1. Amazon is the world's most profitable eCommerce platform.
To be specific, Amazon accounted for 39% of all e-commerce sales made in 2020, and that number has skyrocketed since. Analysts predict that Amazon's income will double by 2026. You read that right, double.
Since Amazon made 39% of all e-commerce sales in 2020, that doubles would equate to $187.2 billion in 2026!
They're the king of the hill, with very little competition being as fierce. Even Walmart comes in behind at a distant second-place
Given this market dominance, it's relatively easy to make a solid, continual profit off of the back of Amazon by being a seller on the platform. Sure, it takes continuing education, planning, and understanding nuances of how products and sales velocity works. But if you understand how sales velocity works, it's hard not to be profitable.
How you protect that profit, however, is another matter. As Amazon constantly changes fee structures - depending on whether you sell as an FBM or FBA - there are little things you need to do here and there to protect your expected margins. Instead, you can do a few tactical things - both as a new and experienced Amazon seller - ensuring long-term profitability.
Before we dig into those, let's take a look at the main factors that affect profitability.
2. The Six Profitability Margin Factors
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Six factors play a huge role in whether you'll be able to maintain profitability as an Amazon seller:
1. Cost of Goods Sold (CoGS)
2. Advertising Budget
3. Fulfillment by Amazon (FBA) Fees
4. Product Returns
5. Product Promotions
6. Taxes and VAT
Let's take a look at each of these in further detail.
Cost of Goods Sold (CoGS)
Determining the CoGS for a set period is a relatively simple equation:
Starting inventory + any additional inventory - final inventory = CoGS
CoGS is also sometimes referred to as your "landing cost." The reason why it's called landing cost is CoGS is the cost-per-unit for you to manufacture, pack and ship your inventory to an Amazon fulfillment center regardless of whether you work as an FBA or FBM. The best way to actively control your CoGS - and therefore protect your profit margin - is to have a deep and intimate understanding of your direct and indirect costs, facilities costs, and costs related to your current and future inventory.
When you understand all of the levers that affect your costs, it's much easier to understand the short-term and long-term picture of how these costs affect your profit margin and do everything in your power to control them.
It's tempting when you're first starting as an Amazon seller - and when you're looking to ride the wave of a product that's doing well - to scale your advertising spend. This temptation is powerful if you're getting cheap clicks for the money you're spending, or your conversion rate is solid for the traffic you're receiving daily. It's a slippery slope, however. If your advertising spend starts to outpace your profit margin percentage, you could quickly get out in front of yourself.
As a ballpark figure, the amount you spend on advertising for each product sold should only have a 6-10% effect on your profit. So, if you sell an item that drives a $60 profit, your advertising costs for the product should eat up only $6-$10 of that profit. It's a good idea to read up about ad spending on Amazon to understand further how everything works.
FBA is a great way to work as an Amazon seller, but it comes at a price, as we all know. Amazon is notorious for sticking FBA sellers with all types of fees for them to be able to sell on its platform. In fact, there are so many fees that jokes run rampant in Amazon circles about "fee-fees."
Amazon's FBA fees nominally cover you for four primary activities: storing, picking, packing, and shipping. The typical margin impact of FBA fees is somewhere between 25-40%, making it the biggest offender to your profit. And this number can vary wildly, depending on the size of your packaging, where it is shipped (typically), and other associated costs like long-term storage of inventory. Check out this article to learn more about FBA fees.
Product returns are something that makes all Amazon sellers cringe, but they're a reality of doing business. Returns have to be kept in check actively, and the effort surrounding that should be central to what you do with customer service. If too many returns occur, your product listings could take a hit, slowing your sales velocity substantially and, by association, damaging your reputation as a seller. Products returned from most categories cause somewhere between a 2-5% effect on your profit margin. Read more about how the product life cycle affects your ad spending.
Amazon Seller Promotions are another necessary evil that Amazon sellers must manage to ensure sales velocity stays on track. So you don't have to suffer too many valleys among the peaks of your sales. Anytime you're going to run a promotion for a product - whether it's a discount code, lightning deal, or something else - you have to consider the margin impact that deal will have. It's tempting to go bargain basement for a day or two to rack up as many sales as possible - especially on a product within your line that's struggling. But it could have an unintended consequence if all of your profit margins disappear in the process.
