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How Much Does it Cost to Sell on Amazon? | 4 Business Models Explained.
06/16/20 — 0 min read

How Much Does it Cost to Start Selling on Amazon?

To sell on Amazon, you need to decide how to source and sell your products. Learn the cost breakdown of each business model, and which is best for you.

If you want to sell on Amazon, you have four main business models to choose from: Arbitrage, Dropshipping, Wholesale, and Brand Building. Each option has different upfront costs, strengths, and drawbacks. Not sure if you can afford to start selling in the Amazon marketplace? Here you’ll learn the pros and cons of each option you have, including a comparison of typical costs, and how to choose which is best for you.

Overview: The 4 Business Models to Sell on Amazon

Before we get started, we’ll give you a quick overview of each approach to start selling on Amazon. The Amazon marketplace can be incredibly profitable, but it’s not always obvious how to get started. While some options are easier on the wallet than others, you’ll also want to look at things like: scalability (how easily you can grow it), time investment (short and long term), technical requirements, and business knowledge requirements. Keeping that in mind, these are the four business models to consider:

  • Retail Arbitrage – don’t let the jargon deter you: arbitrage is fairly straightforward. It consists of buying your merchandise at retail or online stores (Walmart for instance), then selling it at a markup on Amazon.
  • Dropshipping – similar to arbitrage, except you don’t hold any inventory. Instead, you first make listings on Amazon for your items. When someone purchases the item, you have it sent directly from your supplier.
  • Wholesale – a common business model: purchase items in bulk from a manufacturer, sell them individually on Amazon
  • Brand Building – while it takes more effort and skill, it can prove immensely profitable to create your own branded merchandise to sell in the marketplace. Many sellers do this as a Private Label, a discounted alternative to major brands.

Now that you have an idea what each business model looks like, let’s break down the typical costs of each.

Cost Comparison of Business Models for Amazon Sellers

There are 10 key factors that contribute to Amazon selling costs. No need to memorize them just yet, we’ll look at each as they become relevant. The final five items on the list will only apply if you are building your own brand, so you can ignore them for the first three options.

Bear in mind that any serious seller on Amazon should get an Amazon Pro subscription, which is a monthly cost of $39.99. For simplicity’s sake, we’ve kept it in our cost breakdowns as a one-time payment.

Common costs for Amazon sellers:

  • Amazon Pro – monthly subscription, recommended for all business models
  • LLC – registering as a Limited Liability Company (costs vary depending the state you register). We’ve added this cost estimate equally to each option
  • Software – to manage inventory, logistics, etc. Recommended for every option, though the level of software investment varies
  • COGS (inventory) – some options will require you to purchase initial inventory to get started
  • Shipping to FBA – costs vary depending on what you’re buying. Learn about freight forwarding [LINK to updated December freight article] if you still need your international shipments sorted out.
  • Engineering – product development, if you’re building a brand
  • Samples – part of development, ordering from manufacturer to iterate better versions
  • Promotions – new products need marketing in order to get sales and rank in searches. Methods to get more Amazon reviews can include ads and offering free/rebated items.
  • Photography – professional photos of your product can boost sales
  • Trademark – registering to protect your intellectual property

To give you a quick comparison, the graphic below shows each business model and its approximate costs. However, each business model is a different endeavor, so we’ll look at each option and weigh the pros and cons next.

Arbitrage

Dropshipping

Wholesale

Brand Building

Amazon Pro

39.99

39.99

39.99

39.99

LLC

250.00

250.00

250.00

250.00

Software

49.00

120.00

100.00

100.00

COGS (inventory)

300.00

500.00

2000.00

3000.00

Shipping to FBA

50.00

0.00

100.00

500.00

Engineering

0.00

0.00

0.00

500.00

Samples

0.00

0.00

0.00

200.00

Promotions

0.00

0.00

0.00

1500.00

Photography

0.00

0.00

0.00

750.00

Trademark

0.00

0.00

0.00

750.00

Total (USD)

$688.99

$909.99

$2489.99

$7589.99

Which Business Model is Best for Selling on Amazon?

As we’ve mentioned, the prices alone don’t tell you the whole story (otherwise no one would build their own brand). So let’s look at the Pros and Cons of each option, and what type of Amazon seller may want each.

Retail Arbitrage

imported weaved baskets

Retail arbitrage consists of buying discounted products and selling at a markup

Since we’ve listed Amazon Pro and LLC registration as costs for every option, let’s go straight into what makes retail arbitrage different. To get started with arbitrage, you’ll want to put a few hundred dollars into upfront inventory, and often much more. You buy the inventory from retailers and hold it. This could be at either Amazon warehouses or at your own business (or for many sellers, your house). The costs of shipping to FBA will depend on what you buy, so remember these costs are variable.

