When it comes to online shopping, Amazon is often the first shop we think of. What most people don’t know is that Amazon is not just one seller but instead a network of sellers, each trying to get their own slice of the pie.
How do they do it? Sellers on Amazon often use Amazon FBA or Fulfillment by Amazon. It’s all in its name: fulfillment by Amazon, meaning Amazon handles the heavy lifting from storage, warehouse inventory, order processing, up until shipping. However, not all sellers on Amazon are on the same track when it comes to FBA, as FBA could be wholesale or private label.
Wholesale & Private Label – What’s the Difference?
Whenever you see stores overflowing with stocks of one item in their storage and not selling them individually but instead in large quantities, that’s the very concept of wholesale in action. Wholesale is all about buying large quantities of a product, often from a direct supplier or manufacturer, for a lower price per unit. Buying in bulk means getting a discount.
Amazon Wholesale, on the other hand, takes this concept with a slight twist. Sellers still buy in bulk, but they list the items individually on Amazon. By leveraging Amazon’s customer base, sellers are able to ride on the popularity of established brands and not have to start from scratch, guaranteeing sales.
On the other hand, private label is exactly that: an exclusive brand established by the seller or store owner. They introduce a new brand to the market with unique attributions, and they either manufacture it themselves or partner with a supplier to produce the items.
On Amazon, where wholesalers get a headstart by riding on existing brands’ popularity, private label sellers have to introduce their brands and start from scratch in building an audience and a customer base. They are the only sellers who would be offering this unique, branded product.
While both wholesale and private label sellers operate on the same platform as Amazon, they do not have the same journey when it comes to the selling process. All the same, though, whether your entrepreneurial spirit vibes with the wholesale path or wants to create its own brand and go private label, Amazon FBA is still the same stage you’ll walk on.
Advantages and Disadvantages
Whichever of the two paths you choose, there will always be pros and cons for each.
- Easier Entry Point: As mentioned previously, the wholesale model provides a headstart as it makes use of existing brands’ popularity to get sales. For the wholesale model, the wheel is not broken. There is no need to reinvent the wheel. These products will already be readily available in the market, freeing up time that would have been used for product research or product development.
- Established Brand Recognition: Since you’ll be selling products from brands known to the public already, you’ll be riding on this name recall and banking on already-established brand trust. The heavy lifting for marketing has been done (and is being done by the main brand), so all that’s left for you to do is list the product on Amazon.
- Quick ROI Potential: These products have already been proven to meet customer expectations with tested product reliability, so sales can start faster and meeting your ROI will be a fast feat.
- Lower Profit Margin: The wholesale path guarantees sales, but it doesn’t guarantee a big profit margins. Since this is technically the easier path of the two, expect that there will be other similar sellers competing with you for sales of the same product. It would be like playing tug of war on pricing, and the best way for you to secure the sale is to lower your profit margin and sell on a lower price point.
- Limited Branding Control: You’re essentially acting as the middleman in this FBA method. You cannot change anything product-wise — not in the branding, not in the packaging, not even in the marketing. All you need to do is list the product, and all you can actually do is list the product.
- Supplier Dependency: A wholesale business depends on its supplier. Changes within the supplier’s system can make or break your FBA business, such as stocks running out, prices rising, and product quality changing.
- Higher Profit Potential: You are not limited on how much you can price your product—the brand is yours after all! You are in control of everything, including pricing parameters and margins.
- Branding Autonomy: Again, you are the captain of this ship. First branding not working? You can easily implement a change! The final say is yours in all aspects, and you steer the ship to the direction of your brand’s vision.
- Unique Brand and Product Creation: A unique product would really set you apart, especially in the online business world. Aside from selling on Amazon, you can also sell your products on your own website. Selling popular branded products is good, but people nowadays are much more open to trying new names in the market.
- Upfront Investment: As these products will be yours and yours alone, you have to have deep pockets when starting with private label. Product research, development, design, manufacturing, packaging, and marketing all cost a substantial amount. But think of this as planting the seeds in your garden: it needs to be watered and fertilized regularly, but the day will come when you’ll be surprised with blooming, beautiful flowers.
- Market Acceptance Uncertainty: Introducing a new product comes with the risk of it not being well received by the market. A lot of factors can contribute to this. It might be that your product is not reliable and does not deliver its promises, or it might be that you have a good product but bad marketing. Gaining traction for a new idea is always a 50-50 risk.
- Steep Competition in Popular Niches: Just establishing a brand is not enough. Your product should also have an edge—something that makes people want to buy this one in a sea of similar offerings. You might have a unique idea for a product line, but considering the niche you are selling in, is it still really unique?
