The Costs of Selling Grocery Items on Amazon
Considering Amazon’s Fees in Advance
Selling on Amazon has become just about unavoidable in the modern economy. Grocery brands of every size are now vying for position in the world’s largest marketplace.
But before your brand runs blindly into the fray, it’s a good idea to gain some understanding of the financials at play when selling on Amazon. For some brands the math simply doesn’t make sense: the margins will be wrong, and the effort needed will open the door for operational crises.
Succeeding on Amazon is a brand-altering victory—of course, it is. Amazon boasts a market cap bigger than Australia’s GDP. But for the same reason that you wouldn’t just send the better part of your inventory to Melbourne on a whim, you might also put some consideration into how you approach Amazon. Consider what offerings to list, what price point you will use, your method for shipping to Amazon, and the advertising strategy once listed. These factors will allow you to better understand how each choice will affect your margins.
Weight and the FBA Fulfillment Fee
When determining what quantities to sell on Amazon the most relevant factor for most natural food brands will be the weight per unit. Amazon does have different fee tiers for oversized or undersized products, but for the most part grocery products won’t be the size of a baby crib or a pen. When selling through FBA—everything that follows will be operating on the assumption that brands want to and need to be selling through FBA to have long-term success—Amazon charges brands a per-unit Fulfillment Fee based on the weight of the product.
If you sell ready-to-drink beverages, you may consider how many units to include in a pack. For brands who will be selling a product like cashews or raisins, there can be utility in factoring the below cost structure when determining what size to offer. If you hope to sell thousands of units over the coming years, adjusting the unit weight to fit in a lower-tier could have a significant long-term effect.
Price and the FBA Referral Fee
The listing price will of course be affected in large part by what pack size you settle on, but there is less finality to the initial decision of price since it can be changed at any time post-launch. That being said, when thinking about your margins and what is feasible as a listing price, a food brand will do well to price its offerings at $15 or less whenever possible.
In addition to the fee logic, there is a consumer psychology reason for this. Amazon Prime shoppers can see an item priced below $15 and, for the most part, buy it without hesitation. A $12 snack is worth trying just because, whereas a $20 snack with an identical (or better) price-per-ounce becomes a decision.
But the fee logic shouldn’t be ignored. The referral fee is a percentage of the product price, charged by Amazon for the right to sell products on their platform. The referral fee for a grocery item selling at $15.00 is 8% per unit ($1.20) while a product priced at $15.01 carries a referral fee of 15% ($2.25). This jump means that a product you might otherwise have listed at $16 will have better margins if priced below the cutoff.
Obviously, if your production costs suggest pricing closer to $20 or $30 per unit then this isn’t a factor, but it’s good to consider if you are starting from scratch and determining the unit size and pricing structure with Amazon in mind.
The Case for Not Considering Amazon’s Fees in Advance
It’s easy to assume that to succeed on Amazon you will need to produce multipacks and bulk offerings to keep up with a marketplace predicated on options. But this isn’t necessarily the case.
Keep in mind that Amazon is reframing the entire approach to how people stock their homes. If you sell a pantry staple like a jar of nut butter or a bag of oats, then there might be an urge to sell multipacks so customers can stock up. But Amazon delivers so quickly and consistently that it has started to act as the extended pantry for many Americans. A customer won’t be inclined to buy in bulk unless there are worthwhile savings to be had, because they could just as easily buy a single jar now and then another two weeks from now.
Furthermore, when brands try to produce options to sell on Amazon—because what is Amazon but a marketplace full of options?—they often skip past what makes Amazon so sought after on a purchase-to-purchase basis: the ease of shopping. Customers want options, but once they’ve selected one option they want simplicity. If a customer clicks into your listing and finds that they have to choose between five flavors, three sizes, and a variety combo, then the whole experience suddenly becomes overwhelming.
Tinkering with margins one decimal at a time can be a thrill, but for a young brand, the best practice might just be to sell what you already have produced and are ready to go. Maybe there are cents to be gained or lost on increasing unit weight or offering multiple pack sizes, but don’t overthink it. The cost of producing a new unit size could just as easily eliminate any margin to be found by selling it.
Don’t be afraid to start with what you already sell. Adjust the price if it makes sense and if your margins allow it. As the products gain momentum you will always be able to increase offerings to accommodate new pack sizes and variations based on the feedback you receive.
Storage Fee
Amazon charges a fee for the space your inventory takes up in their fulfillment centers. This is calculated by the cubic foot and is dependent on the time of year, with Amazon inflating its storage prices threefold for the holiday season:
January-September: $0.75 per cubic foot
October-December: $2.40 per cubic foot
In theory, and especially during those end-of-the-year months, you might think that you could try to optimize your margins by keeping FBA inventory as low as possible to avoid the mounting fees. Don’t do this.
The downside of losing sales velocity by going out of stock should outweigh any sliver of margin which could be gained in this game of chicken. If the storage fee is obscenely high during the end of the year, that is because traffic on Amazon peaks before the holidays. This also means that the time it takes for supplemental inventory to be shipped and checked in rises during the holidays, to the point that brands cannot expect to rush products to FBA centers in time to keep them from going out of stock.
Never play chicken with your inventory levels. As long as your products are selling you should plan to restock them regularly and in full. Approach Amazon’s storage fee as though it were a fixed expense rather than a variable.
Shipping Fee
This will fluctuate wildly depending on what your product is and how you feel comfortable shipping it. This is the nature of the industry. Drink powders will be much easier and cheaper to send than will ready-to-drink beverages.
Amazon accepts product that is sent in boxes or palletized, so whatever works best for your operations. After a few shipments, you should be able to get a sense of what this cost will look like and the budget for that going forward.
As a note on shipping in boxes or pallets: generally by shipping on a pallet your shipping costs will go significantly down, but the corresponding time it takes for the product to arrive and get checked in will be much longer. Inventory sent via parcel delivery can be checked in and available for sale within days, whereas a pallet of the product might not go live for two to three weeks.
Professional Seller Account
When it comes to the storage fee and the shipping costs, you really don’t have much control over them as a matter of smooth selling operations. When it comes to the seller account you have literally no control over the cost. To be a professional seller on Amazon costs $39.99 a month and for any brand hoping to succeed on the platform, it is required.
Advertising Expense
This is unique to our list because it is the only cost of selling that isn’t technically required. It is worth including, because for most brands—and especially those new to the platform—advertising on Amazon is all but a necessity. On a marketplace with minimal barriers to entry, anyone is allowed on the shelf, which means that the way for new brands to establish a presence is to buy their way into shoppers’ search results.
Consider allocating some budget to advertising on Amazon. If you are paying for the storage fee and the shipping costs already, then leaving your listings sitting silently in their corner of the marketplace would be like getting a car entered into the Daytona 500 and sending it to the race without any pit crew.
Keep track
It can be easy to treat Amazon’s fees kind of like a bill that you’ve set up on autopay. But even though these are numbers that you won’t necessarily be able to change going forward, there is something to be said for checking in at the end of the month or end of the quarter to ensure they are working correctly.
Amazon is a massive operation with enough automation in their system that they’ll never keep track of whether or not your account is being overdrawn. Determine an expected baseline for the storage fee over your first few months on Amazon, and keep track of shipping costs and selling fees as a percentage of sales. From there you’ll have a basis to ensure that consistency and logic are playing a part in your Amazon financials.