Amazon Sellers should be aware of their true profit margin in order to make smart decisions when investing in their business. Knowing your true profit margin allows you to accurately assess the profitability of different tools, services and products, as well as determine whether a particular strategy is yielding desired results.
It can also help identify areas for improvement – such as investing in marketing or using a more efficient shipping process – so that Amazon Sellers can gain more control over how much money they make from each sale. With that said, understanding one’s true profit margin is key to staying competitive in the ever-changing world of ecommerce.
So for better appreciation of this critical metric, we will touch base on the following topics:
- What is True Profit Margin?
- The Importance of Understanding Amazon Profit MarginsÂ
- How To Calculate Your Amazon Profit Margin
- What is a good profit margin for an Amazon business?
- Costs Affecting Your Profit MarginÂ
- Strategies To Improve Your Profit Margin & ROI
What is True Profit Margin?
True profit margin is the total amount of money that you make from a sale after deducting all associated costs, such as platform fees, cost of goods, returns/refunds, advertising, and shipping.Â
There are two types of Amazon profit margins every seller must concern themselves with: Gross Profit Margin & Amazon Net Profit Margin.
Gross Profit Margin vs Net Profit Margin
Gross Profit Margin typically refers to the profit after deducting your cost of good sold (COGS) from your total net sales.Â
Gross Profit Margins indicate how well the Seller is generating money while managing associated costs. It practically validates your business strategy.
Second is Amazon Net Profit Margin, which refers to the profit left after ALL costs such as COGS, platform fees, taxes, debts and overhead expenses are considered. This basically determines your business’ real profitability, indicating how much you can reinvest into the business or even take home.
The Importance of Understanding Amazon Profit MarginsÂ
The importance of knowing your true profit margins is far-reaching. This helps sellers avoid costly mistakes such as mistakenly pricing products too low that they sell for a loss, or too high that the inventory can’t move and is already stacking hefty storage fees. Moreover, by not knowing true profit margins, sellers cannot accurately assess their products’ true performance and may end up having faulty sales expectations.Â
Knowing your actual and prospective margins are also helpful when dealing with:
- Product Sourcing – It’s essential to know how to accurately calculate profit margins and project profitability when sourcing products for your store. True profit margins guide sellers toward smart strategic decisions in order to create an inventory full of profitable items.
- High Revenues, Low Profit – High revenues can be a double-edged sword: while it can be exciting to see that numbers are up, they may mask underlying issues with management or expenses that could lead to lagging profits.Â
- Maintaining Profitability – To keep a business profitable, it is necessary to be vigilant with numbers. Maintaining a successful business requires constant optimization of cost and margins to keep up with the evolving market and supply chain.
How to Compute For Your Profit Margin
Manually compute your Amazon FBA profit margin with the cheat sheet below. Otherwise, you can explore Amazon’s FBA calculator or subscribe to third-party profit calculators to help you out with the process.
Before computing these figures, knowing where to draw accurate information is vital. Existing sellers can leverage Seller reports to determine accurate figures. After all, using inaccurate data is counterintuitive. Learn how to use seller reports to calculate your profit margins in this blog.Â
Benchmark: What is a good profit margin for an Amazon business?
It goes without saying that the higher, the better. However, on average, Sellers can make a decent profit by staying between a 15%-20% profit margin, while anything lower than 5% will put any business at risk.
There are a lot of variables that affect margin performance so there isn’t a one size fits all approach to determining the sweet spot that would work for your portfolio. Hence another reason to gain a good understanding of what costs and conditions are affecting your margins.
Understanding Costs Affecting Amazon Profit Margins
The profit margin of an Amazon business can be affected by a variety of costs, including but not limited to
Landed product costs: The cost of making the product, freight and import charges.
Amazon Costs: Seller account fees, Amazon fulfillment fees, inventory storage fees, variable closing fees, referral fees, and long-term storage fees,Â
Operating costs: Covers overhead expenses such as Amazon advertising spend, customer service costs, software and technology fees, rent, shipping and handling fees.
Other Costs: These may include taxes and fees associated with doing business on Amazon. All these costs should be factored in when calculating the profit margin of an Amazon business.
Strategies To Improve Your Amazon Profit Margin & ROI
Maximizing profits doesn’t have to be a guessing game. Consider these smart strategies to boost ROI and maximize margins, no matter what the market looks like.Â
Tip #1: Increase Amazon Profit Margins Without Raising Prices
Expand your margins by cutting on controllable costs such as purchasing costs. You may lower purchasing costs with the following recommendations:
Negotiate Dynamic Pricing. Continuously negotiate with your existing supplier and ask for the lowest rate based on dynamic pricing (not personalized pricing). Often confused with dynamic pricing, personalized pricing is the rate your supplier gives you based on negotiations built on relationships or certain characteristics, while dynamic pricing is the pricing that is dependent on economic factors such as supply & demand. Be knowledgeable about the movement of the market in a particular product category and sharpen your negotiation skills to increase your chances of copping your goods for lower prices.Â
Reverse Sourcing. Another way to lower purchasing costs while increasing sales efficiency is through reverse sourcing. Instead of flipping through wholesale catalogs to find the items you want for your store, why not reverse the process? Reverse sourcing is an effective way to get started with wholesale—pick one product you’re interested in and start from there. Find wholesalers that already carry what you need, compare their offers with one another and use supplier offers as leverage during negotiation. This way, you can cop the best deal and you won’t end up having inventory that you don’t know how to sell.Â
Referrals & Research. Lastly, you can also ask for referrals or monitor high-performing stores that carry the products you’re interested in, and do your research to trace their source.Â
Tip #2: Consider Going Low and Steady
In this cutthroat retail world, Amazon sellers face the challenge of staying competitive. Although low prices mean smaller margins, they can be your ticket to success if you’re seeing great traffic and that product is generating profits in the long run. Assess whether lower-priced listings are really your best bet for sustainable profit growth through Amazon seller sales reports, or with the help of Lab 916’s professional Amazon Consultants.
