Amazon Business Models – Which One Is Right for You?
On Amazon, different business models exist because every Amazon seller has a unique path to success. What works for one might not be ideal for another. This is why it’s important to thoroughly evaluate each Amazon business model before crafting your sales strategy.
In this guide, we’ll take a closer look at the five most popular Amazon business models. We’ll analyze their key features, advantages, and disadvantages, providing insights to help you make an informed decision. Additionally, we’ll offer tips on how to leverage each model to maximize your profits and achieve long-term success on the platform.
Ready to find the perfect business model for your Amazon journey? Let’s go.
Which of the Amazon Business Models Fits Your Needs the Most?
FBA
Fulfillment by Amazon (FBA) is an outsourced shipping and handling service that simplifies logistics for Amazon sellers. When a consumer makes a purchase, Amazon picks, packs, and ships the item, also handling customer service and refunds. Sellers register their products, ship them to an Amazon fulfillment center, and let Amazon manage the rest.
FBA is highly beneficial for specific seller personas. Companies without an in-house fulfillment scheme find FBA invaluable, as it handles packing, shipping, returns, and customer inquiries. This hands-off approach allows businesses to focus on growth while offering Prime-eligible products.
Wholesale sellers, who buy established products in bulk to resell, also gain from FBA. The service enables them to offer Prime shipping, participate in Prime Day and Cyber Days, and potentially rank higher in search results. These sellers can also use programs like FBA Subscribe & Save and FBA Pan-EU to expand their reach.
For businesses transitioning from small operations to larger ones needing warehouse space, FBA is a game-changer. Amazon’s fulfillment centers manage large inventory volumes, freeing up resources for business growth.
However, FBA may not suit brands that prioritize close customer contact. Overall, FBA works best for businesses without a fulfillment scheme, wholesale sellers, and expanding companies needing more logistics support.
FBM
Fulfillment by Merchant (FBM) is a suitable option for specific seller personas who prefer to maintain control over their entire logistics process. One such seller persona is the niche or specialized seller who offers customized or handmade products. These sellers often require direct interaction with their inventory to ensure quality control and personalized customer experiences, which FBM facilitates.
Small businesses with established fulfillment systems also benefit from FBM. These businesses can manage their packaging, shipping, and customer service, allowing for greater flexibility and cost control. Additionally, sellers with items that are oversized or have special handling requirements may find FBM more practical and cost-effective, as they can avoid the additional fees associated with FBA.
Finally, businesses that prioritize brand identity and close customer contact often prefer FBM. This approach allows them to maintain a direct relationship with their customers, offering personalized service and retaining full control over their brand image.
Private Label
Private label brands are items made especially for certain sellers, enabling them to sell these products under their own brand name. Sellers can make changes or improvements, which the manufacturer will implement. Some manufacturers also offer custom packaging or can print your logo on the product if you ask.
This is how it works:
Over the past five years, private brands of U.S. consumer goods have witnessed a constant growth in market share, going from 17.7 percent in 2019 to close to 19 percent by 2023.
Keep in mind that the private label model is quite time-consuming. You will need to gain knowledge about marketing and how to create product listings on Amazon. Additionally, it will take some time for your products to gain visibility in the marketplace.
Advantages
Disadvantages
Retail Arbitrage
Retail arbitrage is a business model where individuals or businesses buy products at a lower price from one retailer and then sell them at a higher price on another platform, such as Amazon or eBay, to make a profit. This process involves identifying price differences between different retail markets and taking advantage of these discrepancies.
For example, you might find a popular toy on sale at a local retail store and purchase it at a discounted price. You can then list and sell the same toy on an online marketplace like Amazon for a higher price, pocketing the difference as profit. This model requires detailed market research, quick purchasing decisions, and efficient listing and shipping processes to be successful.
Advantages
Disadvantages
Online Arbitrage as Amazon Business Model
The term “arbitrage” originally comes from finance and refers to the practice of exploiting price differences of the same asset in different markets to achieve risk-free profits. For example, a trader can buy an asset at a lower price in one market and simultaneously sell it at a higher price in another market. The word itself is derived from the French “arbitre,” meaning “referee.”
Similarly, in retail and e-commerce, Retail Arbitrage or Online Arbitrage involves exploiting price differences between two or more markets to make a profit. Sellers buy a product at a lower price and then resell it at a higher price on another platform.
For instance, a tent from a popular manufacturer is listed on eBay for a discounted price of 499 Euros, while the same model is sold on Amazon for 575 Euros. Buying it on eBay and selling it on Amazon would yield a profit of 76 Euros due to the price difference between the two markets.