Capital Requirements and ROI
Now that we’ve weighed the pros and cons, let’s step into cost expectations for both wholesale and private label FBA. How much do you need to kickstart this business? What’s the potential return, and how long will it take to meet this?
Wholesale is bulk buying, and bulk buying often comes with special discounts from suppliers. However, even with these discounts applied, the capital you need to purchase large quantities of stock will still range from a few hundred to several thousand dollars.
The actual cost will depend on what product you’re selling, from which brand, and how much stock you’re willing to buy on the first purchase. For example, wholesale selling of electronic products would cost you a heftier price because of the nature of these items, but wholesale selling smaller products like fashion accessories would cost you less.
Product supply costs aren’t the only capital you need to start. There’s also Amazon’s FBA fee, warehouse fee, and shipping cost. Shipping costs would vary depending on where your stocks come from, and if you’re sourcing internationally, expect that this would be higher.
Now, for what probably is the part you’re most excited to read, the return on investment…
With wholesale, volume is king. Yes, you may have to have smaller profit margins to make your listing attractive, but these small margins add up! A good estimate and expectation for wholesale FBA is an ROI of anywhere between 10% to 30%. Pretty big range, but why? This is affected by many factors:
- Market Demand: Plus points if your chosen product is in high demand!
- Supplier Prices: Lower supplier prices mean less capital is needed. Make sure to ask around and canvass supplier prices, then build a relationship with the one with the best offer.
- Competition: Unfortunately, a high market demand can also mean there would be too many sellers of the same product already, which might drive you to implement a lower profit margin, which then means lower income per product.
- Operational Efficiency: We mentioned that in wholesale, you only need to basically post the product listing on Amazon, and the rest will be done by the brand, but that’s just on the main selling part. Behind the scenes, you’ll still be in contact with the supplier, managing supplies, and accounting expenses. How well you do these back-end ops also contributes to your ROI.
Private label costs are much more intricate than wholesale.
Capital investment for a private label includes a lot of gear to help start the machine that is your business, and all these gears will need a budget: product research, product development, product design, manufacturing, and packaging. You’re not just buying stock; you’re creating a whole new brand.
Product research is the very first step, where business owners can utilize platforms just like Jungle Scout who charge a monthly fee. Once you’ve decided on which product to sell, product design and development will vary from $100 to a few thousand dollars, depending on your niche. Manufacturing the product and realizing your plans and designs may cost upwards of $1,000, which would be because of the usual minimum order quantities manufacturers require. Once you have the product made, another batch of costs you need to settle would be on packaging, branding, and marketing. You can also apply for it to be patented.
After all the initial investment costs, how much could your ROI be in private label?
As mentioned before, you control everything with private-label goods, including pricing. This means you can have higher profit margins! If for wholesale you only have between 10%-30%, for private label, you could be looking at 25%-50% ROI. Sounds impressive!
Just like wholesale, though, not everything is set in stone, and a number of things can influence how much ROI you can get.
- Product Uniqueness: Unique products can be priced higher.
- Brand Recognition: If your product looks expensive and premium in quality, then customers will be more willing to pay the premium price.
- Quality & Reviews:Again, on premium quality, if your product is true to its description, then it can yield better returns.
- Pricing Strategy: When determining how big of a profit margin you’ll use, find that sweet spot between profitability and competitiveness.
- Market Saturation: Crowded niches can have oversaturated markets and it could be harder to prove a unique selling point.
Time Commitment and Scaling Potential
Time Commitment: In wholesale FBA, your time will be spent mostly on sourcing suppliers and placing orders. Put effort into looking for manufacturers and distributors, as this relationship will be the foundation of your business. Once you find them, it’s time to secure the deal. Establish your terms, negotiate prices, and set up a streamlined order process. Make it as smooth as you can, both for you and your supplier. When everything’s set and the supply process is in motion, most of your time and effort will be spent taking care of this relationship.
Scaling Potential and Strategies: Scaling in wholesale FBA means diversifying and diving into other products or niches or tapping other selling platforms outside of Amazon. Scaling can also mean getting back to the negotiation table with your supplier. Show them proof of your order history and how much you have made them in this business, and negotiate the discounts you receive and/or the price per unit.
Some people have a misconception of wholesale sellers not being able to scale and remaining stagnant, but this is just wrong. It all boils down to the seller’s entrepreneurial spirit.
Time Commitment: Crafting a product from idea to realization is not for the faint of heart. It would involve most of your 24 hours in a day, especially in the creative process. Product research can take up time, from identifying market gaps and problems to thinking of solutions you can provide. This could include hours and hours of brainstorming!
