Let’s Figure Out Fulfillment
This is the second post in the Tiny Cables series. Part one, Let’s Start a Company, covered how I decided to start a cable company with my friend Tommy. I wrote about how we decided to pursue the project and what our goals are.
In the aftermath of the decision to pursue Tiny Cables, we are faced with two questions that are fundamental to the business:
- Where are we going to get these cables made? (Sourcing)
- How are we going to get these cables to the masses? (Fulfillment)
This post is about fulfillment. Sourcing will come later this week or early next.
I’m in awe of Amazon Prime. Two-day shipping has turned Amazon into an indispensable part of my life, and I’m not alone: Amazon has more than 300 million registered users with 80% of registered U.S. customers purchasing at least once per month. 55% of all U.S. online shopping trips start with an Amazon search. It’s true. You could look it up.
There are countless stories of people who find the right niche product, achieve high ranking on Amazon, and generate thousands of dollars in just a few weeks. Sounds pretty good, right? There’s also a support network: dozens of active communities on Facebook and Reddit where Amazon sellers share resources.
This is all thanks to Amazon’s Fulfillment by Amazon (“FBA”). For a fee, Amazon will store your inventory, process payments, manage returns, pick, pack, and ship your product.
To be one of Amazon’s Prime-eligible products, Tiny Cables just needs to secure product with packaging that fits their specs, ship it to an Amazon warehouse, and watch the cash roll in.
Easy. With an audience, a fulfillment service, and an active support network, it stood to reason that Amazon was the way to go — so we dug in.
First things first: Amazon’s picky about how your thing is packaged.
Two things were immediately clear after registering for an Amazon Seller account:
- Packaging is the most complained-about and difficult to crack piece for first-timers.
- Amazon does not make it easy for you to figure out what kind of packaging your product needs.
Amazon offers a useless PDF that promises to clarify all packaging and labeling requirements, from which font to use on the label to how to pack adult products. Don’t bother.
Thanks to Larry and Sergey, I landed on this YouTube video that promised to explain how to prep small products for FBA:
That’s when it all clicked.
Sometimes, you just need to see what people are talking about. This video led to another (Amazon) page that was much clearer about their demands:
- Package units in transparent, sealed bags with a suffocation warning label. A poly bag seems to be the weapon of choice.
- Place a product label with a scannable barcode.
- Do not allow the bag to protrude more than 3 inches past the dimensions of the product.
That’s when I remembered that the useless PDF mentioned which font I should use. I found this list of requirements for the poly bag and label:
- Poly bags with a 5" opening or larger are required to have a suffocation warning. This suffocation label needs to be a minimum 10-point font size for small bags.
- Bag thickness must be at least 1.5 mils. I know what you’re thinking: “what the hell is a mil?” I’ve got you covered.
- The bag must be transparent and completely sealed.
- The bag must have a UCC128 barcode. This made me wonder what goes into securing a barcode, which turned out to be far more complicated than I could have imagined. So complicated, it’s going to turn into its own post. Yeah, seriously.
- The label must be white and contain a barcode with “appropriate quiet zone areas,” an SKU for fulfillment centers to identify each unique product, a title and description, and the condition of each unit.
After about an hour, I felt comfortable that I had figured it out. I ran the requirements by our potential suppliers and they all indicated that it would be no problem. More on this in the sourcing post.
The True Cost of Fulfillment by Amazon
That’s when my focus shifted to the cost of FBA. Amazon is offering to do a lot, from accepting payment and filling each order to customer support and returns. This had to be kind of pricey.
The first stop was Amazon’s official guide, which seems simple enough. According to the guide, it would cost about $2.40 to have our items picked, packed, shipped, and for Amazon to handle customer service and product returns. ($2.41 from January through September and $2.39 from October through December.) Amazon also charges a monthly inventory storage fee per cubic square foot — this is not a material amount and would add up to fractions of a penny per unit.
But then there was some trouble in paradise: Amazon offers a “Fulfillment by Amazon Revenue Calculator” to help sellers calculate the difference between selling on Amazon via their own fulfillment vs. FBA, and the numbers changed. According to this calculation, it would cost $3.41 thanks to “Selling on Amazon” fees, which were not previously disclosed.
