The Net PPM Formula & Why Amazon Vendors Must Track This Metric
November 6, 2024
by Aivy Tran-Nguyen, Marketing Manager
As an Amazon vendor, profitability is central to your business strategy—not only in terms of your own margins but also Amazon’s perception of your product profitability. One of the key metrics Amazon uses to measure this is Net PPM (Net Pure Profit Margin). Understanding and optimizing Net PPM is essential for maintaining a strong vendor relationship, negotiating favorable terms, and ultimately increasing your profitability on Amazon.
This guide will break down the details of Net PPM, explain its significance, and provide strategies for analyzing, improving, and using this metric to prioritize opportunities.
What is Amazon Net PPM?
Net PPM, or Net Pure Profit Margin, is Amazon's calculation of how much profit they can make from a product after factoring in the cost of goods sold (COGS), vendor terms (like co-op and accrual agreements), and sales discounts. It provides a holistic view of product profitability, helping Amazon evaluate which products are most beneficial to their bottom line.
In practice, the Net PPM value is the percentage profit Amazon makes on a product after all these factors are considered. For vendors, a higher Net PPM means that Amazon is more likely to view your products favorably and be open to negotiating better terms.
Shipped Revenue: The total revenue generated from the sale of the product.
Shipped COGS: The cost Amazon pays the vendor for the product.
CCOGS (Contra-Cost of Goods Sold): Vendor-provided terms like co-op agreements or accruals that offset the cost for Amazon.
Sales Discounts: Discounts provided to customers, including coupons, deals, and promotions.
Why is Net PPM Important for Amazon Vendors?
Net PPM plays a critical role in your negotiations with Amazon. It is one of the primary metrics Amazon Vendor Managers use during quarterly or annual reviews to assess product profitability and determine vendor terms. If your Net PPM is healthy, Amazon is more likely to offer favorable trade terms, while a low Net PPM may prompt Amazon to push for cost reductions or adjustments to your terms.
Additionally, tracking Net PPM helps you understand how your products perform relative to your competitors within the same category. A strong Net PPM positions you better in category-level negotiations because your products are more profitable than your competitors’, while a low Net PPM may lead to delisting or reduced exposure for your products on Amazon's platform.
How to Calculate and Analyze Net PPM
Understanding and calculating Net PPM begins with accessing the right data. You can find Net PPM metrics in Amazon Vendor Central by navigating to Retail Analytics and selecting the Net PPM report. This report provides product-level Net PPM percentages over time, which you can compare with past performance or industry benchmarks to identify areas for improvement.
To calculate and analyze Net PPM, follow these steps:
Collect Shipped Revenue and Shipped COGS: Obtain data on the revenue generated and the costs associated with each product. This data is available in the Retail Analytics section of Vendor Central.
Factor in Vendor Terms: Calculate the impact of co-op agreements, accruals, and any other contributions you provide to Amazon. These are part of the CCOGS figure, which reduces Amazon’s cost of goods sold.
Account for Sales Discounts: Include any discounts or promotions that reduce the net selling price.
Calculate Net PPM: Use the formula above to determine the Net PPM for each product.
Once calculated, analyzing the Net PPM involves:
Comparing Trends Over Time: Track how your Net PPM changes from month to month or year to year. A declining trend may indicate increasing costs or aggressive discounting that needs to be addressed.
Benchmarking Against Competitors: Compare your Net PPM to similar products in your category to understand how competitive your pricing and profitability are.
Evaluating Promotions and Discounts: Assess the impact of discounting strategies on your Net PPM. While promotions can drive volume, excessive discounting can erode profitability.
Strategies to Improve Net PPM
Improving Net PPM requires a strategic approach that balances pricing, cost management, and vendor terms. Here are several key strategies:
Optimize COGS: Review your supply chain and cost structure to identify areas for cost reduction. Negotiating better rates with suppliers, optimizing production, or finding cost-effective logistics solutions can lower your COGS and improve Net PPM.
