When just starting out in selling on Amazon, or when choosing a new product to include in your range, it is crucial to know how to calculate the fees that Amazon will charge.
This is a very important part of knowing what your ultimate profit will be.
If you rush this part and make any mistakes when sourcing new products, then it could be devastating for your business. Your final profit margin is important, and you need to build in enough margin to enable you to reduce your costs for deals and special offers, while still making a decent profit.
There are of course different schools of thought on this and I can only share mine.
You might hear differing opinions and that is fine, but all I can share with you is my own experience, knowledge and just what has worked for my business.
When sourcing new products we like to have a minimum of $10 -$12 profit before costs. In other words if a product costs $4 plus $2 to ship, and you can sell for $24 then you have $6 to pay your fees and be left with a $12 profit.
So we need to know how to calculate exactly what fees Amazon will charge. Because charge they will, no matter what your profit or loss might, Amazon still want their cut.
However this is very fair for the returns and benefits you get from selling on the world’s biggest ecommerce platform.
As with a lot of guidance on Amazon, the calculation of these fees can sometimes be confusing.
So please allow me to help you with that, and by the end of this article you should know exactly how to accurately calculate your Amazon fees, and therefore confidently predict your profit margin.
First of all here is the link to the Amazon help section on fees and pricing for FBA sellers:
When one of your item sells on Amazon the price is collected together with any shipping costs, and Amazon will deduct the associated fees before depositing the balance in your FBA account once the product has shipped.
There are 4 fees associated with FBA selling.
- FBA Order Handling Fee
- FBA Pick & Pack Fee
- FBA Weight Handling Fee
- Referral Fee on Item Price
Order Handling Fee
The order handling fee is dependent on your category of product but basically there are media and non media products, and the help section will guide you on this.
A non media product will be charged at $1
Pick and Pack Fee
A non media product will be charged at $1.06
Weight Handling Fee
This is dependent on the weight of your product as in the chart below:
In most categories there is a minimum referral fee, which is usually $1 ( but please double check this by looking at the current guidelines from the link above)
So for example, if you sold a product for $20, you would be charged a 15% referral fee of $3, because 15% of $20 is more than the $1 minimum referral fee.
But if you sold a product for $3, 15% of $3 is $0.45, so you would be charged the minimum fee of $1.
Let’s look at an example to explain it more clearly:
You’re selling a product on Amazon for $20 and using FBA.
First, calculate your referral percentage fee. Amazon deducts 15% from your sale price for selling on their platform.
Sale Price $20 – Referral Percentage 15% x 20 = $3
Secondly, is your product is media or non-media. Assuming it is non media you will be charged:
Order handling fee – $1
Pick and pack fee – $1.06
Finally, you’ll need to calculate the weight of your product.
If it weighs 1 pound the weight handling fee will be 0.96
- Product sale price – $20
- Referral fee – $3
- Order handling fee – $1
- Pick and pack fee – $1.06
- Total fees – $5.06
Deducting $5.06 from the product price you are left with $14.94 which will be deposited into your bank account at the relevant time.
So the formula to calculate your Amazon fees are:
Sale Price – (Referral Price + Order Handling + Pick and Pack + Weight Handling) = Gross Profit
Next determine your acquisition costs, or what it costs in product price plus shipping to get your product to Amazon – this is often referred to as the landed cost.
Lets say that this $20 product cost $3 plus $1.50 shipping so the landed cost is $4.50
Take this $4.50 from your gross profit of $14.94
You are left with a net profit of $10.44.
NB. Do bear in mind that this is not a true and final net profit, because you obviously have other costs associated with your business. But it is the starting point in calculating whether you consider there is enough profit in your potential product.
Based on whatever you determine your business needs as a profit margin you can decide whether this product is one which is a potentially profitable one.
Before you launch any new product, it is crucial that you determine your total profit margin.
1. Deduct your COGS (cost of goods sold) – ($4.50 in this example) from your sale price
2. Deduct your overhead costs (Amazon Fee) – ($5.06 in this example) from your sale price
Bear in mind that your proposed sale price can and will change, so that means your 15% fees will change too. You will need to have enough profit to cope with price fluctuations and reductions, especially when first launching your product.
Only after having calculated these numbers can you know that your selected product has potential.
Amazon guidance can be tricky to navigate at times, so I hope that this article has helped you to figure out your profit margins a little more easily.
Using the formula above will allow you to make this important decision and determine the price range you can charge allowing for a healthy and sustainable profit margin.