Discover How Leading Brands Navigate Amazon Profitability
Amazon’s marketplace is becoming increasingly competitive, and ensuring your brand is profitable is a vital factor for success. Knowing the different elements that play into Amazon profitability, and having the right tools to maximize them, can mean the difference between success and failure on the platform.
To help brands navigate this challenge, Envision Horizons, Getida, and EcomBalance have partnered up to create the most comprehensive guide to understanding and improving profitability on Amazon. This resource will help sellers identify key factors influencing their profits while offering actionable solutions to boost product sales and maximize profitability.
Download the full FREE eBook here, or continue reading for a synopsis of the Amazon Profitability eBook.
The Importance of Amazon Profitability
With over $64 billion dollars in eCommerce sales in Q4 of 2022, understanding how to play the Amazon game is of utmost importance for brands looking to expand their reach. Yet getting that reach at a favorable cost is a complex process.
The following guide should serve as a handbook for navigating profitability on Amazon. We tackle big questions like…
“How can brands survive in an ecosystem that favors constant price reduction and increased reliance on advertising dollars?”
“Does it make sense to leverage Amazon’s fulfillment network for efficiency and does it make sense to maintain price parity across the omnichannel landscape?”
For brands, this guide runs through many of the different factors that may affect profitability and based on that, provides insightful actions to increase margins immediately.
“In uncertain economic times, brands that are able to get full transparency into their profitability on any channel, not just Amazon, will win.”
-Laura Meyer
The Cost of Selling on Amazon: The Burying of Costs
Uncovering true profitability on Amazon can be a cumbersome task. The first step in maximizing your Amazon profitability is understanding the fees and costs associated with selling on the platform. These include things like listing fees, storage fees, referral fees (the percentage of each sale that goes to Amazon), FBA (Fulfillment by Amazon) fees for storing and shipping inventory, advertising costs, and more. Knowing how much each fee or cost is—and how it affects your bottom line—will help you make informed decisions about how to maximize your profits.
Breakdown of Amazon Fees: Where the Money Goes
Before reading further, it should be noted that Amazon’s selling costs are dependent on the model and/or selling relationship that a brand has with Amazon. A 1P cost structure varies wildly from a 3P seller in the Premium Beauty program, for instance. Nonetheless, the below information should provide a solid frame of reference for platform costs.
For an individual analysis of forecasted costs, please reach out directly to Envision Horizons for a custom forecast or fee audit.
Selling plan: The Individual plan costs $0.99 per unit sold, and the Professional plan costs $39.99 per month no matter how many units you sell.
Referral fees: Amazon charges a referral fee for each item sold. The amount depends on the product category. Most referral fees are between 8% and 15%.
Fulfillment fees: The cost to ship your orders depends on whether you fulfill your own orders or use Fulfillment by Amazon (FBA). LINK TO FBA CALCULATOR
Other costs: Some sellers may incur additional fees (such as long-term storage fees) or pay for optional programs like advertising or premium account services.
Amazon Profitability: Seller vs Vendor Central
Example:
What Percent of Sales Should Your FBA Fees Be?
While FBA simplifies e-commerce shipping processes, pricing for this service can be complex. Amazon FBA fees are dynamic and depend on various factors, including seasonality and the type and size of items being stored and shipped. And because of this, % of sales for FBA fees are not a fixed amount.
In some cases, FBA fees may make up a relatively small percentage of sales, while in others, they may make up a much greater share. Ultimately, it’s up to each individual seller to determine the best balance for their specific business.
The Amazon FBA Calculator
For an estimate, use the Amazon FBA Fee Calculator in your marketplace. This calculator helps you get a better idea of the costs associated with bringing your product to market. In addition to eliminating guesswork, it smooths the process and alleviates any fear of financial failure.
Utilize the calculator effectively by avoiding estimates and entering solid data gathered from your supplier. You will then be able to determine your costs per unit more accurately and determine the percentage of sales you should charge for FBA.
Measuring Amazon Profitability and Profit Benchmarking
Amazon Profitability Benchmarking
Brands new to selling on Amazon often want to know approximate profitability metrics before embarking on a new opportunity. While it’s difficult to give a blanket number across the wide spectrum of categories and businesses on Amazon, a general (healthy) contribution margin would range between 15-35%.
However, there are exceptions here! Some brands choose to operate at a loss while investing in Amazon, focusing on scaling with long-term profitability in mind. Other brands use Amazon as a customer acquisition channel, operating with low-profit margins, but benefit from the lifetime value of customers who then shop on their DTC.
