Amazon and the Penny Books - Who's Making Any Money?
By: Chris Green - FBAPower
Amazon's New Fee Structure and Penny Book Sellers
'Penny books' (books that sell for $0.01 + shipping) have been around on Amazon for a long time. They are the result of a competitive marketplace and a downward spiral of ruthless competition trying to complete on price alone. Sellers dropping price again and again as they look to be the 'best price' and get that next sale. It a common practice in all markets, but you may start to wonder, "At these prices, is anyone making any money?" It's a great question! Let's look at the numbers.
First off, remember that when a penny book sells on Amazon from a merchant fulfilled seller (a seller that ships their own orders), the buyer is actually paying $4.00 ($0.01 + $3.99 shipping). The $3.99 shipping is fixed for all books. A seller who uses Amazon's Fulfillment By Amazon (FBA) program would price that same book at $4.00 in order to 'match' the merchant fulfilled seller's price. So when comparing fees structures on penny book sales from merchant fulfilled sellers and FBA sellers, we are using slightly different prices to find our net profit.
With the advent of FBA, penny books turned into essentially sub-penny books, because now sellers could price their books lower than the $4.00 total price. The merchant fulfilled seller has an absolute price floor of $4.00 because of the $3.99 shipping credit on all book orders; they simply cannot price any lower than the $0.01. The FBA seller can go below $4.00; they can go all the way down to $0.01 as an FBA price if the want to (want to lose money that is). So FBA sellers are able to push the prices on penny books down even further. They will often push the prices down so low that they are literally working for pennies per book and sometimes even set prices where they lose money on every sale. Hopefully, by understanding the Amazon fee structures for both merchant fulfilled and FBA, you can avoid ever losing money on a sale.
All fees can be checked on the Amazon website and by using the Amazon
Merchant Fulfilled Penny Books
Take this book for example: The Long Tail
This is a small, lightweight book. If it was sold for $0.01, the buyer would pay $4.00 total with shipping. Amazon would take 15% of $0.01 (which is zero), as well as a $1.35 Variable Closing Fee (VCF). So the seller would end up with $2.65 in their Amazon account. They would then have to ship the book to the customer. The most inexpensive shipping rate is USPS Media Mail.
T rate for up to one pound is $2.47. This leaves the seller with $0.18 left to pay for packaging/envelopes, labels, tape, and their time and effort to pack the order and make sure it gets to the Post Office. Not exactly how I would suggest sellers spend their time, especially new sellers! So are all of these sellers making just a few cents each on their sales? Some are, but there are ways to get even better USPS Media Mail rates and that is to do some heavy volume. We're talking about 300 orders per day and on top of the volume requirement, you also have to presort your shipments. Can money be made this way? Sure; but it is a lot of work and it is not exactly a scalable option for most new sellers.
FBA Penny Books
So, is FBA the answer to being profitable selling penny books? Well, it was, but not as much anymore. A few years ago, not as many sellers had figured out how lucrative FBA was (and still is) so there was not as much competition from FBA book sellers. This meant that FBA prices were still at levels where sellers were making a nice profit per sale.
Here is how FBA penny books used to work. An FBA seller would list their books that normally sold for $0.01, but they would list for $4.00. They would get the sale easily because the net price to the buyer was the same and the buyer actually received much faster shipping from the FBA seller than from a merchant fulfilled seller who used Media Mail.
Take this same book: The Long Tail
If it was sold for $4.00 from an FBA seller, the OLD fee structure
would look like this:
So after all fees, the FBA seller gets $1.23 using the OLD fee structure. This was a dream come true compared to packing up hundreds of penny books a day for less than a quarter profit each! So as more and more sellers realized this, more and more sellers adopted the FBA model. As a natural progression, prices began to be pushed downward again.
FBA Competition Heats Up
With more and more sellers using FBA, sellers naturally looked for ways to compete further. This led to sellers pricing their items BELOW $4.00 which was actually lower than any merchant fulfilled book seller could even go. With each seller dropping price by $0.01 to try to attract the next sale, another seller would then drop price below them. The same downward spiral that led to books being sold for a penny was now looking for a new price floor with FBA. So how low could they go? Well, they ended up going as low (and sometimes lower) then the absolute break even point of profit. Sellers would sell books for prices where, after fees, they made $0.00. While this may seen silly to most sellers, you may have also forgotten that this wasn't just giving a book away for free; that seller actually paid inbound shipping charges to get that book to an Amazon FBA warehouse as well as put in the time and effort to sort, list, label, and pack up that book in an FBA shipment.
The prices were being pushed down to their theoretical break even points. This book could be sold through FBA for $2.77 and the seller would net out zero. The sellers had a new price floor for each item instead of $0.01.
FBA Penny Book with the NEW Fee Structure
This month (2/2012), Amazon introduced a new fee structure for FBA sellers that affected low priced, light-weight media items. Media items under $25: Pick & Pack Fee going UP from $.60 per unit to $1.00 per unit. Weight Based Handling Fee (per pound) going DOWN from $.40 to $.37 but ROUNDING UP to the nearest pound.
So look at the same book sold through FBA today:
So after all fees, the FBA seller gets $0.68 using the NEW fee structure. This is a big change from the $1.23 that the sellers were getting before. What this does is increase the theoretical price floor that sellers should not be pricing under (unless the choose to lose money on purpose). This book should now have a minimum base price of $3.32.
How Will Sellers Adapt?
Time will tell how sellers will adapt to the ever-changing marketplace. In theory, all low priced, light-weight media items sold through FBA should go up in price to reflect the $0.40 increase in the Pick & Pack fee as well the weight based fee being rounded up. Time will tell if sellers paid attention to these changes properly or not.
Sellers Priced Below the Break-Even Point
You'll see items on Amazon that you know are being sold at a loss. While your curiosity may pique as to what's going on, don't let your curiosity lead you to believe that this is some magic business model that you need to be a part of. You have limited time in each day, so spend it wisely selling profitable items and not chasing pennies around. When a seller realizes that they have inventory at Amazon that will likely never sell, they have three options; sell it at a low price (possibly at a loss), pay to have it returned to them, or pay to have it destroyed (thrown out). Removing the item from Amazon would cost the seller $0.50, destroying the item would cost them $0.15, or they could try to sell the item for less than a $0.15 loss and try to come out a few cents ahead compared to destroying the item. This entire scenario can be avoided by not sending in items that won't sell. If you do find yourself in this situation, take steps to remedy it efficiently. I would not spend too much time trying to reprice items to try to lose only $0.10 instead of losing $0.15 because time is money. Spend it wisely on profitable items. Sometimes you just gotta get rid of the junk. So when you see prices this low, this could be what is happening.
So Who's Making The Money Here?
It's no secret; Amazon :)
Amazon has openly said that they will not enforce how sellers price their items. The Amazon marketplace fees are set and known ahead of time so if a seller chooses to sell at a price that does not make them any money, that is their choice. However they price their items, when they sell, Amazon knows they will making money on that order.
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