Amazon FBA represents a great opportunity to sellers who are looking for a relatively low barrier to entry venture. You get access to Amazon’s vast network of customers and, in theory, it should be a matter of time before you see growth.
In practice however, large numbers of Amazon businesses fail each year, as is the trend with small businesses in general.
You might have heard the often-repeated “fail fast, fail often” mantra that tends to run through Silicon Valley and other entrepreneurial centers, but for most trying their hand at FBA, we’re talking about micro-businesses for whom a fail is not so easy to recover from.
For this reason, it’s good to have an idea ahead of time about what causes FBA businesses to fail. You might not be able to completely avoid all pitfalls, but with a bit of planning you can try to mitigate effects on your business.
Here are some of the reasons FBA businesses fail:
#1. Poor Business Plan
There are a number of possible business models you could go for on FBA; private labeling, retail arbitrage, product bundles, selling well-known brands, specializing in a niche and more. Any of these might be quite profitable if done right, but you’ve got to have spent the time on developing a business plan.
One of the core parts of your plan is that you should have goals for the results you need for your business. You should understand margins and know what your minimum is to be able to achieve your goals. You should also understand your market and know whether there is truly demand for the products you sell.
There isn’t any one “right” business model for your FBA business, but it does need to be making you money.
A mistake that many FBA sellers have made is in failing to account for all of the costs that go into selling their products. Does that margin work out in the end when you include Amazon fees, cost of the product, shipping from suppliers and all the little costs that go into running a business? Know your numbers.
Another point here is that, whatever your business model is, you need to be able to follow it consistently or you just won’t experience growth. For example, if you choose a retail arbitrage model, are you able to consistently access new products to sell? If you’re importing products, have you found a reliable supplier and are you able to avoid costly stock-outs?
#2. Poor Money Management
There’s another saying you may have heard of; “cash flow is king.” Quickbooks interviewed consultant, Richard Weinberger on this and here is what he had to say:
“Small businesses may be profitable but not have much cash. They may have made sales on credit, they’re servicing debt, they’re paying for equipment, or maybe they’ve got lease payments. If you know in advance that you may be short of cash, you can prepare. You could look for additional bank financing or try to modify the repayment terms on loans or other debts. But to do any of that, you have to be able to predict your cash flow.”
Your product might be profitable, but do you have the cash available to order new stock? Can you pay the bills for any tools you use to run your business? A failure to understand and predict cash flow can put your business in the position of not being able to meet obligations on time and draw your operation to a standstill.
You can improve cash flow management by preparing cash flow forecasts and knowing your cash to cash cycle. You can also look to negotiate payment terms with your suppliers so that you might get Net 30 or Net 60 invoices. This can help to give you breathing room to meet your obligations.
There’s another part of money management which often plays into business failure – how much of the profits are you drawing for yourself? More importantly, how much are you reinvesting in your business? Businesses need investment in order to grow, whether you’re buying in a new product line or spending some extra money on paid advertising.
A new seller mistake has been to draw too much from the business while failing to invest for growth. Without that reinvestment, your business may stay exactly where it is, or it may decline, particularly if your competitors are putting investment into growth.
#3. The Side Hustle Myth
How many people get into selling online after listening to some “guru” of internet marketing? The problem with many of these people is that their product is internet marketing. They’re very good at selling that, but in practice don’t know a lot about specific models for selling goods online.
If you spend time listening to these people, it’s easy to be convinced that selling online can be a “set and forget” venture. “Oh awesome! I can lie in my hammock while my phone beeps with sales notifications. Pretty soon a “side hustle” will replace my full time income…”
There’s a common trait among side-hustlers who are successful; hard work. They aren’t lying in a hammock, unless they’re connected to wifi and spending time on research, marketing and tweaking their businesses. They work to take their businesses to specific, targeted audiences rather than waiting for buyers to come to them.
When it comes to FBA, listen to the people who have gone before you. Ask questions in the forums, talk to those who have been successful and test things out for yourself. FBA side hustles can grow into highly profitable businesses, but it won’t happen while you sit and wait.
#4. Owner Burnout
About that hard work we just mentioned… Most people who are just beginning with FBA also have some kind of “day job”, or perhaps multiple other side-ventures. If you want success on FBA, then treating it as a serious business with proper management practices in place is essential…
… but can be very stressful.
You’re juggling other jobs, bills, family or friends and the requirements of a business. Things can head toward burnout fast, especially if days are at work and nights are on FBA. Many business owners can find that it starts to consume their lives and that stress reaches intolerable levels.
Something has to give when the stress becomes too much, and for many it’s their FBA business.
It’s not easy to minimize stress while you’re trying to build a business, but here are a few tips to try to avoid burnout:
- Set realistic goals. Sometimes we’re just putting too much pressure on ourselves.
- Manage your time well. Set yourself a schedule of things you need to do and try to stick to it. This way, hopefully you’re still leaving some time for leisure (you should include breaks in your schedule too!)
- Look after yourself. Eat properly, exercise, socialize and get some sleep!
- Use tools that are designed to automate and cut back time spent on business tasks. For example, Forecastly for inventory management.
#5. Because Amazon…
There’s one thing that every FBA seller should have a good understanding of before committing to selling on Amazon; you are building your business on someone else’s real estate. This might be perfectly fine – many third party sellers are making large profits selling on the platform, but you do need to be aware of the risks:
- Amazon can ban you, and it may be out of your control. Steve of “My Wife Quit Her Job” personally reached out to sellers who had been banned to learn what happened, and it often wasn’t the fault of the seller. Just as an example, poor reviews and claims against the conditions of products can be a reason to get banned. Steve found that there are services which will deliberately give poor reviews and that customers are almost incentivised to return a product as “defective” because this way they avoid return shipping fees.What can you do? Often not a lot, but know Amazon policies and do your best to keep your nose clean. Also, keep good records and evidence of your products just in case you need to fight an Amazon ruling.
- It can be relatively easy for other sellers to copy you, or even hijack your product listings. You can’t always do anything about it, not unless the seller is trying to sell a different product under your listing or if they’re blatantly ripping off your private brand. Protect yourself by registering your brand and keeping records you can use as proof.
- Bigger sellers (including Amazon themselves) might get into selling the same product as you and be able to undercut on price due to their size and purchasing power. There’s not a lot you can do here except keep monitoring products and be prepared to be flexible. If you can’t possibly drop your prices to match, it might be time to look at other products.
Like other small businesses out there, there are large numbers of FBA businesses which fail, often in under a year. You can’t necessarily avoid every circumstance which can lead to failure, but you can learn from how others have failed and put steps in place to mitigate those factors.
Make sure you plan well and that your expectations of the business are realistic. What sort of return do you need? How much time and money do you have to invest?
Look after your business but look after yourself too. FBA can be very profitable for those who develop a good system which works for them.