3 Steps to Ensuring Profitability on Amazon
by Liz Adamson, on December 8, 2015
A friend once told me that the field he worked in was so cutthroat that most business owners were either losing money or losing money and just didn’t know it yet. His observation can be applied to many industries, and it rings especially true for Amazon sellers. It can be very easy for third-party sellers to bleed cash with every sale and not know it until it’s too late.
One client who was relatively new to Amazon asked me to help calculate his profitability for a couple of product lines. Adding up all his cost of goods, shipping, Amazon fees and overhead expenses for each product, we found the expenses for his primary product line were almost equal to his sales. He clearly wasn’t making enough money to reinvest in his business or even give himself a decent paycheck.
Here are three steps you can take to ensure that with each sale you are putting cash into your pocket, and not just Amazon’s.
Understand What Amazon is Charging You to Sell on Their Marketplace
You should have a record of these fees for each product you sell. With a professional selling plan, there are three sets of fees that go into every sale:
- Referral Fee. This fee usually ranges from 6%-15% depending on the category you are selling in. This is a percentage of the total sales, which includes shipping and gift wrap fees. In most categories the minimum fee is $1.
- Variable Closing Fee. For media products only, it’s $1.35 for each media item sold.
- FBA fees. For sellers using FBA there are monthly inventory fees (which vary depending on the time of year), order handling, pick-and-pack and weight handling fees. These fees are a little more complicated and vary by the size of your product.
These three sets of fees can be found for each of your listings in the Fee Preview report (found in Seller Central under Reports > Fulfillment > Payments). This report does not include your monthly storage fees so you’ll need to add those in. You can calculate them using the calculator on Amazon’s Inventory Storage Fee help page. RestockPro, in addition, tracks all three of these fees for you.
After Calculating Amazon Fees for Each Product, Add Up Cost of Goods
Be sure to calculate the per-unit cost of the shipping expenses involved in getting your inventory from the manufacturer to the Amazon Fulfillment Center. Also include the cost of any required prep such as poly bags and labels. Subtract all expenses including Amazon fees from your retail price, and when you're done you will have something that may look like this:
Address Whether the Gross Profit is Enough to Cover Operational Expenses
These expenses include advertising, promotions, returns, software solutions, office expenses, people expenses and any other operational costs incurred in running your Amazon business. If you have multiple sales channels, you will need to determine what percentage of your fixed costs are specifically used for your Amazon sales. Add up these costs for the month or year, divide them by the total units sold on Amazon in the same period and you’ll have your overhead costs per unit.
In this example, if you subtract the $3 in overhead costs from the $6.38 in gross profit, you are left with $3.38 or a 23 percent net income on this particular product. You will need to decide if this percent of total sales number meets the goals of your business or not.
Calculate for All SKUs
So what’s next? These calculations should be done for every SKU that you sell on Amazon. With these calculations in hand for each of your products, you will have the information you need to keep your Amazon business profitable and growing. You will know exactly which products are making you money and which products are costing you money to sell; and you can adapt your pricing and product mix accordingly.
Ensure Profitability on Amazon
Don’t let Amazon take all the profits and become the kind of business owner who discovers profitability problems only when it’s too late.
RestockPro is also a great way to measure your profitability on Amazon. Try it free today.