"Build" Guide - how to Build your Private Label Business
Buying wholesale from a brand owner is still viable for sure; someone which owns one brand. As far as a wholesaler, that distributes several brands, it depends. They have to make their profit too, and there might not be enough margin to go around. They are also likely to be selling to other Amazon sellers which would cut into your sales.
If you go to Back Country, they would carry the Black Diamond brand, as well as many others. Will wouldn’t buy from them but rather buy directly from Black Diamond.
One of the big reasons Will got into Vendor Central is that he hates launching products. It’s much easier to start with a product that already has 10,000 reviews. His philosophy is not to do something that’s hard just because it’s hard. So many people are worried about building a brand and launching products from scratch. It’s a lot easy to just make money first. Then, when you want a challenge, build your brand.
One recent product launch Will and his team did, was they got ping pong accessories from China. Got them in, slapped labels on them, no real packaging to them. They sent them into Amazon. There was four different types that they bundled in two and four packs. They’ve sold about 357 units in a month in a half and they just got their first review.
They spent $1000 on PPC to make $4000 so their A-cost is about 25% which is about break-even but gets them some traffic. It’s selling about seven units a day at $6 or $7 and he did nothing more than throw it up on Amazon. It’s all because he picked the right niche with the right keywords. He knew he could compete only on price.
If you are trying to go after a product that has 1500 reviews, then you will need 1500 reviews just to compete. What’s your strategy for getting 1500 reviews? If you do 1500 giveaways, that’s not sustainable. If someone wants to sell dog leashes because they love dogs, what can you do with that? You can’t put your love of dogs in the title. You can’t work with that. However, if you want to sell leashes because you see a gap in the market of seeing-eye dog leashes. They’re all 20ft long which makes no sense if the person is blind. It needs to be 4ft long. Great! You found a gap in the market. You found a specific keyword. There is a way to differentiate yourself and add value. Also, you didn’t need to do some crazy manufacturing. Just make a shorter leash.
No. No one really has that app on their phone. A lot of people will go out of their way to avoid shopping at Wal-Mart. Just Google “people of Wal-Mart”. There is a negative stigma. Much like eBay. Will they take a portion of the market? Yeah, but they won’t be a major competitor. People like the simple Amazon experience. Plus, if you’re going to buy something from walmart.com, why not just drive down the road and get it right now? The only real benefit Will sees from walmart.com is that if your product does well on their website, they might try to sell it in the stores and then you’ll be able to sell it in all the big-box stores.
Will was recently talking with a hedge-fund manager that owns a part of eBay who said that eBay looks good compared to other retailers. Who are the competitors? Macy’s who’s closing thousands of stores. Sears who is closing thousands of stores. Of course their going to look good in comparison when the competition is about to go bankrupt. They may grow 3.5% year after year, but the S&P average was 18%. 3% isn’t that cool. The numbers of people that get online in America grows at 3%. So eBay is growing at the rate of the internet and slower than GDP.
You will want to find a product in a category that Amazon isn’t sourcing and selling already. Then they will want to get their hands on it. Plus, if you have sales history on top of that, Amazon will love it. If you find that Amazon isn’t selling in climbing ropes, but they are selling 9 of the 10 dog leashes, then they’re not too excited to get anymore dog leases. Buying wholesale is a good way to start this.
It really depends on a lot of factors. It depends on how much cash flow you have, what kind of distributor you have, what the competition is like. Let’s say you have one Chinese supplier that you buy iPhone cases from. They’re the only ones that are waterproof and you buy 10,000 at a time and you have $100,000 in the bank. From they, maybe you build momentum in Seller Central, then move it to Vendor Central so they see the momentum. In Seller Central, you might be ranked in the thousands for iPhone cases, but in Vendor Central you might be rank 1 for waterproof cases.
There is a company in Hong Kong that does Vendor Central so they don’t have to pay taxes in each state whenever they sell in Seller Central. There is all sorts of different scenarios that will affect the decision. Amazon pays for inbound shipping when they order from you in Vendor Central. So if you have a large product that is expensive to ship, you can save a lot of money by using Vendor Central.