Taxes & Value Added Tax (VAT)
Taxes and VAT vary quite a bit depending on where your customers live. For example, tax rates can be as high as 27% in countries like Hungary, and as low as 17% in Luxembourg.
When you have an idea of your median tax rate, it's much easier to determine how to properly position your prices if you’re selling to customers across multiple countries. In addition, this understanding prevents taxes from killing your profit margin and allows you to bake taxes into what you charge for the product.
You have to do this, though, or taxes will constantly eat up your margins when customers from countries don't anticipate purchasing your products.
The term “profit margin” too often becomes a catch-all for the several types of margins that Amazon sellers must consider.
3. The Three Types of Amazon Profit Margins
There are three types of Amazon profit margins you need to manage as an Amazon seller actively:
- Operating profit margin
- Gross profit margin
- Net profit margin
Let’s check these out.
What is Operating Profit Margin?
Operating profit margin is a calculation of how much every dollar of sales - before taxes, that is - ends up as operating profit for your business. Operating profit is the simplest calculation to help with a high-level view of your business’s profitability without getting into the weeds of the smaller factors that affect profit.
What is Gross Profit Margin?
Gross profit margin measures how much money remains following a sale after you strip out CoGS and other costs associated with manufacturing, packaging, branding, and selling your products. This measure of margin is often where Amazon sellers trip up. They underestimate how many different factors play a role in associated costs and end up with an inflated view of how much the gross margin is. The inverse is rarely true.
Here is the formula for gross profit margin:
(Total revenue - CoGS)/Total revenue = Gross profit margin
To accurately identify gross profit margin, you have to have your CoGS down to the decimal point. It seems like we’re hammering on this point, but it’s because it’s so important. If your CoGS are off, everything else will seem skewed, and the data you have available to make business decisions will also skew.
When you have full confidence in your gross profit margin as a seller, it’s much easier to pursue product opportunities that make sense for your continued bottom-line growth. It also helps you identify areas of inefficiency you can mitigate.
What is Net Profit Margin?
Net profit margin has a simple formula:
(Sales - business expenses) / total revenue = Net profit margin
In this scenario, business expenses include payroll, taxes, FBA fees (if you have them), promotional costs, costs of returns, and other associated costs.
Your net profit margin percentage is directly proportional to the amount of money you make as an Amazon seller per $1 of sales of your goods. So, for example, if your net profit margin percentage is 40% and you make $10 in sales, $4 of that sale goes directly to your pocket while the rest goes to the costs we’ve outlined in the previous examples.
With a clear picture of the six profitability factors and how they affect each of the three types of profit margins, it’s easier to think tactically about what you can do to control how your margins end up actively, rather than falling victim to them due to poor planning.
4. How to Actively Control Your Amazon Profit Margins
Controlling your profit margins on Amazon is not a reactive process. If it is, your margins are suffering. Managing your profit margins on Amazon is a proactive process.
There are seven specific tactics you can employ to make sure you’re getting the biggest bang for your buck whenever possible:
- Always be evaluating if you need to reprice your products.
- Purchase your inventory with a credit card.
- Consider how you can bundle products together.
- Try buying out your supplier now and then for greater control.
- Make sure you’re in line with your supplier’s changing costs.
- Capitalize on out-of-stock items.
- Better yet, sell items that consistently go out of stock.
Monitor Your Inventory to Know When to Reprice Products
Constantly monitoring your product lines to see where you need to change prices on products is one of the easiest ways to protect your profit margins. You can rest assured the competition is doing this all the time, so you must do the same to stay competitive. Prices change on Amazon perpetually as sellers fine-tune their profit margins, and it’s your responsibility to mirror that activity. A really great way to accomplish this is by using DataHawk’s Amazon Product Monitoring tool. This software manages, tracks your inventory, analyzes your competitors inventory and strategies, allows process automation, and more.
