How to Protect Your Amazon Profitability From Outside Factors
by Cyndi Thomason, on June 11, 2019
As I write this, the trade war with China is escalating and there’s a lot of talk about increasing tariffs. It’s unclear where this will settle out, but as eCommerce sellers, you need to be concerned with the impact it will have on your Amazon profitability. There are many factors that may impact your gross profits and we recently completed a case study with a fictional company, ACME, Inc. to model these factors. Perhaps these models will help you predict how your profitability on Amazon will be impacted by similar factors.
First, let me tell you a little bit about ACME. The business began selling on the Amazon marketplace in 2015 in the pet supplies and home improvement categories. Their products have an average price of $45 and their sales have reached seven figures. They have eight employees and they lease a warehouse and office space. ACME manufactures in China and imports most often by sea, replenishing FBA inventory weekly. (Remember, ACME is not a real company; they are a composite of many companies that we’ve worked with over the years.)
ACME’s current financial picture is strong. From the balance sheet, they have $3.2 million in assets with $1.4 million of that as inventory. They have $1.1 million in debt or liabilities. All of it short-term, either as accounts payable to their inventory vendor or as credit card debt that they use in operating their business. This leaves them with working capital of $2.1 million. The Profit and Loss statement shows that they have grown rapidly from less than a $1 million in sales in 2015 to over $14 million in 2018.
If we look at 2018 alone, you can see gross profits of $3.7 million.
A Look at Factors That Can Drive Amazon Profitability
How does their world look if we change those factors that can drive Amazon profitability? We’ll examine the following:
- New Tariffs
- Product Cost Decreases
- Amazon Fee Increases
- Use of Air Freight vs. Sea Freight
- Run Lightning Deal
Here is the new gross profit graph demonstrating a 25% increase in tariffs. You can see that the profits decrease to $2.2 million down from the $3.7 million shown earlier.
As we examined each of the factors, you can see how they impact both the Gross and Net Profit for ACME.
Another factor that we examined was Amazon Lightning Deals. If you’re invited to offer a Lightning Deal, is it good for your bottom line? We reviewed the profitability per unit in this analysis. As you can see, the gross margin line is quite thin.
Here’s how the numbers work in this one example for our ACME product.
Control What You Can
As you already know, there are many factors impacting your profitability, several of which are outside of your control. No matter your efforts, you are unlikely to have the option of removing tariffs and Amazon fees. You can, however, understand the impact of a Lightning Deal, reducing product costs and shipping by sea. Use that understanding to work on factors you have some control over to improve your profit margins and overall Amazon profitability.
In the meantime, you can build your rainy day fund to help you weather those factors you cannot control. By implementing the Profit First Cash Flow Management program, you can build that fund by setting aside funds in your Profit Account. The Profit Account has two purposes. First, you will take a 50% distribution from the account each quarter to reward your role as a business owner. Second, the remaining 50% will continue to grow to be available for your rainy day fund. To learn more, check out Profit First for Ecommerce Sellers.