Is selling on Amazon profitable?
It’s hard to tell if selling on Amazon is worth your time. There are costs associated, and deciding the appropriate path for your business can be super challenging. The most common question that arises is, “Is selling on Amazon profitable?” We've explored topics like boosting sales and avoiding common errors on Amazon in the past. Now, it’s time to dive into the bigger question of profitability on this massive platform.
Factors determining Amazon profitability
Profitability on Amazon isn't black and white; several factors come into play. Determining your Amazon profit margin will be the most helpful for deciding which route to take when becoming an Amazon seller.
Demand:
High-demand products often translate to higher sales volume, which can increase overall profits. However, these products also tend to attract more competition, potentially impacting pricing and margins. Understanding market trends, customer needs, and seasonal demand fluctuations is essential for selecting products that will perform well on Amazon, ensuring a steady stream of sales and profitability.
Amazon Selling Fees:
The Amazon platform's selling fees vary by product category and include referral fees, which are a percentage of each sale (typically ranging from 8% to 15%), and fulfillment fees for those using Fulfillment by Amazon (FBA). For example, FBA fees depend on the size and weight of the product and can include storage fees. Understanding and factoring in these fees when pricing products is vital to maintaining a healthy profit margin.
Channel Management/Cleanliness:
If a brand has authorized resellers or controls its distribution channels effectively, it faces less competition, which can lead to better control over pricing and higher profit margins. Conversely, if multiple sellers offer the same product, especially at varying prices, it can lead to a race to the bottom in terms of pricing, significantly impacting profitability. Therefore, maintaining a clean channel by managing who sells the product and at what price is crucial for maintaining healthy margins on Amazon.
Competition:
The level of competition in your chosen niche can significantly impact your pricing and advertising costs. More sellers mean more choices for buyers, but it can drive prices down. Increased competition means you might need to spend more on ads to get your products noticed. Choosing your niche is mission-critical to your success.
Fulfillment cost:
Choosing between Amazon FBA (Fulfillment by Amazon) or handling logistics yourself, Fulfillment by Merchant (FBM), is a big decision and can be confusing.
Amazon FBA takes care of shipping, returns, and customer service, but it comes at a cost. On the other hand, fulfilling orders on your own means managing inventory and returns in your own time and space. Depending on the type of products you’re selling, shipping costs can eat into your profits, especially if the selling price is low.
A helpful framework is to take a general approach, examining your product portfolio from a high elevation:
How many SKUs are in your product range?
What are the general sizes of your products?
What does your supply chain look like? How many intermediaries are involved before the product reaches you or the Amazon warehouse?
Ad costs and margins:
Advertising on Amazon is a key piece to your profitability success. It can boost your product’s visibility, but it's a cost that needs to be managed carefully. Understanding your margins, or the difference between the selling price and the cost, is crucial to budgeting for ads. There are several key metrics to assess your ad spend effectively:
ACOS (Advertising Cost of Sale): This is the ratio of ad spend to targeted sales, which helps in understanding the direct cost of advertising to generate sales.
TACOS (Total Advertising Cost of Sale): A broader metric, TACOS considers the ad spend relative to the total revenue, not just the revenue from advertised sales, offering a holistic view of advertising impact.
ROAS (Return on Ad Spend): This metric indicates the revenue generated for every dollar spent on advertising. A higher ROAS means more efficient ad spending.
Using these metrics, you can tailor your advertising strategy to ensure it contributes positively to your overall profitability.
Determining your Amazon seller profit and loss (P&L)
Your P&L starts with revenue, which is rooted in the sales price of your products. Then you subtract a variety of fees, some of which are variable fees that can be tied to a SKU and others of which are fixed fees that must be spread across your business.
Fixed Costs:
Storage Fees: Regular fees for storing products in Amazon’s warehouses, irrespective of sales volume.
Amazon Seller Central subscription fee, which is variable for brands selling fewer than 40 items per month and fixed above that threshold.
Variable Costs:
Product Cost: Costs associated with manufacturing or purchasing, which can fluctuate based on quantity and market prices.
Amazon Fees: e.g. referral fees based on sales and fulfillment fees if using FBA).
Advertising Costs: These fluctuate based on your ad strategy and campaign performance.
Returns: Variable, depending on the rate of returns, which can impact overall profitability. Again, the impact here will depend on if you chose FBA or FBM.
Understanding the interplay of these costs is key to effectively managing your Amazon P&L. Fixed costs like storage are constant, while variable costs like product costs, Amazon fees, advertising, and returns change with your sales and operational decisions.
Reason’s Amazon Profit Guide
Here are 5 simple steps to answer “is it profitable to sell on Amazon?”:
Research your niche:
Understand Competition and Pricing: Use market research tools like Amazon's Product Opportunity Explorer (Product Opportunity Explorer) to research competition levels and price points for your product idea.
Analyze Trends: Look for emerging trends, identify the top sellers, and learn from their strategies to gain a competitive edge.
Calculate product and logistics costs:
Include manufacturing, shipping, and storage costs in your calculations.
For FBA, use Amazon’s FBA calculator to estimate fulfillment fees, taking into account factors like size, weight, and storage duration.
Estimate Amazon fees:
Use Amazon’s fee calculator to get a ballpark figure of the fees you’ll incur.
Factor in advertisement costs:
Decide on an advertising budget. It might need adjustments as you go along, but having a starting point is important.
Many sellers will buy ads to help launch a new product. This is fine as long as you have a path to profitability. You need to develop a long-term strategy to decrease ad spend over time and enhance profitability after new products have been on the market for a while.
Monitor and adjust:
Regular Performance Review: Monitor sales performance weekly using Amazon dashboards or third-party tools like the Seller Profit Toolkit from Reason.
Profitability Analysis: After sales have stabilized, evaluate actual profitability per SKU and per sale/order using tools like Reason’s Seller Profit Toolkit to ensure you stay on track for profitability.
Is it profitable to sell on Amazon?
Selling on Amazon requires an understanding of several factors that affect profitability. To manage this, sellers can benefit from creating their own Amazon Profit Calculator. A profit calculator helps you see how revenue translates into net income or losses, offering a clear view of operational performance. For a step-by-step guide on how to create your own, see: “How to Build Your An Amazon Profit Calculator”.
By maintaining an updated profit and loss (P&L) statement through such a calculator, you can make informed decisions about pricing, product selection, and operational strategies. This approach not only simplifies the financial tracking of selling on Amazon but also supports a strategy aimed at enhancing profitability. Regularly analyzing your P&L statement is essential for spotting trends, resolving issues efficiently, and guiding your Amazon business towards long-term financial success.