Adjust Vendor Terms: Revisit the co-op or accrual agreements you have with Amazon. While these contributions can enhance your relationship with Amazon, it’s important to ensure that they don’t excessively cut into your profit margins. Renegotiating these terms can directly improve your Net PPM.
Refine Product Pricing: Monitor market conditions and competitor pricing to ensure your products are priced competitively but also profitably. Raising prices may boost your Net PPM, but it’s crucial to maintain a balance that doesn’t deter customers.
Optimize Product Portfolio: Regularly review the profitability of your product range. If certain products consistently yield a low Net PPM, consider discontinuing them or focusing on improving their cost structure. This can help maintain a higher overall Net PPM across your product portfolio.
Limit Over-Discounting: Discounts and promotions can help drive sales, but they can also negatively impact Net PPM if overused. Test different discount strategies to find the right balance between driving volume and maintaining profitability.
Prioritizing Opportunities to Improve Net PPM
When deciding which products to focus on for Net PPM improvements, prioritize based on the following factors:
High-Revenue Products: Focus first on products that generate the most revenue. Small improvements in Net PPM on these products can have a significant impact on your overall profitability.
Low-Margin Products: Analyze products with the lowest Net PPM to identify opportunities for cost reduction or pricing adjustments. These products may be dragging down your overall profitability.
New Product Launches: Ensure that new products are designed with profitability in mind from the start. This includes setting appropriate pricing and negotiating favorable terms with Amazon.
What Net PPM Doesn’t Cover
While Net PPM (Net Pure Profit Margin) is a valuable metric for understanding Amazon’s profit margin on your products, it’s essential to recognize its limitations. Relying solely on Net PPM as the primary measure in your trade relationship with Amazon may create an incomplete picture and even hinder a sustainable business partnership. Net PPM focuses almost exclusively on cost prices and trade terms, simplifying the vendor relationship down to immediate profit indicators. This narrow perspective favors short-term wins, often leading Vendor Managers to push for lower cost prices or higher trade investment contributions without considering broader value-adding factors.
One core issue with overemphasizing Net PPM is that it often represents Amazon’s path of least resistance in negotiations. Reducing cost prices or increasing trade terms are straightforward demands, yet they might not support the long-term growth and resilience of a vendor's operations. Essential aspects, such as improving packaging for reduced damage rates, investing in supply chain efficiencies, or focusing on free cash flow growth—factors that can enhance overall profitability and operational health—are often sidelined in Net PPM-centric discussions. These elements, which contribute to a more balanced and durable vendor-Amazon relationship, fall outside the scope of Net PPM and may go unrecognized when it is the dominant focus.
As a vendor, reframing these conversations with your Amazon Vendor Manager can help foster a more holistic approach to profitability. Instead of being restricted by cost-cutting or trade term adjustments, aim to address broader, sustainability-focused topics that impact profitability at a systemic level. By doing so, you can work towards a trade relationship that supports both immediate profitability and long-term business stability.
Setting Up for Data-Driven Net PPM Analysis
To effectively manage and improve your Net PPM, it’s important to establish a data-driven approach. Here are steps to set yourself up for success:
Automate Data Collection: Use Amazon’s Selling Partner API (SP-API) to automate the retrieval of Net PPM data. Automating this process saves time and ensures you always have up-to-date data to work with.
Integrate with BI Tools: Once you have the data, integrate it with business intelligence (BI) tools like Power BI or Tableau. This will allow you to create dashboards that track Net PPM in real-time, helping you identify trends and act on them quickly.
Establish Regular Review Cycles: Review your Net PPM weekly, monthly, and quarterly to ensure you stay on top of changes. Regular monitoring will help you identify emerging trends and respond before they affect your profitability.
Create a margin management strategy for Amazon
Net PPM (Net Pure Profit Margin) is one of the most poorly understood metrics in the Amazon vendor ecosystem – partly because of numerous, sometimes incorrect, definitions floating around. This limits all aspects of brand strategy: operations, GTM planning, and negotiations. In this paper, we will clarify many aspects of Net PPM while sharing methods for expanding the utility of PPM data provided by Amazon through Retail Analytics, and provide strategies for making net PPM a key part of your business development process.
