Small Businesses Selling on Amazon: Is it Worth it?

Amazon. The place where you can get anything. From coffee filters to giant pillows that look like baguettes. It is the everything store, the overlord of e-commerce. As of 2022, Amazon holds 37.8% of the e-commerce market share. To put that into perspective, Walmart only holds 6.3%. The reason Amazon has become so successful is because it allows independent sellers to use Amazon as a platform to sell their goods. Amazon's marketplace relies on these small to medium-sized businesses to bring in massive amounts of revenue. But, with everything that these merchants are bringing to the table for this mega company, is it really worth it for them? We'll explore the details of being a merchant, and discuss if small businesses selling on Amazon is the best option for e-commerce.

Amazon Merchants

If a small business wants to start selling their items on Amazon, the process is fairly simple. The convenience is why many business owners choose to sell on Amazon. Since 2017, sellers on Amazon’s marketplace have been responsible for most of the company’s product sales. This is obviously great for Amazon. The more sales they rack up, the more money Amazon generates. If a small business wants to sell on Amazon, all they really need to do is sign up and they can start selling.

The easy onboarding process creates the falsehood of being the one and only option these small businesses have if they want to start selling online. This is similar to restaurants trying to offer online ordering. DoorDash, Postmates, UberEats, etc. is marketed as being the obvious choice, but the cons often outweigh the pros for small businesses offering their products on these third-party platforms.

The Cons of Small Businesses Selling on Amazon

From the outside looking in, selling on Amazon seems like the easiest most profitable way to sell products online. But, there are hidden deficits surrounding small businesses selling on Amazon that many people don't realize until they get started.

High Competition

There is the idea that offering your goods on Amazon will expand your reach. Yes, when you offer your items on Amazon, you are unlocking an insane amount of potential customers. More than you ever would otherwise. But, just because there is a huge amount of people that buy from the site, doesn't mean you'll gain access to even a fraction of them. Again, using the comparison of a restaurant offering their food on a third-party ordering site, the competition is fierce. You're offering your product, but so are hundreds of other merchants. Amazon has its own ranking system and orders products based on what they feel is the best one. And let's face it, no one scrolls to the 2nd or 3rd page of Amazon. So, if your product isn't somewhere near the top, the chances of potential customers choosing your item decrease tremendously.

How Merchants Get Ranked High

It's not totally clear what the specific requirements are to get ranked high with Amazon, but people have figured out what the basics are.

• Good Feedback and Reviews
• On-time Order Fulfillment
• Fulfillment by Amazon (FBA) program
• Good Customer Service
• Having Competitive Prices
• Constant up-to-date Product Availability

High Fees

Whenever a small business offers its product on a site that isn't its own, there are fees that need to be paid. Amazon has a list of fees that merchants selling on the marketplace need to pay.

Commission Fee

Amazon has a commission fee for every product sold. There are two different options merchants can pay the Commission Fee. They can either sign up for the Professional Plan or the Individual Plan. The Individual Plan charges merchants $0.99 per item sold. This plan is marketed as the beginner option, for people who are just starting to sell online or that sell less than 40 items per month. The Professional Plan is $39.99 a month with no fee per item.

Referral Fee

On top of the commission fee, merchants also need to pay a Referral Fee for every item sold. The amount varies by category of product, this fee could range from 8%-45%. There is also a Minimum Referral Fee. Amazon assigns a Minimum Referral Fee to some categories. If a category in which you sell has a minimum referral fee, you’ll pay the greater of the two fees based on your product’s selling price.

Closing Fees

Amazon charges an additional fee for products sold under its media categories. This fee is the Closing Fee, and it’s a flat $1.80 charge, which is added to the Referral Fees for items in any media category.

Fulfillment by Amazon (FBA) Fees

Both Individual and Professional sellers can use FBA to stock, pack, and ship their Amazon products. This is an optional fee, but if a merchant really wants to be successful on Amazon, they're going to want to partake in the Fulfillment by Amazon Program. Not only will Amazon rank your items higher by using FBA, but your orders will be organized and fulfilled on time and more accurately updated on your storefront.

FBA fees vary based on product size and weight. The two types of FBA fees you’ll see are:

1. Pick, pack, and weight handling fees: This is your entire pack-through-shipment fee, including your shipping cost.
2. Monthly storage fees: This is the cost of storing your products in Amazon’s warehouse.

FBA fees are based on the size of the product you’re storing and shipping. Size includes any packaging for your product, such as shoe boxes, blister packs, or retail packaging. Amazon divides FBA products into two size categories.

1. Standard-sized products: Small standard-sized items, fully packaged, must weigh less than a pound and not exceed 15″ x 12″ x 0.75″, while large standard packages can be up to 20 pounds and 18″x14″x8″.
2. Oversized products: Any item over 20 pounds and/or exceeding 18″x14″x8″ is considered oversized.

Storage Costs

FBA also charges inventory storage fees that increase dramatically during the October to December holiday season. These storage rates are charged in addition to referral fees, account fees, and fulfillment fees.

These fees are not seller fees, but if you are not attentive, they could cost you money. If you personally deliver Amazon items, Amazon will reimburse your delivery expenses with a postage credit on each sale. However, there is a catch. When compared to the shipping costs you actually pay to send items, Amazon often provides merchants with a small credit.

You can find yourself paying significantly more to ship orders than you do to obtain Amazon's shipping credit, depending on what you offer and the overall size and weight of each box you ship. You must be aware of the amount you will receive from Amazon for each item you sell in order to prevent losing all of your income to shipping charges.

Choosing a Different Route for E-Commerce

At VMS, we will help your small business set up the perfect e-commerce platform that's customized to you with a gateway. Either link your existing website or have us help you create a new one. By having a gateway, you are opening up your business to the whole world just like on Amazon. With a gateway, small businesses can exist exclusively online, or unlock a new stream of revenue in addition to in-store purchases.

Gateways are simple to set up, PCI compliant and encrypt all transactions but we'll still guide you through the whole thing. With a payment gateway, the payment information is fully protected, giving your customers the peace of mind that their credit card info is secure and will not get leaked to third parties. At the same time, your operations have a defense against breaches that could otherwise leave your business vulnerable to damaging complaints and customer lawsuits.