Another situation in which a business might choose to sell with negative profit margins on Amazon could be for a subscription-based business, where the initial sale does not account for the majority of its revenue. An example of this could be a security camera doorbell sold for a low price on Amazon, which requires a monthly subscription fee to store security footage.
“Shifting your mindset from Amazon being a separate silo of your business from your DTC to a funnel for future customers is crucial for seeing long-term growth on the platform. Amazon’s reach can be used to propel your other sales channels forward and grow the LTV of your customer base.”
-Taylar Allan
How to Accurately Measure Profitability on Amazon
Leveraging Data to Make Decisions
Harnessing data is one of the most important steps in improving profitability on Amazon. By keeping track of sales trends, market changes, and your customer journey, you’ll be able to make informed decisions about how to do business more effectively. Using data points like average order value and customer acquisition cost will help you understand how customers interact with your store and products. Leveraging this data will allow you to identify areas where you can optimize for maximum visibility and conversions.
Envision Horizons proprietary technology, myHorizons, you can easily track and analyze your profitability at a high level, or drill down into ASIN level data.
With myHorizons, you can easily and effectively manage your Amazon listings, discover key insights, track your progress, and more. Take your business to the next level by making Amazon less stressful and more profitable. Whether you’re just starting out or you’re a seasoned pro, myHorizons will help you reach your goals. Now you can try myHorizons for free with our month-long free trial and see the results for yourself!
Understanding ASIN Profitability
It’s extremely difficult to improve overall brand profitability if you don’t know your profit by ASIN. Understanding profitability by ASIN allows for a more informed advertising budget by product. This also allows for better merchandising and knowledge of what products have longevity. There are some products that will never be profitable on Amazon.
On myHorizons’ Child ASIN Profitability page, you can view a full financial picture of how your ASIN’s expenses account for profitability. Adjust COGS for single ASINs or the default COGS percentage for all your ASINs and quickly assess how it affects your profit margins.
How to Increase Amazon Profit Immediately
Efficient Advertising: Lowering TACOS
One of the simplest ways to improve profitability on Amazon is by optimizing your TACOS, or “Total Advertising Cost of Sale”. To lower TACOS, you can do one of a few things. You can work on increasing your organic sales, you can decrease your ad spend, or you can increase the total value gained from your advertising efforts (ie. increase AOV).
Optimize Your Pricing Strategy
The importance of price to success on Amazon can’t be overstated. Price isn’t only an important signal to the algorithm, it’s an obvious conversion factor for consumers. Brands must ensure products are competing at the right price point while still maintaining the most healthy profit margins available.
Removing Excess Inventory
Removing excess inventory from Amazon that isn’t selling can help immediately improve profitability for businesses. Start by identifying which products are selling regularly and at what rate so that inventory accumulation can be based on real-time data. This allows businesses to avoid the expenses associated with keeping excess inventory in stock that won’t move.
How to Build Better Amazon Profit Long-Term
The key to successful long-term profits on Amazon is creating a strategic plan and maintaining consistency over time. From improving your COGS to efficient inventory management, a lot of strategies can be implemented to generate better margins over time. Additionally, focus on driving good quality organic traffic by optimizing listings, utilizing search engine optimization (SEO) practices, and building LTV (lifetime value).
Ultimately, generating better margins over time and scaling profitability can be achieved through careful planning, diligent budgeting, and targeted marketing efforts that resonate with your customer base.
Growing Organic Sales
Building LTV (Lifetime Value) and Encouraging High Repurchase Rates
With the rising costs of acquiring customers, brands should be developing marketing strategies that focus on both increasing customer lifetime value (LTV) and driving up repurchase rates. In other words, there is a growing focus on solutions that target improving customer loyalty; showing past customers the value of what their brand provides in terms of acquiring, retaining, and sustaining long-term relationships.
Improving CAC (Customer Acquisition Cost)
Strategies to help improve CAC on Amazon include optimizing Amazon advertising, identifying new target audiences, testing different price structures for products, merchandising differently (i.e. bundles), and evaluating the performance of campaigns to ensure maximum return on investment. One of the most effective ways to improve CAC on Amazon is through targeted keyword optimization.
Amazon SEO: Listing Optimization
For SEO in particular, the goal is to optimize the listing for the robots as much as possible while balancing out readability, salesmanship, and an accurate description of the product being sold.
The weight of each part of the product detail page (PDP) is explained in our SEO guide here. The aim for sellers should be to build a strong keyword universe and disperse those terms & phrases in every aspect of the listing.