So 2017, third-party sales will still grow from 2016. However, at the same time, Amazon will condense. If you look at their earnings report, the number of items offered for sale has gone down; the number of items fulfilled have gone up. Amazon is clearing up a lot of junk sellers. You have people like Will going through and condensing their listings. Once they get rid of the riff-raff, it’ll be much more simple, and you can tell who the private labelers are that care, and who’s selling junk. Eventually, the junk ones will phase out. The sales of third-party sellers will go up, but the amount of third-party sellers and third-party products may fall over time. So, by the time 2018 rolls around, everyone will try to find a way to differentiate themselves because the third-party selling will become a thing of the past.
Just over 3 years ago, Coran and his wife left Australia and their corporate jobs and began traveling. They had online businesses at the time and soon began buying and selling websites to fund their traveling. He liked the process of building a company to sell it rather than building to for the income. He struggled to keep his attention on one thing.
For this interview Coran create a package of tools for Amazing FBA listeners at http://thefbabroker.com/amazing. So do check that out.
About a year ago he got into the brokerage side of things after people began asking him to review and vet websites that were for sale and help negotiate the sales. As of about a month ago he has been dealing exclusively with FBA businesses.
Most people do this backwards. They build up a business and it’s making money and then they decide they want to sell it. Maybe they want to focus on something else, maybe they want to cash out and pay off the investment. That’s a terrible time to sell. Odds are, you won’t be structured in a way that is attractive to sellers. The first thing you need to think about is who you are going to sell to and what they are looking for.
Let’s say you have a private label business that’s been operation for an year and half to two years. So you have a bit of history and you beginning to think about exiting. Reasons that Coran decided to sell his companies were that he might need the cash flow for something else or he was getting bored with the business.
Coran breaks Amazon businesses down into three types, retail arbitrage/wholesaling, private label, and unique or proprietary.
For retail arbitrage/wholesaling, unless you have exclusive rights to selling on Amazon, the chances of your income being taken away is very high. What an investor is looking for is a return on investment. They will pay a certain multiple for a business with the intention of getting that money back first. So with wholesaling, for almost all cases, your only asset is your inventory, so if you lose your means of selling it, you’re just stuck with a load of stock.
Private label is the most popular way to sell on Amazon. There is a barrier of entry so your products have a shelf life of 6-12 months. That means that if you have one product that you haven’t differentiated, you just stuck your label on a product and built the brand, it’s not super defensible. So it will sell at a lower multiple. You can definitely sell these companies, you just have to put a little work into it.
Unique or proprietary products are much more defensible. You may have taken negative comments on your products and tweaked them. So you might have a unique mold or something that makes your product unique, that will sell at a higher multiple. The more you can make a private label product better or unique, the better it will be when it comes time to sell.
For example, Greg Mercer at Jungle Scout ran a case study where he made his chop sticks a little longer. While not super defensible, it is unique, and if you build your brand around that it sets you up in a better position.
There is a debate among brokers as to what the minimum amount of time is. For Coran, a year is still young. You certainly want 12 months of history. There are a few reasons for this. One, you want to see if there is any seasonality involved. An investor wants to work out their return on the longest history possible. There is also something to be said for a product that takes time to gain traction. Seems a bit counter-intuitive but an investor will look at a product and think, “What’s to stop me from doing this myself?”, so a product that takes time to get established show the investor that this company is worth buying because it will take that much more time to get it going if he/she wanted to start from scratch.
Most importantly, when it come to age of a company, you want the company to be established. For online companies, that typically means 3 years. Compared to offline, like brick and mortar businesses, 10 years is a long time.
Even if you’re not thinking of selling your company soon, now is the time to start preparing for it. A year, year and a half out, you want to make sure your products are defensible and that you have products that will add value to your company when it comes time to sell.
Coran is working on two businesses, trying to get them ready to be listed. One business is completely private labeled, very little in the way of differentiation. It’s just brand. He has 20 products. That business is attractive because of the wide range of products. Out of the 20 products, most of the income comes from three products. It is all on Amazon and bringing in a million in sales a year.
The other company has only one product that is unique. It’s is their own formulation and their own brand. 70% of their income is coming from Amazon. They also sell on Amazon US and Amazon UK. 30% of their income is coming from their Shopify store. So they have several layers of defensibility.
The gold standard, according to Coran, is a third company he is working with. They have 10+ uniquely formulated products. Multiple sales channel. 70% through their e-commerce channel, 30% on Amazon.
The less reliant you are on one thing, the better. Multiple products, multiple sales channels, multiple traffic sources. So if you have a private label and don’t want to focus on unique products, focus on finding sales channels outside Amazon. That way, if one thing takes a hit you have hedged your bets.