Here is how you can make online arbitrage work for you:
As with Retail Arbitrage, consider Amazon’s fees and the item’s original cost to calculate your final revenue.
Advantages
Disadvantages
Wholesale
Wholesale is a popular choice among Amazon business models. It involves buying products in bulk at lower costs and reselling them online for profit. While it’s a straightforward Amazon business model, particularly for newcomers, several critical factors need consideration to ensure success.
First, it’s essential to build strong relationships with reliable wholesalers and manufacturers. This ensures you get the best prices and a consistent inventory supply. Compliance with Amazon’s policies and legal regulations is also necessary.
Thorough market research helps identify high-demand products, reducing the risk of unsold inventory. Detailed, optimized listings will make your products stand out and attract buyers.
Consider storage and logistics carefully. Amazon’s Fulfillment by Amazon (FBA) service can handle storage, shipping, and customer service, but it comes with additional fees that must be factored into your pricing strategy. It is also worth mentioning that these fees have been constantly increasing in the past years.
A competitive pricing strategy is key to staying ahead of competitors and maintaining profitability. Your profit is the difference between the selling price and the sum of Amazon’s fees and the original product cost. Effective cash flow management is essential, as wholesale often requires substantial upfront investment.
Additionally, some brands require authorization or restrict who can sell their products. Ensuring you have the necessary permissions can prevent potential account issues.
In summary, the wholesale model on Amazon requires more than just “flipping merchandise”. Strategic planning, market research, and relationship management are crucial to achieving long-term success.
Advantages
Disadvantages
Dropshipping
Many sellers choose this model because it eliminates the need for you to handle fulfillment and shipping. With drop-shipping, a third-party supplier takes care of fulfilling customer orders. Sellers simply upload products to the marketplace and notify the supplier when an item sells. To become an Amazon dropshipper, follow these steps:
When a customer places an order, you need to:
The downside of drop-shipping is that you have no control over product quality. Since you don’t inspect the goods, customers might receive damaged or delayed items, which could result in negative reviews.
Review Amazon’s Dropshipping Policy to learn more (sign-in required).
Advantages
Disadvantages
Things to Consider Before Choosing an Amazon Business Model
As we mentioned above, selecting the right business model can make or break your success on the platform.
Therefore, let’s look at the main features to consider, before you choose an Amazon business model:
Additional Tips
Consider Each Model’s Pros and Cons
Do you plan to build a long-term brand from scratch? Then, Private Label is the right choice. But if you seek a secondary source of income, then go with Online or Retail Arbitrage.
Stick to Your Budget
It’s crucial to take your business’ strengths and weaknesses into account when selecting one of the Amazon business models.
Remember, the tools you choose must work to your advantage. So, consider the following factors when planning your Amazon incursion:
Learn from Experience
Is this your first Amazon business? Do you have key allies that will lend their expertise to building your store?
Find stores that have found success with each Amazon business model. Learn from their own seller journey to boost your chances of success.
If you follow the steps they’ve taken, and avoid similar setbacks, it’s likely you’ll be successful too.
Final Thoughts
Each Amazon business model comes with its own perks and setbacks. Make sure you have the necessary tools to work with the one that fits your needs.
Review your strengths and opportunities thoroughly so you can make an informed decision. And whatever decision you take, make sure to learn the ins and outs of each model to ensure the success of your business.
Best of luck!
FAQs
The Amazon Canvas Business Model is a strategic tool that helps you visualize and plan different aspects of your Amazon business. By breaking down components such as value propositions, customer segments, revenue streams, and cost structure, you can better understand which business model—such as FBA, FBM, Private Label, or Wholesale—aligns best with your goals and resources.
Using the Amazon Canvas Business Model, you can map out and compare various selling strategies side by side. For instance, you can analyze the benefits and drawbacks of drop-shipping versus private labeling by examining factors like profit margins, fulfillment responsibilities, and marketing efforts. This approach helps you make an informed decision on the most suitable business model for your eCommerce business.
Yes, for new sellers, it’s essential to focus on key components such as value propositions, customer segments, and channels within the Amazon Canvas Business Model. Understanding your unique selling points, target audience, and the best channels to reach them can significantly influence the success of your chosen Amazon business model. This focused approach ensures that you build a solid foundation for your eCommerce venture.
Image credits in order of appearance: © Parradee – stock.adobe.com / © Brian – stock.adobe.com