SEO Keyword Strategy
The best way to do SEO on Amazon is by leveraging the tools & data that are available. Build a keyword universe not by guessing what terms your product should rank for, but by using Amazon SEO tools such as Brand Analytics, Search Query Performance Dashboard, Product Opportunity Explorer, and Third Party SEO Tooling (myHorizons, Helium10, Jungle Scout, etc).
Merchandising/Building Value Bundles
Physical and virtual bundling is an effective and efficient way to increase profits. Bundle packages give customers the opportunity to purchase items in bulk at a slight discount while allowing sellers to increase revenue with lower overhead costs.
“Using bundles on Amazon is a popular strategy for increasing profitability as it allows sellers to differentiate their products from competitors and offer unique value to customers. Bundles can also increase the average order value, reduce shipping costs, and streamline inventory management. With physical bundles sellers can also decrease their referral fees.”
-Samantha Evans
Improving COGS on Amazon
Negotiating with suppliers is one of the most effective ways to improve the cost of goods sold on Amazon. Building a strong relationship and good rapport with suppliers can be beneficial in more ways than just cost savings. From customizing products to increasing stock turnover rate, successful negotiations can serve numerous purposes in helping retailers reach their desired goals quickly and weather market cycles efficiently.
Providing Strong Customer Service
Providing customers with an exceptional experience is key for maintaining loyalty and increasing repeat sales from existing customers; this also helps ensure customer reviews are positive which will help drive more traffic toward your listings.
Reducing Return Rates
Amazon considers a 10% return rate to be normal- the average return rate on Amazon ranges between 5% to 15%. However, the return rate for some categories, including clothing, can get as high as 40%.
Oftentimes high return rates are indicative of a larger problem with the product or listing. Knowing your return rates and reasons on Amazon is important for proper listing optimization in order to manage customer expectations.
- Evaluate High Return Rates Within Your Catalog
- Look at Return Reasons as Valuable Feedback
- Know How Much Returns are Costing You
- Consider Offering Refunds Instead of Returns
Efficient Inventory Management
Staying in stock has a clear impact on your ability to rank on the platform, therefore affecting your overall success. Additionally, inventory management affects profitability because the more efficiently you manage your inventory the less money you’ll pay Amazon in fees.
It is also important to create an inventory management plan that ensures your account standing remains healthy. Keep track of current stock levels and understand when new orders need to be placed so that stock does not run out frequently–which would hurt performance metrics such as conversion rate.
Quality Over Quantity!
Having a catalog that is too diverse or too large could mean that you’ll have a larger number of SKUs as low-selling products. This translates into unnecessary storage costs and ultimately long-term storage fees. It’s best to trim your catalog as much as possible to prioritize top-selling ASINs and focus on a smaller quantity of individual SKUs/child ASINs.
Avoid OOO
Analyzing historical data is the key to inventory management. To avoid going out of stock ordering, reordering forecasting and replenishment reports are key.
Replenishment calculation formula:
- Reorder Rate = Average Daily Sales x Lead Time
- Buffer stock = (Max Sales Per Day x Max Lead Time for Product) – (Average Sales (Per Day) x Average Lead Time Per Order)
Repackaging Products
Repackaging products for Amazon FBA fees is an often overlooked way to save money and increase profitability. Some options to consider for repackaging products to optimize for FBA Fees include but are not limited to…
- Packaging redesign
- Shrink wrap
- Rolling vs flat lay
- Premade bundles
- Polybagging or labeling to avoid 3PL fees
Savvy business owners understand that optimizing for FBA fees includes more than just product packaging—it’s also about looking at operational processes and warehouse efficiency to make improvements that will cut costs and maximize profitability.
Catalog Strategy
It’s extremely difficult to improve overall brand profitability if you don’t know your profit by ASIN. Understanding profitability by ASIN allows for a more informed advertising budget by product. This also allows for better merchandising and knowledge of what products have longevity. There are some products that will never be profitable on Amazon.
Know your Profit by ASIN and Adjust Strategy Accordingly
With knowledge of your profit by ASIN, you can effectively adjust your strategy to lower costs and maximize returns. To get the most out of your catalog, it is important to identify both high-margin and low-margin ASINs and make strategic decisions accordingly.
For relatively high-margin products, you can increase sales through additional marketing and advertising efforts.
Alternatively, for low-margin products, it may be more beneficial to switch to higher-priced versions with better margins or offer them in a two-pack format.
By understanding how each individual ASIN contributes to revenue and costs, you are able to enact smart decisions that drive revenue while cutting expenses.
Download the Full Amazon Profitability eBook