You need to look at it from an investors perspective, they are looking for a return on investment (ROI). Their in for $1,000,000 and their making $200,000 a year on it, that’s the ROI. They way we value Amazon businesses is net profit. The best way to look at this is: what is your annual net profit. If your business has been around a year and making decent profit, that’s not as attractive to these kinds of buyers. The important thing to consider I: what is your profit right now? When working with clients, Coran finds that most people over-estimate their profits. Oftentimes it’s as much as half of what they thought it was once they put in their numbers. If you want to find out what your business is worth, use Coran’s tool for that.
The longer your business has been around, the better
The more profit you’re bringing in, the more attractive your business will be
Diversified traffic sources
The strong the competition, the more wary investors will be
Profit and Loss Template – Use this spreadsheet to help determine how much money your are actually making.
It starts with your total sales and revenue. From there it takes out the cost of sales. This is your Amazon fees, packaging, shipping, etc. All the costs associated with selling that item. Then it takes your operational costs out. The is refunds, ads, web hosting, salaries and other drawings, etc. All the costs that are associated with running your business. In the end you’re left with your net revenue.
In regards to salaries and other drawing from your business, when it comes to selling the business you can add that back into your profits. The reason is that your investor might not want to draw anything from the business. So you want to present them with the profits including what you are drawing from it. Then they can decide what they want from it. If they are looking for an income, they can look at the net revenue and determine how much they can draw. If they are looking for growth, they might want to leave everything in and use that to grow the company.
If you don’t add back your salary, it makes it much more difficult for them to find it. You want to make it as easy as possible for your buyer.
This 2nd way of increasing sales is so neglected, you can get ahead simply by implementing anything in this area!
The simple idea is to increase the AOV=Average Order Value.
It can be more difficult to implement on Amazon than just getting new customers but is potentially much more profitable.
If someone usually buys a $10 widget at 50% margin, you get $5 profit per sale. If you usually sell say 10 orders of 1 $10 widget a day, your profit per month=$5X10X30=$1500
If you can increase the AOV by say just $1, you would end up with $11X50%X10X30 profit=$1650. $150 extra ie 10% extra.
Multiply such effects across several products and it can add to your bottom line quickly.
The simplest way to increase your AOV is simply to increase price! But you have to weigh up against conversion rate changes etc. to see whether that increases or decreases your price.
Another way is to bundle together products physically eg a 3-pack, 4-pack, 6-pack etc etc. Easy and very very easy to sell on Amazon.
Another way that is even easier is to offer a discount via a promotion code. Eg BOGOF (Buy One, Get One Free) or buy 3, get 10% etc etc.
If you set things up wrongly, you’ll make less profit, not more, so know your numbers going into this! Done right, this is a simple way to edge up your profit margin.
A harder way but possible on Amazon, is to do cross-sells eg “this is also bought with X” (spatula with slotted spoon for example). It’s possible to influence this again using promo codes – you can offer a 25% discount off a slotted spoon, for example, when you buy a silicone spatula etc.
Another way that is hard to do on Amazon but possible, is to upsell eg from a $5 spatula to a $25 frying pan. Same kinds of methods.
Increasingly, we are looking at strategies that will work best when you have control – in other words, you start to build your own email lists (and other assets like social media subscribers/followers etc.).
There is one more basic way to increase sales that is used least of all by Amazon sellers but could be the most powerful of all…read on…to the next episode…
To find out more about the Amazing FBA London Mastermind mentioned in the episode, click here
Everyone gets a bit obsessed with the wrong things when it comes to Amazon competition.
The first mistake is to get blinded by sales volume and ignoring the competition and what that will do to your profit margin. If you can’t produce a differentiated product, don’t go into a market.
However, you need to assess the competition correctly.
REVIEWS – WHAT REALLY MATTERS
The biggest red herring is to worry about the raw number of reviews the competition has without looking at the quality of the listing and of those reviews.
But it is true that you won’t look credible with 5 reviews if the nearest competitor has 200. A rule of thumb was that you want to aim to get at least 50% of the same number as your nearest competitor.
I’m not really convinced any more. Given that it’s also harder to get reviews than ever in the USA, I would focus on quality more than quantity. Still, it’s worth avoiding markets where you’re going to have to get more than 50-100 reviews unless you have really deep pockets, in my view.
