For Amazon FBA sellers, high-profit margins are essential for building a healthy e-commerce business. With the right initial investment and strategies in place, it is possible to achieve healthy and sustainable profits through Amazon FBA.
The Fulfillment by Amazon (FBA) program enables sellers to store their products in Amazon’s warehouses and have them shipped directly to their customers, allowing them to take advantage of the vast customer base and its shipping capabilities to create a profitable business.
Profit Margin is a metric that shows the percent by which your sales revenue exceeds your business costs. So, the higher the margin, the better your Amazon business.
Amazon sellers must concentrate on reaching high revenues and profit margins to maximize profits. Sometimes it makes sense to sacrifice profits to reach a specific goal, such as increasing visibility. However, in the long run, your profit margin should be high enough for your business to grow and make more money.
Below, we’ll look at key indicators of profitability, how to calculate real profits, and efficient ways to boost profit margins for Amazon FBA sellers.
Good Profit Margin For Amazon FBA Sellers
There is no universal “good” margin because different product types have their own average profit margins. Also, startups tend to have lower profit margins due to the expenses associated with launching their business.
A good profit margin for Amazon FBA sellers can vary depending on the product, competition, and other factors. Most Amazon sellers make a profit of 15-20%. This means they keep the money after deducting the total cost from sold items, including Amazon fees, shipping fees, and product-related expenses.
20% or more is a nice profit margin, but if it is less than 5% – it’s not good for Amazon’s business.
Keep in mind that Amazon FBA profit margins can differ depending on the seasonality. You may earn more or less depending on the time of year, market trends, or other factors.
How To Calculate Profit Margins
Profit margin determines the overall health and long-term growth of your business. To gain an accurate understanding of the profitability of a product or business, it is essential to calculate and analyze certain key metrics: gross profit margin and net profit margin.
The gross margin indicates the effectiveness of your business model, while the net profit margin indicates how successfully you implement it.
Gross profit margin on Amazon
Gross profit for Amazon sellers is the amount of revenue left over after deducting the cost of goods. This includes the cost of manufacturing or acquiring the product and shipping costs to Amazon fulfillment centers.
To calculate gross profit margin, sellers must determine their sales. We recommend using total sales (total amount the seller got from customers) from business reports. But there are also cases where sellers use NET sales = Total Sales – Discounts – Refunds
Then, they should subtract the total cost of goods sold (COGS) to obtain the gross profit amount. Finally, the gross profit should be divided by the sales and multiplied by 100 to get the gross profit margin percentage.
The formula to calculate gross profit margin:
Gross Profit Margins = (Sales – COGS / Sales) * 100
The higher the gross margin, the more profitable business is on a per-sale basis. Amazon sellers should aim to maintain a healthy gross profit margin by continually optimizing pricing and sourcing strategies while keeping costs in check.
Net profit margin on Amazon
The net profit margin is the percentage of revenue remaining after all expenses are deducted. For Amazon seller, calculating the net profit margin involves subtracting all direct and indirect costs from total revenue.
Indirect costs include fixed overhead expenses such as rent, salaries, and utilities.
Direct expenses comprise the cost of goods sold, Amazon FBA services, shipping costs, inventory storage fees, marketing costs, and other operating expenses. Once these expenses are deducted, the amount left is the net profit.
To calculate the net profit margin percentage, divide net profit by sales and multiply by 100.
A high net profit margin indicates that the business generates more profit per dollar, a good sign of financial health.
A low profit margin, on the other hand, may indicate problems with cost management, pricing, or business strategy.
The formula to calculate the net profit margin:
Net Profit Margins = ((Revenue – All expenses) / Revenue)*100
If you constantly monitor these metrics, they help you correctly measure your market position and set the optimal prices for your products, discounts, and advertising expenses.
Each Amazon seller can use tools such as My Real Profit – Profit Dashboard to analyze sales data and monitor amazon profit margins at account and item levels. Understanding profit margins at different levels is crucial for Amazon sellers to make decisions about pricing, marketing investments, product selection, and overall business strategy.
Profit margin and ROI are different
Amazon profit margin and ROI (return on investment) are two different metrics that are both important measures of financial performance.
Profit margin measures the profitability of a business by calculating the percentage of sales revenue remaining after all expenses have been subtracted.
Amazon ROI measures the effectiveness of an investment, comparing the amount of return generated to the amount of resources invested (Cost of Goods for e-commerce). Despite they are different measures, they are interrelated.
The formula to calculate the net Amazon ROI:
ROI = (Cost of Goods / Revenue)*100
Being an Amazon seller the only cost you pay upfront is your inventory. All other costs are deducted directly from your Amazon account after the sale has been made. So when you sell products for $100, after amazon fees, you will get about 30% – 50% of it. And that is when Return on Investment (ROI) becomes extremely crucial. This metric can tell you how much money you make in percentage from your initial investment.