After finalizing the product idea, it’s time to design and develop, which can take longer than the first step. This involves a lot of trial and error until you get the design you want for your brand. Manufacturing is the only time you’ll be hands-off, except for quality checking. Other private label tasks that would need your time and attention are branding and packaging, which both demand creativity and strategy. You need to have a story behind your brand and an identity behind your logo.
Once all’s done, you can then start listing the products on Amazon. When the sales start to come in and you’ve found a steady pace for your new brand, your time will be split between managing manufacturing and inventory, as well as the administrative operations of your brand.
Scaling Opportunities and Brand Expansion: Where wholesale is a bit limited, private label has all the opportunities. Private label allows for a lot of scaling opportunities, such as extending the product line or crafting product variations.
Another scaling opportunity is going offline and selling on shelves once you’ve built your brand into being a household name. Making it more accessible to people by being in physical stores is a goal!
Flexibility and Risk Management
Dependency on Suppliers and Market Demand: Flexibility is luxury in the wholesale arena. Suppliers dictate everything, and your whole business model depends on them. Stock issues, sudden increases in price, and changes in contracts are just some flexibility issues that you unfortunately cannot control.
You’re also riding the wave of demand for the brand you choose to sell, meaning if they have a dip in sales, you most likely would face that dip too.
Mitigating Risks with Diversification: How can you mitigate this flexibility risk then? The answer is diversification. One thing you can control with wholesale FBA is that you’re not locked into one product and one product only. You are free to find other suppliers and sell other brands. It could be that while one of your products is experiencing a dip, another is at its peak of demand.
Challenges with Quality Control and Market Acceptance: Ensuring product quality is another hurdle private label sellers face. Unless manufacturing is done in-house, it’s very likely that some inconsistencies will be present in every product batch.
You will also have to face uncertainties about market acceptance—will the market receive the product well? Will they be willing to pay the price I set?
Strategies for Risk Mitigation: Test, test, test, and don’t forget quality checks. Before launching, make sure to do a small beta test or even a beta market test to see the possible market reception. Take note of feedback and suggestions, and then get back to the drawing board for possible changes. Market research would be your best armor for mitigating this risk. Conduct focus groups and check on industry competitors for a full view of potential market acceptance and where else you can improve.
Making the Decision: Key Questions to Consider for Amazon FBA
So, wholesale or private label? Your decision will shape the trajectory of your Amazon FBA endeavor. Here are some vital questions to guide your decision:
1. Your Capital Availability: What’s in Your Wallet?
Launching a business always starts with a capital investment, and as is with any investment, there are things you need to ask yourself first:
- How much are you willing to invest and potentially lose?
- Do you have extra funds for unexpected costs?
- Which FBA model does your budget align with better? Is it with wholesale selling, which would require less capital but slower and smaller returns, or private label selling, which requires high initial costs but with more substantial returns?
Your financial flexibility is a significant determinant of your starting point.
2. Willingness to Take on Risk: Are You a Gambler or a Guardian?
How much risk are you willing to take?
Every business venture comes with a risk, and every entrepreneur has their own risk appetite.
- Do you play safe, or are you used to taking calculated risks?
- Would a failed product, especially a private label product, be easy to accept for you, or is this a failure you are not comfortable facing?
3. Desired Level of Involvement and Control: Captain or Crew Member?
These two business models also differ in how much control you have over the operations and how much involvement you have in total. Think about who you are as a leader.
- Do you enjoy having control over everything, from ideas to design to branding, and marketing? If so, Private Label might be for you.
- Or, do you prefer wholesale where you just focus on you, and the brand does everything else?
4. Market Research and Product Category Preference: Where Does Your Passion Lie?
Both business models start with product research. We all know different niches have different market trends, and your personal passion might not be a trend in its niche. How will you approach this?
- What problem in your chosen niche are you planning to solve? How can your product fill this gap?
- Would you prefer working on a niche you personally have an interest in?
Your intuition, combined with market research backed by trends analysis, can help you decide where to invest.
5. Long-term Business Goals: The Destination on Your Horizon
Do you see yourself in this space in the next 5, 10, or 15 years? Always think long-term when starting a business. You never know how things might turn out—this Amazon business might be the one you build your family legacy on!
- Is Amazon FBA just a short-term venture, or are you looking at it through a long-term lens?
- Do you dream of launching a brand that becomes a household name or having a wide-scale business with products in diverse niches?
Let your vision guide you in choosing which path to take.
There are lots of things to consider when choosing a path in Amazon FBA, but one thing is for sure: both are very lucrative online businesses, and both can be what you’ve been looking to start as you dive into e-commerce.
Wholesale and private label both offer different opportunities and challenges, each with their own distinct requirements. Choosing one over the other doesn’t mean you can’t go back and take the other path in the future. If capital is not an issue, why not try both and see for yourself?