Thankfully, this is an easy and cheap business model to start, so if you’re looking to get your feet wet in the Amazon marketplace without too much hassle, this could be your best bet.

Pros of Arbitrage

  • Inexpensive to start: on average, people find they can jump into an arbitrage business with less than $700 investment
  • Low Risk: aside from being inexpensive, you typically choose items that have already been proven to sell
  • Easy to get started: you can dive in with just a little money and a smartphone
  • Good for small side income: this business isn’t the best option if you want to scale your business, but it’s a great way to make a little extra pocket money

Cons of Arbitrage

  • Time investment: it’s hard to find consistently winning item, and since the best items are often seasonal, you may find yourself constantly looking for the next thing to sell
  • Inventory handling: you have to handle your own inventory. This means ordering from or even visiting the store to buy items, getting it sent to FBA (or directly to your customer), and, if you ship from home, creating labels for each shipment
  • High Competition: when a business is this easy to start, the downside for you is that it’s easy for everyone else, too. With a low barrier to entry (just a cell phone and some initial cash), everyone and their dog is doing it.
  • Hard to scale: if you want to make a living as an Amazon seller, this isn’t your best bet. To scale it, you’ll generally need a much higher investment, and not always the safest one.

Dropshipping

Working from home with a laptop

You can start dropshipping without ever leaving your desk.

While dropshipping has some overlap to Arbitrage, the perk of dropshipping is that you never need to touch the inventory. While not required, you may want to order a few samples to test product quality, verify shipping times, and take some product photos and videos if you need to.

Again, dropshipping hooks a lot of new sellers because all you really need is a laptop and some cash to get started. It’s a great option if you want to scale your business, though this eventually requires a much bigger software investment to handle orders, and integrating the different software platforms can be a headache if you’re not comfortable with logistics software.

A big issue with dropshippers on Amazon is when you run out of inventory, or your products don’t reach FBA in time, which you can get penalized for. This means you’ll want to put at least $500 of initial inventory investment to stay on Amazon’s good side. If you have some technical knowledge (or the motivation to tackle a steep learning curve), you can get started dropshipping for under $1000.

Pros of Dropshipping

  • Low risk: it’s a low initial investment, and you don’t need to purchase that much inventory to get the ball rolling
  • No inventory: if you want to sell online but don’t want to be locked in one place, dropshipping is great. You can sell your products without ever needing to touch them, so many dropshippers move abroad to places in Latin America or Asia.
  • Quick to get started: without the need for inventory or shipping capabilities, you could start right now without standing up from your computer.

Cons of Dropshipping

  • Account suspensions: Amazon likes to keep a high standard for its sellers, and they’ll check to make sure you’re authorized to sell your products. They might suspend your account due to order cancellations or complaints about defects and shipping times. Dropshippers do not usually do well at these metrics, so seller account suspensions are common.
  • Low Margins: due to the low barriers to entry, dropshipping is very competitive. You may find it hard to get sales, especially because so many dropshippers compete on price, and the only way to keep up (without a personalized brand) is to sacrifice profit margins.
  • Mistakes can cost big: since the margins are so low, a single return can ruin the profits for multiple other sales
  • Technical: you’ll have to string together multiple software platforms as you get further along, and between all the updates and bugs and unexpected compatibility issues, this can become stressful for many people

Wholesale

Wholesale warehouse inventory stacked boxes

Wholesale requires a bigger upfront cost for inventory, but has great margins.

As the name suggests, this is where you’ll purchase wholesale inventory from your supplier, and then either ship it to Amazon FBA for storage, or simply ship items directly to the customer yourself. As with the other options, this will require a basic software investment.

However, buying wholesale requires a large initial investment, because most manufacturers will require one to two thousand dollars per purchase. This differs from the small quantity purchases (of individual items) you’d make with arbitrage. Buying in bulk can help with your margins though, so this pays off. You can expect to pay around $2500 to get started with the wholesale model.

