Learning From My Mistakes
The only true way of learning is through trial and error. It is the basic recipe for knowledge in science, business and life in general. Suppose you wake up with a business idea one day, what do you do?
You either do nothing and your idea is basically worthless or you decide to validate your idea by putting it into practice and observing which of the assumptions underpinning your idea were right or wrong. Once you have done this you have actually learned something for yourself and you can make a decision on whether your idea is worth pursuing or whether you are better off abandoning it.
Obviously validating ideas come at a price. You have to invest time, effort and money in in order to validate them. Luckily there is a less costly, albeit less profound, way of learning. Namely by learning through other people’s mistakes.
The goal of this post is to go through the assumptions that I have tested with my business experiment on Amazon FBA. Hopefully you can use my mistakes to make a better informed decision on whether Amazon FBA is the right tool for your business experiment.
What is Fulfillment by Amazon?
Since you are reading a post on the topic probably already have an idea of what Amazon FBA may be. I want to briefly touch on how I learned about Amazon FBA and to explain what it is in my understanding.
I found out about Amazon FBA by reading about Amazon’s software architecture. As a software engineer I took interest in how Amazon has applied a Service Oriented Architecture (SOA) throughout their whole business.
The idea behind a Service Oriented Architecture is pretty common approach to complex problem solving. You break down your problem into smaller parts, solve those smaller parts individually and combine the solutions to the smaller parts to arrive at a solution for your larger problem.
You can think of these services as building blocks that can be combined in various ways to arrive at solutions for various different problems. Now that we have split up our problem in smaller building blocks they can be maintained, reused and improved independently.
As Amazon grew larger in scale it was forced to break down its software technology into services. These services were then combined into features that make up the Amazon website. Now, Service Oriented Architecture are pretty common and not very interesting in itself. What Amazon did on top of them however is ingenious.
They asked themselves the following: How do we ensure that a service is managed efficiently? This is an exceptionally hard question to answer. Instead of answering that question, what Amazon did is force each service to be efficient by exposing it to the outside world as a commercial offering. By putting a monetary value on each service its efficiency becomes much easier to determine. This is how Amazon Web Services was born in 2004.
Over the years Amazon has expanded this strategy to other aspects of their business. With Amazon Marketplace they have opened up selling on Amazon to the general public as an e-commerce platform which leverages Amazon’s infrastructure so anyone can sell their products online.
With Amazon Fulfillment by Merchant (FBM) you can list and sell your products through the Amazon website while handling fulfillment of the orders yourself. With Fulfillment by Amazon (FBA) you use both Amazon’s e-commerce platform and Amazon’s warehousing and delivery infrastructure as a service to store, keep inventory and deliver your products to your customers.
You may ask yourself, what is the relevance of all this? It is the first hint of why my business on Amazon FBA failed. I came to know about FBA from a very technical perspective and stayed too focused on the technical aspects instead of focusing on the value of the products that I was trying to sell.
What’s the Drill?
If you search Google for Amazon FBA you will find hundreds of articles about how to start an FBA business, how to find profitable niches etc etc. The premise of all these tutorials is that there is some profitable niche out there on Amazon.com which you just need to exploit to become a successful entrepreneur. One of the mistakes I made is that I bought into this premise. While there may be some truth to the premise, it is a very risky business strategy to employ.
The idea is that you find a promising niche which has relatively high demand and low competition. Once you have found your niche, you source your product cheaply from a Chinese manufacturer who produces and ships your product directly to the Amazon warehouse. Obviously you need to make sure you differentiate your product enough from your competition by choosing a different color, size or add more units in your offer. Sounds easy right?
Whenever something sounds too easy to be true it probably is. In fact, when the barrier to entry to a certain market is too low it is probably not a good idea to pursue it. A low barrier of entry means it is easy for competition to form which inevitably brings profit margins down due to high competition.
Suppose you found the perfect niche as described above. You source your product from China and create a neatly optimized product page. What stops your manufacturer from doing exactly the same? He controls the production process, you will never be able to compete with him on price. On top of that, there are hundreds of other manufacturers out there that can out compete you because your product is not sufficiently differentiated. When price the only differentiator, you are playing a losing game.
Instead of focusing on the Amazon Marketplace, which in the end is just a tool to get your product to your customers, you should focus on creating a product that creates real value for your customers. Instead of spending time on finding the perfect niche, you better have a look around yourself to see what you could improve. Does the world really need another set of protective screen covers for the iPhone 11 Pro Max on Amazon?
