
Start product listings on Amazon’s Marketplace
When orders are received, the consumer’s end destination is forwarded to the product manufacturer in order for them to fulfil the consumers’ order

A bit about Amazon Stores

The place where your own branded products can do their thing, and you can make even more money than you did before. Who wouldn’t want that?

Existing since the year 2017, Amazon Stores allow you to create your own brand by way of an Amazon store. By doing this, you can increase your sales because your brand is getting much more traction and visibility on the platform.

An Amazon store is a visually rich platform where you can showcase your products, and create a lovely shopping experience for your customers. Due to the nature of Amazon stores, by having one you automatically enhance your consumers’ shopping pleasure, and drive more sales, as it makes it even easier to buy from you, and therefore, your brand.

Amazon Stores in a few bullet points:

Gives you a chance to get your brand out there to customers you haven’t reached before.
Gives your existing customers a new look at your brand, and to tempt them into buying from you again.
You can create slideshows of your products with images, text, and videos, and is wonderful for launching new products, and making a huge fuss about it!
Heightens your SERPs within Amazon in an organic manner.

The major component that drives Amazon entrepreneurs to set up their own Amazon Store is to encourage more sales – sales with their existing customers, and sales with their brand new customers. If you make your Amazon Store a really appealing place to be, and a pleasant shopping experience, more sales will come. It’s a very accessible method to shop, and one which shoppers enjoy – so why not go ahead and create that very platform for them to enjoy – and buy from you?

Your Amazon Store is not restricted to desktops, either. The mobile shopping experience is second to none, so you can capture your prospective shoppers’ interest whether they are browsing your Amazon Store on their own computer, or mobile, or out and about.

Final Thoughts

There are many roads to success when it comes to handling your own Amazon selling business. And there is definitely money to be made doing so. In essence, the business model that Amazon adopts is constantly evolving, and the fact that you can create your own business through Amazon is a very good opportunity indeed.

In 2019, Amazon enjoyed a reported $280 billion in revenue, with around $11.5 in net profit.

And of course, Amazon offer several different subscription services to their many consumers, including Amazon Prime, and Amazon Video. These recurring subscriptions are a great business model, and one to take advantage of, as many people simply go ahead with their recurring online monthly payments without cancelling. And that’s not even to mention the advertising associated with Amazon, which is another massively lucrative avenue!

Around 70% of Amazon’s overall revenue is attributed to item sales. Which is the majority percentage, however that section of the business model exists to grow other sections which are more lucrative. Other sections such as Amazon Prime and Advertising, and this is how Amazon has managed to create a unique, diversified business model which continues to grow exponentially.

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