Search for how to make money on Amazon FBA, and there are many results and suggestions, one of which is for building out a private label business – you too can make $100k on Amazon! Essentially, you find a top seller on Amazon, you look on Alibaba for a supplier who can produce something similar, get and approve a sample, buy the MOQ or more, work with a broker or logistics provider to bring the goods into the US to an Amazon fulfillment center, then sit back and enjoy the cash!
While is is true that there is a lot of money in private label – after all, the profit margins in this space are typically 30-45% – it is equally true that there is significantly more risk with this model. Production takes time, and the cheapest method of shipment is ocean freight, but that takes time. Often between when you start and when you’re selling, you’ve had a 4 month lead time for your product to be up for sale. Adding to the inherent business risk is the concept of the importer of record (basically, whomever is filing the Customs paperwork) – for US agencies enforcing laws in the US regulating consumer goods, the importer is the entity primarily responsible for regulatory compliance, and thus you are responsible for port seizures and payments, recalls, fines, and are the primary target in the case of a lawsuit. On top of these regulatory risks, you may end up bringing in a product that comes nowhere close to the original top seller in terms of star ratings, in spite of having approved a great prototype from your chosen manufacturer.
How can an FBA seller take advantage of the significant benefits of moving forward with setting up their own private label while mitigating for these significant risks? This can approached by breaking down the basic tools and regulatory requirements into four pieces: 1) supplier onboarding; 2) product testing; 3) inspections; and 4) recordkeeping and customer complaint investigations.
Multiple times I heard frustrated complaints from buyers – “but the sample was so great!” I read one recommendation that a good way to vet a potential supplier was to have a Skype call with them. This is not a solid approach to determining a good supplier, not if you want good star ratings and avoid any potential regulatory issues if your product is regulated. A factory audit can evaluate factors such as employee training, production quality assurance, turnover of the employees, recordkeeping, and can provide you with pictures of the factory. At the end, you’ll receive a full report and a visual sense for the quality of the factory you want to work with. If you’re growing your private label business and you’re planning to spend $10k on your first shipment, which will make or break your success, a $750 factory audit to check if that $10k is going down the drain is definitely worth it.
Product testing comes in a few different forms: benchmarking, pre-production, and production testing.
If you’re trying to replicate a top selling product, it’s rather important that your replicate private label product be a reasonable analogue to get the customer star ratings and reviews you want to achieve those promised sales. A lab can reverse engineer the specifications of the product, and then test the prototype of the product you are buying to ensure that it meets specifications. Depending on the product, this can run from $60-1000, with textiles being the least expensive to validate.
Pre-production testing and production testing are sometimes required by regulation, but aren’t necessary if you’re not selling a regulated product and you’re satisfied with your factory choice. For those products that do require pre-production testing, such as electrical products or some automotive parts, this can run between $3-15k. Any product requiring certification is going to be quite expensive to launch. Sometimes the factory will provide you with their certificate – always check with the original provider or get a professional’s second look, as I have seen multiple forged certificates, some of higher quality than others. Some regulatory regimes require production testing, essentially testing a product from an actual production run (not prototype) and ensuring that the product meets requirements. This is required for items such as apparel, children’s goods, mattresses, and household furniture.
Inspections come in a few varieties: raw materials inspection, during production inspection, pre-shipment inspection, and loading inspections. These all solve various supply chain problems. A raw materials inspection is intended to ensure that the supplier is receiving raw materials as expected – this is recommended for very high risk products or for suppliers with repeat problems. A during production inspection is intended to evaluate the quality of the production from the nuts and bolts up, and find problems before the goods are finished and more difficult to correct. A pre-shipment inspection is performed when the production run is finished and nearly completely packaged, and a random sample is inspected to ensure that the quality and labeling requirements have been met for the shipment. A loading inspection is done at the dock to ensure that the sealed products from the pre-shipment inspection are the ones actually being loaded onto the container (inspection providers will put specialized tape on the boxes when they re-seal them). Inspections cost between $250-400 for one day, although very large shipments or complicated products may require multiple days to inspect.
Recordkeeping and Customer Complaints
Nearly all regulatory regimes require document retention, usually between 5-10 years, and that the responsible company perform investigations on customer complaints and report them if necessary to the relevant regulatory agencies, typically within 24 hours. This is a significant burden, but selling on Amazon can make it very easy for you. First, Amazon knows everyone you sold the product to, and you can contact all of them if there is a problem. Second, if you’re only selling through Amazon, that makes your supply chain very defined and removing inventory is simple. Lastly, and probably most important, is that Amazon has a built in customer feedback ecosystem – from forums, to customer questions, to reviews, to returns data, you have a wealth of customer data about how your product is actually doing in the marketplace. Seller Central allows you to download your returns records and analyze the return types and reason codes to deep dive into what the problems are that you are encountering. I highly recommend working with a qualified professional to perform investigative testing if there is an issue with a high risk product due to the risk of litigation.
At the end of the day, you CAN make a lot of money selling private label products on Amazon. Margins are great, and there are solid providers to work with to make a great product that will sell very well on Amazon. But, you don’t want to inadvertently have your goods seized at Customs, or have to run a recall, or incur fines due to labeling or noncompliance, or endure a lawsuit due to a customer issue. The risks of failure are real, and customers will not be happy with a toxic toy they gave their infant, or a laptop adapter that starts sparking on their carpet, or Christmas lights that burn their house down.
I highly recommend working with an experienced professional to evaluate your product lines or proposed new products. You can, of course, work directly with testing providers, but they are in the business of selling you their services, some of which you simply don’t need. Good luck selling!