More important is the average review, ie the average no. of stars. If everyone has 4.7-5.0 stars average, you’ll struggle to compete unless your product is amazing. If everyone has 3-4 stars, it makes me wonder whether you are just asking for trouble – read the reviews in detail and find out!
A sweet spot is when quite a few page 1 products have 3-4 star reviews and lots have 4.5-5 stars. This implies there are winning and losing products. Investigate – what makes the winners win? Can you solve the issue from the low rated products with a better product?
If the market looks over competitive, at this point I would just walk away unless I had really deep pockets and lots of Amazon experience.
COMPETITION ANALYSIS – MAIN PHOTOS AND PRICES
If the market still looks viable, I would investigate the competition in great detail. First, I would review the page 1 photos and price points. Are there crappy looking products selling for a decent price? It’s unusual but if so, you may have found a niche that is underserved. More likely, can you see a way to produce a more beautiful product?
IN DEPTH COMPETITION LISTING ANALYSIS
If, and only if, the market still looks viable, I would then look at every listing on page 1. How many of the (usually 9) available photos do they use? How good are they? Do they have lifestyle shots? (showing the product in use) Do they use models?
Photos are crucial on Amazon, so I’ve stopped worrying too much about the Bullet points looking great. But great photos make a huge difference.
Remember: it’s not going to be enough these days to do decent photos. You’ll need to have a genuinely better product to command solid prices and take sales off the competition! Don’t delude yourself about the power of photography in mature markets. Good photography is a price of entry now, not a way to win.
The next thing to do IF your product has good demand at a fair price (so probably over $30 at least), the next thing to do is to check the competition.
Here we look first at brand dominance. This comes in two forms:
If you’re in the Cookware space, for example, if you see a product like “Russell Hobbs” and you can see that the spread of prices is $15-30 but only Russell Hobbs is commanding $25-30 a unit sales price whereas the rest only make $15-23, I’d be wary of entering that space
2. A private label type brand
You may well be able to beat these guys because they don’t have a large brand. But you need to have a really really visually differentiated product. Otherwise – you’ll just end up getting shopped on price. Amazon ads costs go up – selling price comes down – profit disappears.
This is an incredibly common pattern – do not ignore differentiation! If you don’t think you can beat similar competition that is well established with a genuinely different and better product, DO NOT go into that market!
If you are considering selling price, I’d advise aiming for $30-40 upwards. It leaves a decent profit margin after Amazon ads, and means you’re less likely to enter into wars on price because price was not your main selling point in the first place. Both of which protect your overall profit margin.
Just because a product may cost more per unit, doesn’t mean that the upfront costs will require a huge budget. Most MOQs (minimum Order Quantities) from Chinese suppliers are in reality more like minimum amounts per order. So as long as you are spending $2000+, you can often get away with much lower MOQs than advertised.
Next we look into projected P & L in more detail.
But remember: Eliminate before you Investigate! Don’t spend valuable time analysing products you should just eliminate.
After gathering ideas, the big Second Phase is: FILTERING.
The first thing to say is: there is no single perfect formula. If you use the same formula as everyone else, you’ll end up with the same products, you’ll compete on price and you’ll make no profit (if you manage to make sales).
So DON’T choose “$20-40 sales price, 3000 units a month, lighter than 1 lb weight”!
The first thing to do in this Phase is: set a budget.
The main thing that makes a difference is how much budget you have to spend. If you haven’t got £3-4,000 or $5,000 USD, you don’t really have enough to do private label anyway, in which case I recommend Online Arbitrage, Retail Arbitrage or Wholesale.
Broadly, I would choose a product that you can sell for as high a price per unit as you can afford. If you have for example $5000 to spend on inventory for your first order, get 200 of something fantastic you can land for $25 and sell for say $75.
Don’t get obsessed with units sold per month. Traditionally you look for 3000 units/month sold on page 1 – which means per product, about 300 units a month or 10 a day.
I no longer care about that. I just want $10,000 – even $5000 a month of revenue per product. It’s in fact much better to have the same turnover from fewer, higher priced products because a lot of the costs per unit are similar – so in other words, you make more profit if those units are higher priced.
#83 Episode -Why your customer chooses you.
Differentiation -example: Hairdressers in Haslemere
Part of the **Summer Series** of bite-sized chunks of Amazon Strategic Goodness!