The easiest way to do this is to use a repricing software you trust and can depend on to provide you accurate data as prices fluctuate in your niche. So start here, and consider the other secondary tactics. The right prices alone can help you develop winning profit margins.
Purchase Your Inventory With a Credit Card
It’s tempting early in your career as a seller to use platforms like PayPal or Payoneer to purchase inventory. These platforms work well with e-commerce purchases and are relatively hassle-free. However, convenience comes at a cost. Platforms like these have a business model centered around taking fees from you as a seller to build their profit. You have two choices here: eat the fees and the effect on your margin, or pass the cost to your customers.
Neither is very palatable.
Purchasing inventory with a credit card balances these transactions. While you’ll pay an Annual Percentage Rate (APR) for purchases, you’ll also build up points, cash back, or other perks associated with being a credit cardholder that can benefit your business later.
Think of credit card transactions as a balanced financial move rather than one where you’re bearing the majority of the financial burden.
Bundle Products Together
Bundling products together is almost risk-free for you as a seller. Buyers get the satisfaction of purchasing a few complementary products together in one, cost-saving transaction. They end up spending much less than if they would have bought each product individually.
When customers purchase these bundles, you get the increased profit margin from the total sale, and at the same time, you can move your products that tend to linger in the warehouse for too long to ditch the long-term storage costs Amazon loves to hit you with.
Best yet, you’re never married to these bundles. If they fail, it doesn’t matter. All you have to do is take them apart and go back to selling the products individually.
Buy-Out Your Supplier to Achieve Greater Control
When your supplier is about to run out of a product that’s been selling well, why not take the rest off their hands by buying them out? When you do, you earn much greater control over the remainder of the product and the ability to raise your prices while your competitors wait on the market to center for them to be able to fulfill orders.
You might also be able to buy remaining inventory from your supplier at a discount if they like the idea of having a bulk payment in their hands to use as operational capital.
Watch Your Supplier’s Changing Costs Closely
Regardless of how big your supplier’s inventory is - and the number of products they’re working with - it’s essential to stay on top of their changing costs so you can align your finances. Unfortunately, this is impossible to do manually, so you’ll need to grab a dynamic analysis tool to help you along the way. Watch closely for price drops on products as well. These drops provide a big profit opportunity to capitalize if you move quickly to fill in the gaps.
Capitalize On Out of Stock Items
A great tactic is to be on the watch for items that suddenly become out of stock and jump on those as quickly as possible to get the product shipped to your Amazon warehouse. However, before you jump the gun, make sure these items also have a good sales rank so you don’t send your warehouse many items that will sit there because the sellout was an anomaly.
If people are looking to buy a product, they couldn’t care less who’s selling it. So if you can replenish stock for a popular item quickly, you’ll be sure to reap the benefits.
Better Yet, Sell Items That Consistently Go Out of Stock, Yourself
Now, let’s pause for a second. There’s a reason why this is 7th on our list of seven. Selling items that consistently go out of stock is a much riskier strategy than the others preceding it, but it can also be very lucrative if you pull it off.
The tactic is straightforward: Watch for products that consistently go out of stock, grab some from suppliers, then wait. Then, when the products go out of stock, place them in your product mix at much higher prices than were available most recently for the product. Simple supply and demand, after all, right?
Well, not so fast. Buyers may not be willing to bite on the exorbitant price, opting instead to be patient if their item isn’t a must-have or time-sensitive. Worse yet, you could get a reputation as a poacher who’s trying to take advantage of customer vulnerability or lack of knowledge. Your reputation can impact your ratings, not to mention sales, so be careful.
5. In Conclusion
Maximizing your profit margins on Amazon takes some careful, deliberate work. It requires a deep understanding of the factors that affect profit margins, how to actively calculate and manage the different margin types, and tactics to employ for success.
There’s a fair amount of trial by fire involved here. Like anything else on Amazon, you will learn by doing, but it doesn’t hurt to have some best practices to follow and tools to access to help you down the path of learning to be profitable consistently.
Check out DataHawk’s extensive suite of products and resources that arm you with the data and thought leadership you need to do things right and influence your bottom line growth in the process!
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