The use case for ROI is when you want to understand what products are the best in terms of boosting your capital and make you most of cash. Growing your business exponentially without external funding is possible with a healthy ROI.
It’s critical to maintain healthy ROI when sellers start building their Amazon businesses. Sellers who use both metrics, ROI and margins can better understand how efficiently their business uses its resources to generate profit and grow over time.
Steps to Increase Profit Margin on Amazon
To improve your profit margin on Amazon, you need to use different strategies that can help you minimize your expenses. It is important to have accurate revenue and expense data for each product and the product list as a whole to optimize costs.
Making hasty decisions to cut or increase specific expenses can harm even successful businesses. In this section, we will discuss some effective and practical ways to lower your costs and boost your margins.
Perform market research
The first and most important step to increasing your profit margin is conducting thorough market research. Use market trends, customer preferences, competitors’ pricing, and other factors to analyze data and make informed decisions about pricing, listing content and which products you should offer.
This approach will help you find a balance between meeting customer needs and making a profit. Furthermore, conducting market research can also help you identify niches and spaces in the marketplace. This can enable you to create unique products with high perceived value and command higher profit margins.
Analyze break-even points
The break-even point is the point at which all costs related to selling product is equal to the revenue generated by it. At this point, the seller has neither incurred profit nor loss.
Amazon seller can analyze these metrics to understand their break-even ACoS/ROAS/TACoS to find opportunities to increase profits by adjustimg marketing costs or raising prices while maintaining profit margins.
Sellers can calculate the per unit profit margin by dividing the sales revenue by the number of units sold. Profit per unit gives you better understanding how much money you can invest into marketing in order to make a sale. Your profit per unit equals your break-even CPA.
Find the right price
Another way to increase your profit margin on Amazon is to review and adjust your pricing strategy. Bear in mind that prices can fluctuate based on market conditions and other factors, so it’s important to be aware of current trends and competitor pricing.
It also can be a good idea to use small coupons to increase your pricing visibility and differentiate from the competition.
Reduce business costs
Reducing business costs is an effective way to increase profit margins. Start by researching the fees associated with your Amazon seller account. Many sellers go into Amazon FBA completely blind to all the fees associated with selling on Amazon. So analyze whether changing your product sizes or using alternative delivery methods can help you save money.
If your FBA fees significantly reduce your profits, cross-check your records even if you trust Amazon’s calculations. Many sellers make mistakes of relying solely on Amazon’s fee calculations.
To gain insight into your spending and overall sales on Amazon, utilize My Real Profit analytical software. This software is tailored for Amazon sellers and provides profit analytics in real-time. You can easily identify which products are profitable and which are not and gain other important data.
Buy inventory on time
The most common mistake Amazon sellers often make is not keeping enough inventory of their best-selling items. This is important because as your sell items on Amazon, you create a cycle of advertising, pricing, and organic reach called the Amazon flywheel. If your products run out of stock, you may have to start over by relaunching the items and ramping up again.
Optimize your Amazon ad campaigns
Appearing at the top of search results is crucial for the visibility of your product. But there are also rest of search and product detail pages that can be much cheaper than top of search.
Make sure to review your keyword and search terms reports regularly to understand where amazon is showing your product. This will help you understand where your product is being displayed. By doing so, you can avoid losing significant amounts of money due to irrelevant keywords.
Many new sellers reduce their marketing expenses when they notice low profit margins. However, the right marketing strategy can increase your margins and attract more customers.
Increase your Average Order Value
To improve profit margins consider increasing your average order value (AOV). Increasing your AOV can higher profit for your Amazon business without doubling your shipping and overhead costs.
Another way to increase your AOV is to bundle your-margin product with one lower profit margin. Additionally, you can offer incentives such as deals and coupons with a certain cart value without increasing expenses too much.
Expand portfolio
Expanding your seller portfolio is another important step towards increasing profit margins on Amazon. This involves identifying new products or categories to sell that align with your brand and existing customer base.
You can help drive long-term profitability and growth on Amazon by looking for new products that can fit to your existing variation. Having more products in one parent ASIN is not always the best option, because its not increasing number of placements you take for search results, it can help retain more customers if you offer items that come in different sizes or colors.
Conclusion
FBA sellers must consistently work on lowering expenses and increasing profits to have a healthy profit margin. It is a delicate balance between profit and cost.
Make sure to include all expenses, even small ones, when calculating the margins for your products. To make your brand stand out from other Amazon businesses and be highly profitable, use effective strategies for all stages of your e-business growth and promptly respond to market changes.
If you are having trouble keeping track of all the products you sell, the money coming in, and the money going out, My Real Profit is a software that can help. It makes it easy to keep track of everything. Use a 14-day free trial to get more sale metrics in one window. All the key figures will be accounted for to create a profitable strategy. These metrics tell you what is happening to your brand and show why.
Read tips on How to increase sales on Amazon FBA in 2023: Simple tips for more revenue.
