What Are the Various Types of FBA Businesses?
Almost anyone can launch their own business and start selling products on Amazon. Third-party sellers make up the lion’s share of all sales on the platform. In 2018, 58% of Amazon’s retail sales didn’t come from Amazon itself but entrepreneurs selling their products through Amazon. Most of these entrepreneurs are small and medium-sized companies that started with a simple idea and a little bit of startup capital.
That’s because Fulfillment By Amazon (FBA) enables all kinds of sellers to use the platform without dealing with most of the barriers to traditional e-commerce. Fulfillment by Amazon provides storage, packaging and shipping assistance to sellers. But not all FBA businesses are the same. They generally fall into one of three categories: reseller, private label, and proprietary. If you’re thinking about starting an Amazon FBA business, here’s what you need to know about the differences between these three types of FBA businesses.
An FBA Reseller finds products made by other companies that they can sell on Amazon for a profit.
Reselling on Amazon has the lowest barrier to entry of the three. That’s because you don’t need to produce, store or ship any products yourself. As a reseller, you are a third party, so you act more like a broker than a producer. You can buy items wholesale, then sell them at retail prices through Amazon to make a profit.
To be successful as a reseller, you must develop secure relationships with the brands whose products you want to resell. Ideally, you’ll have an exclusive relationship with those brands so you’ll be the only source of their products on the platform.
- Low barrier to entry: Plenty of Amazon entrepreneurs get their start as a reseller. If you aren’t sure whether an Amazon business is right for you, starting as a reseller can be a good, lower-risk way to dip your toes in the water. According to one estimate, you can get started as a reseller for just $1,700.
- Understand how well products sell before you start reselling them: Businesses that sell their products in brick-and-mortar stores or through their websites might be making plenty of sales already. But by introducing them to Amazon, you can open new sources of revenue for both you and the brand.
- The potential for almost unlimited competition: Almost anyone can adopt the same business strategy as you. And unless you have exclusive relationships with the brands you sell, other resellers could undercut you in the marketplace.
- The risk of competing against Amazon itself: Unlike small and medium-sized businesses, Amazon can afford to sell at an apparent loss to secure long-term exclusivity. The e-commerce giant also has a habit of keeping prices low even when products are scarce, which can cut into a reseller’s profits.
- The difficulty of selling an FBA reseller business: It doesn’t add as much value as the other types of FBA businesses. Because of the low barrier to entry, it can be hard to stand out to buyers as a reseller.
FBA Private Label
The private label FBA model involves buying existing products and then rebranding them as your own before selling them on Amazon. If you’ve ever heard of a “white label” product, it refers to products sold in this type of FBA business arrangement. Many companies produce unbranded products for the sole purpose of selling them to other brands.
This model requires a more of a commitment on your part than the reseller model, both from a time and monetary perspective. You’ll need to stock a significant number of products and prototype them to see how they do on the market. It also requires you to build and establish a brand. This can be a great opportunity for entrepreneurs who are intent on developing a personal brand or expanding their business through brand recognition.
Private Label Pros
- Avoid much of the competition: Hypothetically, if your customers become loyal to your brand, they’ll avoid other sellers, even if they offer similar products.
- Offer a diverse set of products under a single brand label: This makes a private label business more reliable, less risky and easier to scale. Of course, you’ll need to have the capital in place to make this happen.
- Easier to sell than reseller businesses: If you have brand recognition, it means you have steady revenue coming in. This makes you an attractive prospect for buyers who want to add your brand’s strength to their own. If you think you want to sell your FBA business in the future, this is usually a good model to shoot for.
Private Label Cons
- A riskier venture: You’ll have to make a significant investment in both your stock and your brand. If you throw all your money into one or two products and they don’t sell immediately, you could lose your investment.
- Potential for serious competition: Other private labelers can move in on your market share with a similar product. If you don’t have strong brand loyalty, they can take some of your revenue. About 50% of FBA sellers deal entirely or partially in private label products.
- Time-intensive: You’ll need to research your products and your market, engage with factories and suppliers and follow up with customer inquiries as they relate to your brand.
In the proprietary model, you create a unique product or augment an existing product to make it your own, then sell it on Amazon. This differs from the private label model because you aren’t just adding your brand to an existing product. Instead of acting as a broker or middleman, you own both the product and your brand.
- Far less susceptible to competition: For example, if you invent a patented product, you’re the only one who can sell it. You’re also selling something unique, and most customers won’t be able to find anything like it anywhere else.
- Independence from Amazon: Even if your account gets shut down, you can still sell your product elsewhere — even through your website. There is also great potential for word-of-mouth marketing.
- If you can be successful with this model, it’s the most reliable and consistent: You can even gain multiple streams of revenue by selling your product through multiple channels. In 2018, over 200,000 sellers made more than $100,000 by selling on Amazon, in part by creating new products, according to Nick Denissen, Vice President for Amazon.
- This type of business is also attractive to FBA business buyers: Your brand has the potential to add new revenue to theirs.
- Difficult and expensive compared to other models: You have to offer something unique in the marketplace, which means prototyping a product and building trust in your brand.
- Good reviews are essential: Bad reviews will reflect poorly on your brand and your product. If you get bad reviews early on, it can be challenging to correct them.
Which Type of FBA
Business Is Right for Me? Building an FBA business is a great way to establish a brand and generate cash flow, but it’s important to recognize which type of FBA fits your goals.
If you’re just getting started, you might want to get your feet wet as a reseller. But if you’re ready to bring in serious cash and sell your FBA for a huge windfall down the road, the private label and propriety models might be a good fit.
To find out more about setting up your FBA business for success — and making it attractive to buyers — contact us at Boosted Commerce today.