Pros of Wholesale

  • Work with established brands: if you pick the right manufacturer, you have a huge leg up here, because these brands are already recognized for their products, and they know how to work with resellers
  • High potential to scale: if you have a good brand, you’ll find it easy to scale up your business, particularly if you’re using Amazon FBA
  • No need to develop new products: this is true for dropshipping and arbitrage as well, but worth pointing out when comparing wholesale to brand building
  • Built-in demand: odds are, if the product is already selling, you don’t need to do much marketing work on your own.
  • Quick profit: due to the faster turnaround of goods and higher margins, wholesale sellers tend to make a profit faster than with brand building

Cons of Wholesale

  • Hard to find good suppliers: these days, the market is flooded with low-quality manufacturers, so you’ll need to do a good amount of research up front
  • High competition: as with the previous options, a market that’s easy to enter will have much more competition.
  • Higher risk: with the larger initial investment, you’re putting much more on the line compared to the last two options.
  • Dealing with inventory: unless your setup has Amazon FBA handling everything, you’ll have a lot of physical inventory on hand. Even still, holding all that inventory in their warehouses means you’re paying to use that space.

Brand Building (Private Label)

amazon Basics Amazon private label products

Private labels like AmazonBasics can vastly outperform competitors in the marketplace.

Creating your own brand can come in many forms, but private labels are incredibly common. Think “AmazonBasics,” the Amazon-branded products which compete with common marketplace items, like phone chargers. Rather than selling someone else’s brand (as you would with wholesale), you instead have a manufacturer create a similar product with your own branding.

This method is by far the most expensive and complex, but has the most potential for long-term success. Between all the costs, you can expect to spend upwards of $8000 or more. This cost will vary greatly depending on the product you choose.

The biggest cost here is often inventory, because you’ll generally need a solid three thousand dollars to start scaling. Shipping to FBA can also cost a fair amount, again depending on your product. While simple products may not have the highest engineering costs, you may end up spending a great deal on engineering if you want to make something unique that stands out from its competition.

Of course, you’ll want to order samples of your developing product from your manufacturer, to test it out and create better iterations of it. This can cost a couple hundred bucks at a minimum. Then, once you’ve developed the product, you still have big fees ahead for trademarks, professional photography for branding, and promotion.

On this last point, remember that a good chunk of your first order should be set aside for promotion (around half the order). This is because you need to get some initial sales velocity to earn reviews and get your product trending, and an easy way to do this is via rebates and discounts. Not all of these things are necessary, but are generally recommended.

Pros of Building a Brand

  • Scalable: once your brand is built and logistics are organized, scaling is almost as simple as increasing your manufacturing.
  • Easy to find suppliers: particularly if your product is similar to existing products on the market, you can easily find manufacturers who can make your product with minimal adjustments.
  • Sellable business: the perk of owning this from the ground up is that you can sell off the whole business if you want to, and earn a hefty return in the process.
  • Hand off inventory responsibility: if done right, you can eventually set up your manufacturers directly with Amazon FBA, so you never need to handle inventory.

Cons of Building a Brand

  • Very high risk: with such a large upfront capital investment, building your own brand is risky. Especially when AmazonBasics can so easily put out a Private Label and send it straight to the top of page 1 search results.
  • Requires a unique product: while you can offer something similar to existing products, you need to create some kind of unique value if you want to stand a chance
  • Requires marketing: whether you have some marketing skills or you’re willing to hire someone who does, launching a new product can require a serious marketing investment

How to pick a winning product to sell on Amazon

Once you have a sense for what business model sounds right for you, you’ll want to settle on a product. You may already have a category in mind, in which case you can eliminate the guesswork around picking a product by using Massview’s free Amazon seller tools.

If you haven’t had the chance to watch our video above, you can skip straight to the 13:13 mark with this link to see how to choose a winning product. This first example applies to Retail Arbitrage and Dropshipping, and shows how you can use a sales estimator tool (such as the Massview Competitor Insight tool) to see how well a given item is selling, and whether it’s worth competing with.

To see how you would use the Massview platform to pick a Wholesaling or Brand Building product, you can skip ahead a bit more. You can use this tool to see what people want to buy, but aren’t currently finding.

For instance, if the listed items have low reviews, you can create a private label to address the unmet demand. If you see established products with high sales numbers but only a handful of sellers per item, you can contact the manufacturer and see if you can start wholesaling their product.

Conclusion

The cost to start selling on Amazon varies, and more profitable options require a larger financial investment. So rather than choosing the cheapest option, think long term: how much time are you willing to invest in your business? How big do you want to scale? How skilled are you at marketing, or at software integrations? Do you want to make a living from this?

There’s no simple answer, and the best solution depends on your priorities and goals. You may not be sure where to start, so a smaller financial investment can make more sense in the beginning. But if you have the drive to put in the work and build a robust business, the extra cash investment up front can lead to big profits down the road.

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