Navigating Amazon's Heightened Fees: Essential Practices For Success

Amazon FBA, or Fulfillment by Amazon, has revolutionized e-commerce, empowering sellers to scale their businesses and reach a global customer base. With FBA, sellers leverage Amazon's logistics network, allowing their products to be stored, packed, and shipped by Amazon.

We chatted with Gav Kwok, a remarkable entrepreneur who has achieved tremendous success through Amazon FBA. Kwok is an esteemed 8-figure business owner with exceptional expertise.

Gary Drenik: Can you describe your approach to product selection and sourcing, as well as how you identify profitable market opportunities?

Gav Kwok: Our approach to product selection and sourcing involves finding price lists from various suppliers and manufacturers. We utilize scanning software to analyze these lists and identify products with a return on investment (ROI) of over 15%. Once we have identified such products, we negotiate terms with the suppliers to secure a discount, resulting in an ROI of around 25%.

Plus, if we have a long-standing relationship with certain suppliers and our monthly purchases exceed $250,000, we often obtain even better buying terms for each product, enhancing profitability.

When identifying profitable market opportunities, seasonal and holiday products play a significant role. We strive to identify the best brands and establish strong relationships with profitable vendors.

Drenik: How do you manage your inventory to ensure that you have enough stock on hand to meet customer demand, but not so much that you are negatively impacting your business?

Kwok: Managing inventory effectively is crucial in our business, as it directly impacts cash flow. We need to strike a balance between having enough stock to meet customer demand and avoiding the negative consequences of overbuying or running out of stock too quickly. To achieve this, we employ various software tools that provide sales history data for each Amazon product listing.

By analyzing this data, we can identify the months when certain products sell more or less, allowing us to adjust our inventory levels accordingly. Typically, we aim to maintain around 1.5 to 2 months' worth of inventory. However, during the highly profitable Q4 period, we may purchase slightly more inventory. We are cautious not to go below the 1.5-month threshold due to the time it takes to process inventory into Amazon. Processing can be time-consuming, especially during Q4, so we ensure to ship in all our inventory by August or September at the latest. This timing allows ample processing time to cover the demands of the Q4 season.

Our team handles forecasting and sales projections to ensure smooth operations. Managing cash flow efficiently is of utmost importance since it enables us to pay our vendors on time, especially if we utilize favorable payment terms. It's a critical aspect of our business, and we prioritize its effective management.

Drenik: So how long does it take to process a shipment into Amazon?

Kwok: The processing time for shipments into Amazon can vary. During Q4, it might take around two months to process inventory. For smaller quantities, like 50 units, it could take about a week, while larger quantities, such as thousands of units, may take two to three weeks. Product size, dimensions, and whether the shipment is consolidated or distributed across warehouses affect the processing time. Rough estimates range from one to three weeks. We typically ship 1.5 to 2 months' worth of inventory, which is approximately 6 to 8 weeks.

Drenik: How important are customer reviews and feedback to Amazon FBA?

Kwok: Amazon has a large market share in e-commerce.

So, customer reviews and feedback hold some importance, but in the Wholesale business model we operate in, where we sell established branded products, their impact is not as significant.

According to a recent Prosper Insights & Analytics survey, 66.2% of Millennials have an Amazon Prime subscription. We are working with trusted brands like Duracell batteries or Coleman coolers which usually come with positive reviews already. Customers often focus more on the product than the seller's reviews, as they tend to add items to their cart and make instant purchases quickly.

However, negative seller reviews can have consequences. Amazon may suspend your account or limit sales on a listing if you accumulate significant negative feedback. They will investigate to ensure legitimacy, checking invoices and verifying the authenticity of your products.

Drenik: How do you manage product pricing? And what factors do you consider when setting Amazon prices?

Kwok: We consider multiple factors. We utilize software to analyze the sales history of products on Amazon, typically looking at the average price over the past six months. Additionally, we have a software tool that calculates the average price over the past three months. By combining these averages, we determine the accurate average price over the past six months. We consider any nuances, such as price spikes during Q4, and adjust accordingly.

To stay competitive, we use pricing software that automatically adjusts prices based on competition. Our algorithm ensures that our prices are within 5% of the lowest price available. This dynamic pricing allows us to stay in real-time sync with market conditions.

The right pricing strategy is crucial for driving inventory turnover and maintaining positive cash flow. Without a practical pricing approach, inventory may become stagnant, impacting overall business finances.

Drenik: What trends do you see emerging in the Amazon FBA space in the future? And how are you preparing your business to adapt to these changes?

Kwok: I'm observing a significant influx of newbie sellers who are attracted to the stability and low risk offered by wholesale business models. However, this increased competition has led to lower profit margins due to sellers fighting over the same suppliers and products. As a result, it has become more challenging for new sellers to find profitable products unless they have substantial capital or unique selling points.

To adapt to these changes, sellers must differentiate themselves and establish connections with suppliers. For sellers with limited capital, they may need to explore alternative strategies, such as securing additional liquid capital or credit lines. It's likely that larger, more established sellers will continue to gain market share.

As consumers, we expect rising prices and changes in product availability. To stay ahead, we monitor market trends, closely watch Amazon's updates, and proactively source trending products. This involves identifying suppliers, negotiating terms, and adapting our business accordingly.

Drenik: How have you been affected by Amazon now retaining 50% of sellers’ revenue?

Kwok: The retention of 50% of sellers' revenue by Amazon has had a significant impact. The increased cost of fulfilling inventory has led to higher product prices, potentially deterring consumers who may choose physical stores for lower prices. However, it's unclear if the convenience of online shopping will outweigh the price difference for the average American consumer. According to a recent Prosper Insights & Analytics survey, 87% of Boomers use Prime for 2-day shipping.

This is why monitoring Amazon's revenue and quarterly earnings is essential to understand the overall effects of this change. As a seller, it has dramatically affected profitability, especially for those without strong relationships with suppliers. Unfortunately, these changes result in higher prices for consumers, including myself, who frequently shop on Amazon.

Drenik: Thank you very much for joining us today, Gav, and for providing your valuable insights on Amazon FBA program and the changes for 2023.