Tip #3: Expand Your PortfolioÂ
Adding new items to your existing product line on Amazon can be a great way to increase profit margins and diversify your business. With Amazon’s reach, you can access millions of customers worldwide hoping to find exactly what you can offer.Â
This could mean selling more of your signature products or expanding into new lucrative categories such as home goods or apparel. This can also be done by adding new products that are related to your existing ones, or by creating new product bundles (you can even bundle high-performing products with slow-moving ones just to keep your inventory moving). By offering a greater variety of products, you’ll be able to attract more customers and bring in more profits.
Tip #4: Manage Inventory
Optimizing inventory is essential for any seller who wants to boost its ROI. While inventory costs can be high, taking a proactive approach to managing it can lead to savings in the long run – both in terms of lost sales due to unavailability of items, and by reducing inventory holding costs that subsequently increase your margins.Â
This is because careful inventory management makes sure that no item ever needs to be restocked when demand hits or is left unsold, resulting in increased revenues and lower costs. Inventory optimization also allows sellers to respond quickly to trends and customer demand, therefore further increasing their profits.
You can start assessing your inventory health by utilizing Amazon’s Inventory Performance Index (IPI). The IPI is a score that ranges from 1-1,000 that Amazon uses to evaluate a seller’s inventory management. This captures low and excess inventory that can inform strategic decisions in replenishing your products. And also, when you have a lower IPI score, more likely you are to be penalized with higher fees and lower your Buy Box eligibility — so take inventory management seriously.
Tip #5: Nail Your PPC Strategy
As you probably know, Amazon PPC is an auction-style system where advertisers bid on keywords related to their products. When a customer searches for a product on Amazon, the sellers who have placed winning bids on those keywords will have their ads displayed in the search results.Â
You can optimize your campaigns with the following recommendations:
Target high-profit margin products with your ads. This means focusing your PPC efforts on products that have a high markup or profit margin relative to their cost of production and other associated fees. By doing this, you’ll be able to maximize your profits while still reaching potential customers who are interested in buying these items.
Use Negative Keywords. Negative keywords allow you to exclude certain terms from appearing in your ad campaigns so that they don’t show up when someone searches for them. For example, if you’re selling high-end jewelry, you may want to exclude words like “cheap” or “discount” so that people searching for those terms won’t see your ads and click through without making a purchase.
Do A/B testing. Testing different ad copy and creative elements such as images or videos. By testing different versions of each element, you can determine which ones perform best and focus on those when creating new campaigns or optimizing existing ones.
Lastly, don’t forget to track and monitor your PPC performance. TACoS (Total Advertising Cost of Sales), Amazon’s hottest advertising KPI has become an important measure to evaluate an advertisement’s effectiveness and its potential impact on your business’s long-term growth. By tracking this metric, you can better understand how an advertisement or Amazon PPC campaign affects your profits and product sales.Â
Additionally, by building and analyzing advertisements that effectively leverage target audiences, organic visibility can be increased. This approach helps boost organic sales if done correctly. Therefore, tracking TACoS is essential to maximize the return on investment from any Amazon-based advertising or marketing campaign.
Tip #6: Leverage Forecast & Trends
Utilizing forecasts and trend data available on social media, via Amazon analytics and elsewhere can give your business a major boost. Understanding the latest consumer trends allows you to stock items that people will actually be interested in while offering insights into what your competition is doing. Moreover, this enables you to make informed decisions about which products are worth sourcing for maximum ROI and Amazon profit margin.Â
Final Thoughts
In summary, it is essential to carefully analyze your Amazon profit margin and consistently make business improvements to drive positive ROIs. However, accurately calculating profit margins and executing other complex financial or management tasks can be daunting and frustrating for those who manage their Amazon seller accounts on their own.Â
Luckily, Lab 916 is here to assist. Our Amazon Experts take the grunt work of assessing your business’ profitability and taking the necessary steps to maintain a successful and sustainable Amazon business.Â
Explore Lab 916’s range of Amazon Seller Services:
- Amazon Account Management
- Listing Optimization
- Amazon PPC Management
- Storefront Development
- A+ Content Design Development
- Amazon FBA Consultancy
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