Are You Really Making Money On Amazon?
By iLoveToReview | March 11th, 2015
Sometimes when you’re building an Amazon business it feels like you’re on a slow road to nowhere. The Amazon Seller app on your phone tells you that you’re making sales and the exciting little graphs make your heart flutter, but for some reason there’s a knot in your stomach and a quiet little voice that keeps whispering, “Am I really making money on Amazon?”
Sadly, many Amazon newbies have found their way to Amazon through mass-marketed courses and seminars where the gurus only ever talk about gross sales and never about margin, fees, advertising costs and the devastating impact that growth can have on your day-to-day cash-flow. These are all the unsexy parts of owning a business but they’re the only parts that matter if you want to be financially free.
When it comes to selling on Amazon, it’s not about your “turn over”, it’s about your “left over”.
Years ago I used to raise money for early-stage companies and part of that job entailed pitching various businesses to wealthy investors in an effort to get them to invest. One day, one of the richest guys I ever pitched to cut me off mid-sentence as I began talking about the “exploding turnover” (revenue) of a company I was representing. He said to me:
“Adam, don’t tell me about the turn over, just tell me about the left over. How much money are they actually keeping out of all this activity?”
Therein lies a very powerful lesson, especially for independent entrepreneurs who are building Amazon businesses to pay bills today, and hopefully create a future for the families tomorrow.
Why comparing other people’s “outsides” with your “insides” is a terrible formula for success on Amazon.
I recently went to an Amazon seller conference with more than 3,500 people in attendance. It wasn’t run by Amazon itself but rather a company that sells courses on how to make money on Amazon. Most of the room consisted of everyday people wanting to get ahead by building a business on Amazon.
As each speaker was introduced, all that was disclosed about their Amazon business was their gross sales and how long they’d been selling on Amazon. For a new Amazon Seller, hearing those big turn over number gets them excited but those numbers are meaningless if there’s little-to-no-profit. I am sure that wasn’t the case with most speakers, my point is that it’s easy to start thinking “Am I the only guy not making $50,000 a month here?” The mistake is that people compare other people’s “outsides” with their own “insides” and it is devastating to their self-esteem. You’ll never really know what others are making and it doesn’t really matter. What matters is what YOU can control.
A FREE tool to help you figure out if your Amazon ladder is on the right wall.
In life and in business, before you start climbing a ladder it’s probably wise to make sure that you’ve lent it against the right wall so that when you get to the top, you like the view. In the context of Amazon, profit is the destination (the wall) and your product is simply the ladder you choose to get there.
So before you start climbing, you need to understand exactly how much REAL profit there is in your product (your ladder) and to do that you need to be very honest and you need this Excel spread sheet. Here’s a short video showing you how to use it and the power of knowing your numbers.
Why many Amazon Sellers are chasing ghosts
Over the years I have spoken to literally tens-of-thousands of small business owners and you would be amazed at how few know exactly how much money they get to keep out of every sale they make. That part (the left over) is the reason we all go into business yet few know how to calculate it accurately or even what an acceptable net profit margin is.
In traditional businesses I have owned, I usually try to sell products or services that break down as follows:
- 1/3 for the cost of the product itself. This is called “Cost Of Goods Sold” or COGS for short (COGS is a common accounting term worldwide).
- 1/3 for operating expenses.
- 1/3 net profit.
Put another way, if I sell it for $90 I would be buying it for $30 and I would be expecting to earn another $30 profit for all the capital, time, effort and risk required. That’s a net margin of 33% which is very high in most businesses but in the context of Amazon, it is extremely high because Amazon is one of the most competitive marketplaces on earth.
As an Amazon Seller, how much margin is reasonable?
Here’s something to think about.
Apple is the most successful retailer on the planet and one of the most profitable. Last year (2014) their net margin was around 22%. Coca Cola achieved about 15% and Macy’s, the #1 department store in the US, achieved just over 5%. So when I say that 30% is an exceptional net margin, I’m not kidding.
When you sell on Amazon, you are entering the #1 online marketplace in the world and the most competitive by far. Price is a huge factor in how successful you will be so you need to be very realistic about what retail price you will actually achieve on a sustainable basis and that takes research and the ability to overcome your own bias and optimism toward your own products.
In my mind though, I certainly wouldn’t want to be selling anything where my net margin is less than 20% and I would like to shoot for 30% or more in most cases. That’s after everything, INCLUDING the cost of buying a customer through paid traffic, or paying for people to drive traffic in other ways.
The 7 Costs Of Doing Business On Amazon
Assuming that your orders are Fulfilled By Amazon (FBA), here are the 7 costs that we all pay for one way or another:
- The cost of the actual product from your manufacturer (COGS)
- Freight costs and import duties from the manufacturer to Amazon.
- Amazon’s commission on every sale (average of 15% on most items)
- Fulfillment fees
- Weight handling fees
- FBA fees
- The cost of driving traffic to your listing or optimizing your listing so it ranks
Here’s a real screen shot taken from inside my Seller Central account that shows how much I lose on every sale of one particular item I sell.
That is 19% off the top, before I’ve paid for the product and before I have paid for advertising or my time (or someone else’s) to drive people to this listing.
Now let me show you something else that almost nobody will ever show you. The true cost of “buying” a sale using Amazon ads.
This screen shot shows four products that I was testing Amazon ads on. “ACoS” is how much the ads cost as a percentage of the retail sales they made:
On one product it was costing me 42% of the retail price to make a sale through advertising, on two others I made no sales at all, and on a fourth product it costs me 9.5% per sale to buy a customer. So let’s do the math quickly on both scenarios where there’s data – 9.5% and 42%.
* The examples below assume that I sell the product for $100 and that my manufacture cost is 1/3 of that ($33).
The 42% example
– $33 manufacture cost
– $19 (19% in Amazon fees as shown in Amazon Profit Calculator)
– $42 Amazon ads
= $5 profit
Net margin = 5%
The $100,000 a month idiot
In the above example, if I was selling 1,000 units a month I could boast, “I’m doing $100,000 a month on Amazon”. In reality, if I am importing this product from China by boat (like many people do – including me on most products) I’m probably holding three months worth of inventory (about $100,000), to make a measly $5,000 a month net profit.
Why three months of inventory? Because in most cases, if you are importing by boat from China, it will take 3-4 months for:
- Your supplier to make and pack your order.
- You supplier to ship that order to the port in China.
- For freight to travel between China and the US.
- For freight to process at the US port and then ship to Amazon’s warehouses.
- For Amazon to process your freight into inventory which is ready to sell. This alone can take a month at certain times of the year.
For these reasons, combined with the fact that the worst thing you can do as an Amazon Seller is run out of stock, you need to keep at least 3 months supply in the warehouse or in transit at all times.
Now think about growth and other risks. On these margins I would need another $100,000 of inventory just to earn another $5,000 profit each month. What if a new competitor comes in with deeper pockets and now my ad cost rises by just $5/converted sale? Now I am doing it for free! Clearly, a 5% margin just won’t cut it.
The 9.5% example
– $33 manufacture cost
– $19 (19% in Amazon fees)
– $9.50 Amazon ads
= $38.50 profit
Net margin = 38.5%
Now we’re talking. At 38.5% I can do something!
The truth shall set you free
As you can see, two of the most important things in respect to how happy and profitable you are going to be as an Amazon Seller, is how cheaply you can buy customers on Amazon and how quickly you can get stock from your supplier and into Amazon ready for sale. Those variables, above all else, will have a massive impact on how successful you’ll be as an Amazon Seller.