A better approach would be to deeply scrutinize the products you are already using, try to find pain points and try to fix those. Or maybe you have gained some knowledge on your previous job which you can share by creating an e-book that can be marketed online. The possibilities are endless.
The main difference between the two approaches is that with the latter you focus on the value and needs of your potential customers. By doing so you are creating a new market for your product instead of trying to fill holes in existing markets.
My point here is that Amazon FBA is just a channel through which you sell your products. There many other channels out there to sell your products.
Ok I get it, it is super easy to get something up and running on Amazon FBA and reach thousands of potential customers. That in itself, is not enough to build a sustainable business. Instead, by focusing on building an exceptionally valuable product, you can sell it through whatever channel you like at a healthy profit.
Instead of focusing on the sales channel, focus on the value of the product!
Chasing Money with Gurus
When researching Amazon FBA you may have come across something like this:
“How to make $10K a month on Amazon FBA” -Random FBA Guru
Be aware of these self-proclaimed gurus. The main issue with these people is that they do not practice what they preach. They claim to have some easy X-step process that guarantees success.
Now for the sake of it, suppose you have discovered such a process. Would you be spending your time marketing and selling it or would you be applying it and scaling it out so that you can retire early? What these people are really doing is trying to sell you a get rich quick scheme.
Amazon FBA has made it easier than ever to sell products at scale. This makes it a great target for these schemes. Well guess what, selling through Amazon FBA is the easy part. The hard part is creating valuable products, there is no predefined 10-step process to achieve that. It requires dedication, creativity and ingenuity.
If you believe this can be achieved by mechanically applying a 10-step procedure from a guru’s $300 course, I have bridge to sell you.
This has probably left you wondering whether I personally fell into this trap. The answer to that is yes and no. I have spent a small amount of time and money ($10 and a few hours) on a course which explains the technical details of how to set up Amazon FBA. While there is some value to these courses, I would only recommend them until AFTER you have spent a lot of focus and effort on creating a valuable product.
Lack of Control
Businesses that focus solely on Amazon FBA are fragile. Amazon FBA has made it easier than ever to sell products by taking care of the whole fulfillment infrastructure for you. That makes it extremely tempting to sell and advertise all your products through them. If you think this sounds like a good idea you should go read the complaints on Amazon’s Seller forum for fun.
The forum is filled with Seller’s complaints about how Amazon de-listed their products or even worse, closed their accounts. Imagine this being your single source of income and waking up one day to a closed account! If you want to run a sustainable business you need to be prepared for this top happen. Amazon has good reason to be extremely cautious in managing what is being sold on their platform, mistakes could cost them dearly.
You therefore have to assume that it’s in their benefit to close your account at even the slightest hint of a potentially harmful product. The downside for them to erroneously closing account is insignificant compared to the downside to not closing a potentially harmful account. It is important to realize that Amazon has complete control over your account. It can do with it as it pleases.
If Amazon FBA is your only sales channel, you are likely to run into trouble. Obviously getting your account closed is quite extreme. But smaller issues like getting one of your products de-listed can also prove costly.
When one of my product listings started losing sales I slightly panicked when I realized it had disappeared from Amazon. I had spent quite some time and effort in optimizing this particular listing. I managed to have it rank well for relevant keywords and was getting a decent amount of sales.
I swiftly contacted Seller’s support and after a few days I got a reply that my listing had been removed erroneously because of a suspicion that it may have contained hazardous materials. The rep apologized kindly and that was that. In the meantime my rankings for this product listing had collapsed to a point where I decided that it wasn’t worth it anymore.
I made the mistake of being over reliant on Amazon as a sales channel without a sufficiently differentiated product. Having to climb up the rankings again and potentially risking another such setback in the future felt like a Sisyphean task. I decided to sell off my remaining inventory to recoup my costs and called it quits.
A Means to an End
To conclude, Amazon FBA is a means to an end. Consider it as a useful tool to build your business, but do not make your business completely reliant on it. Consider the following points to help decide whether Amazon FBA is the right tool for you.
- Focus on a valuable product first and foremost, sales channels second. That said, Amazon FBA can be an excellent sales channel for your product.
- It is extremely hard to compete on price on Amazon FBA. Instead of competing in competitive markets of existing generic products, create new markets by creating innovative, valuable products that solve customer’s needs.
- The ease of use of Amazon FBA comes at a price of relinquishing control of your account to Amazon. Ultimately they can do with it as they please. If your business cannot sustain temporary product de-listings or account closures, you may run into trouble.
- Diversify your sales channels. Relying on one sales channel is the equivalent of putting all your eggs in the same basket. A problem with Amazon FBA can prove costly if you rely on it completely.