Every seller knows that in order to succeed, you need a good margin on Amazon. However, not every seller knows exactly what that percentage is. But that’s okay — Repricer is here to help. We’ll dive into profit margins, how you can calculate one that works best for you and what is a good ROI for Amazon FBA.
The Types of Margins on Amazon You’ll Encounter
There are two types of profit margins on Amazon: operating, and gross. Your operating margin is how much money you can put back to the business after sales, and it includes fees and expenses. Your gross margin is similar, but counts all the fees in totality from start to finish.
And when it comes to fees, these are the ones you can expect to encounter.
- Seller Account Fee: This is how much you pay Amazon each month to have a Seller Account. The basic plan charges $0.99 per item sold, while the Professional version charges $39.99 for unlimited sales.
- Referral Fee: Whichever category you sell in, Amazon will charge you a fee on every sale you make, which is a percentage of the product’s price.
- FBA: There are tons of benefits to using FBA, but you do have to pay fees for it (monthly inventory storage fee, and fulfilment fee per unit).
- Variable Closing Fee: This is how much gets charged on shipping the item and gets taken off the grand total of the sale.
How to Get a Good Profit Margin Going
Let’s start off with the simplest: the ‘3 times rule’. This means that whatever you paid for an item, you should sell it for three times that so you can get 100% return on investment after all fees.
For example, if you paid $1 for something, you’d sell it for $3 — the first $1 would cover what you paid for the product, the second $1 would cover fees, and the third $1 would be your 100% return on investment.
But that’s highly simplistic and won’t always work, especially when you factor in just how many items and categories there are on Amazon. So, let’s approach it from a different angle.
Consistency is of Higher Value Than Inconsistent Huge Margins
If you’re faced with the choice of selling two items, one at a 10% margin and another at a 100% margin, which would you choose? Naturally, the latter.
But what if we muddy the waters a bit by stipulating that the lower-margin item has a sell rate of 90% and the higher-margin item has a sell rate of 1? Now, which one would you choose?
Unless your goal is to sell a ridiculously expensive item once and retire from Amazon, your better bet would be to sell the lower-profiting item that sells more often and more consistently. This is a much more sustainable way of doing business than the one-off. Plus, it gives you more options to play around with variable costs, which we’ll take a look at next.
Manipulating Operational Costs to Affect Profit Margin
The good (and not-so-good) part of selling on Amazon is no number ever stays the same. While it can make it tricky to 100% predict costs and margins, it does give you a tremendous amount of flexibility to affect both.
Use marketing and advertising as an example. Say you decide to funnel 5% of your profits into marketing and advertising until you reach X dollars — this temporary investment might eat into your profit margins and cut it down to, say, 20%, but once your campaign is over, if it was successful, it could lead to a spike of 45% profit margins, meaning your one-time cost led to a higher profit margin over the long run.
Increase Average Order Value (AOV)
A very effective method of improving your profit margins is by increasing the average order value of your customers. The simple act of getting your customers to purchase more from you or by choosing a higher-priced item can certainly make your profit margins look a lot healthier. There are a few ways to do this:
Product bundling is about combining complementary products and is a highly effective strategy for boosting your average order value (AOV). This approach benefits both you as the seller and the customer, as it offers increased value by showcasing another product that can further address their needs. An example of this could be if a seller sells filtered water jugs, a great complimentary product could be to also sell water filter cartridges.
By offering incentives such as discounts, free gifts, or free shipping for orders over a certain amount, sellers can encourage customers to add more items to their cart and spend more money in a single transaction. These incentives can be particularly effective during peak shopping periods, such as holidays (Christmas) and special events (Black Friday), when customers may be more inclined to make larger purchases. Additionally, by providing incentives for larger orders, sellers can also increase customer loyalty and encourage repeat business, which can have a positive impact on their overall sales and revenue.
Sell at a Higher Margins Than Your Competitor
Another way you can affect which way your profit margin goes is by closely monitoring numbers for a set period of time, like 1-3 months, and evaluating which products are doing well and which ones might need to be scrapped.
If you find certain items are hanging around Amazon warehouses and collecting long-term storage fees, a way to increase your profit margin might be to lower the prices (or bundle the products with something else) to get rid of them quickly instead of paying the long-term storage fees.
Calculate how much you’re paying on each item long-term, then lower the product’s price by less than that. For example, if you’re paying $0.50 a month on a knickknack’s long-term storage fees and it costs $2, lower the price to something like $1.75 and advertise the heck out of it (and then strongly evaluate if it’s worth keeping around).
Knowledge is power and knowing the numbers of what your products are doing for you is the first step in calculating and maintaining strong margins on Amazon. Once you do that, the next step is regularly repricing products so you’re always as competitive as possible. But to do that, you need an all-star app like Repricer. The best part? You start off with a 14-day free trial when you sign up today.