A buck is a big deal when we’re talking about such a low-price item. This fee is apparently used to pay for two things:
- Referral fees. There is a whole world where people set up websites/blogs with links to Amazon listings in order to get a 5–10% commission. 5–10% of what we’re charging is more like $0.29-$0.58, not a dollar.
- Closing fees, which are not mentioned anywhere else. I have no idea what this means.
Suddenly, our margins were getting tight:
While researching Amazon’s mystery closing fee, I stumbled into another problem: FBA Facebook groups seem to be talking about Amazon ads as a means of achieving first-page ranking. A lot. I thought that volume, reviews and a nice, clear listing would be all it took — I had no idea that Amazon was letting companies bid for rank.
This isn’t cheap. Many of the FBA group members talked about targeting a 10% per-sale ad cost — meaning the best-case ad to sale conversion would cost $0.59 per $5.99 transaction.
That 14% margin just went from bad to worse.
Amazon is out.
This sent us into a scramble and made us question whether this could be a viable project. We hit our first real roadblock.
We committed to doing a Medium series and we can’t end after two posts, so it was back to the drawing board. Successful entrepreneurs stand tall in the face of epic challenges like this!
This was a bummer, but going back to square one wasn’t the end of the road. It certainly adds work since we’ll have to figure out how to handle payments and returns, but that’s workable. We can still sell on Amazon and have access to their audience, we just won’t have Prime-eligible listings. All is not lost.
In fact, our first post discussed selling on multiple channels and how that could be an advantage over Amazon’s listings in this category.
I heard of fulfillment centers that do something similar to FBA — pick, pack, ship — but I wasn’t really sure how to find them. This was one of those things that you don’t know what to search for on Google so you end up typing something long-tail like “cheap American shipping and packing center for small orders.” Sometimes this works, sometimes it doesn’t.
It wasn’t working.
I was working through this with Tommy when he mentioned that he has a family member who owns a wholesale textbook company in Texas. Their warehouse recently started offering fulfillment services to other businesses.
I could see the light.
I set up a call with Tommy’s cousin with two seemingly simple questions in mind:
- Which steps of the process can you handle?
- How much is this going to cost?
The call went on for 45 minutes. The low-down:
- We can ship product direct to their warehouse, just like we would have with Amazon. I don’t have to touch the product between the manufacturer and the warehouse. That’s big.
- They’re willing to do some quality testing, if necessary.
- They will pick, pack, and ship product.
- They can accept returns.
Pricing breaks down well:
- $1.10 per order + $0.30 per item for pick and pack
This means that if a person orders more than one item, we’re only paying that base $1.10 once, then $0.30 for each additional item. This can come down with volume.
- Basic poly sleeve packaging will be approximately $0.10 per item.
- Postage will vary but will generally be around $1.25 per order.
They’re willing to do this for approximately $2.75 for a single-item order.
That should work:
This is not the entire story for our unit economics, of course: we have to add payment processing to the FBTC option, for one. Also, we won’t totally dodge the advertising expense that helped scare us away from Amazon. My experience with online advertising leads me to believe that we’ll be able to beat a 10% ad cost with Google, Facebook, and other channels.
With margins between 25%-43%, I’m feeling like:
One quick house-keeping item: we secured smallcables.com for $12.99 from Name.com after one of my friends stumbled into its availability. We’ll just forward this to tinycables.com but we want to play (SEO) defense here.
Keep reading with Episode III: Let’s Source Some Tiny Cables
TinyCables.com — Profit and Loss — March 9, 2017
- Domain: $12.99 x 2
- Logo: $3.99
If you want to follow along as we take this journey, sign up for our e-mail list at our website. We’ll be posting about once per week while we work all of this out — we won’t sell your e-mail address or anything like that.
If you want to share your feedback, drop us an e-mail at team [at symbol] tinycables.com or find us on Twitter: @andrewjchapin and @airdrummingfool. You can download the mobile app we built together, benjamin, by clicking here.