amazon profit margin

Many Amazon sellers put efforts on defensive strategies, like sourcing exclusive cutting-edge and high demand products, for the purpose to avoid the market share impact as much as possible from other merchants selling the same ones with lower pricing. It’s a kind of product competition protection on Amazon and gains a good profit margin sustainably.

This approach is absolutely correct, but the point is sourcing and managing well an exclusive product are not easy, because you might spend much investment on R&D or paying off exclusive fees, or the product is totally a brand new concept you develop, which needs time to educate consumers through marketing effort. So, once you have top-selling products, you are not willing to see its profit margin keeps going down. Furthermore, relying on one or two golden products to survive is risky in the business world nowadays as well, because consumer demand is changing pretty fast and other following merchants also are reacting very fast.

Thus, no matter you are implementing a product deep-dive GTM strategy or diversified product lines tactics, you need to implement more advanced strategies to sell the best pricing with the lowest cost. This is a core principle, for the purpose to gain and maintain a good profit margin as an Amazon seller.

In this article, I would share with you 3 tips, from product price, operation cost to marketing strategy perspectives. You could learn how to automate pricing reacted on the market, optimize operation cost, and leverage marketing to boost sales, for the purpose to gain and sustain a good profit margin. Let’s go!!

What’s A Good Profit Margin

Firstly – Good profit margin is subjective

You’re the final gatekeeper to decide how much profit to earn from a product listed on Amazon. For example, if you are selling high-tech camera products and they’re in high demand with less direct competitors, you might expect higher-margin such as 30~40% or even more. On the other hand, if you are selling FMCG products with lots of competitive merchants on the same search result page, you might be totally okay on lower profit margin such 5~10% or even lower, because you’re aiming more sales volume to capture market share, instead of profit from each transaction.

However as a basic calculation Table A from below, the profit margin in fact is not 100% fully controlled by your preference to define, and it’s more being controlled by what products you are selling. In terms of a store on the marketplace, it’s a kind of product-centric strategy as I talked before in a video about Amazon FBA vs Amazon Associate. So a good profit margin can be varied time by time, geo by geo.

Table A

profit margin calculation table

For example, when you are considering to source and sell a product, you could approximately calculate its EXW price per unit which is quoted by a supplier, shipping fees affected by the transportation method you select and the size of the product, referral fees charged by Amazon based on what category of product you are selling, FBA fees if you need Amazon to automatically handle the fulfillment, CPS(Cost per sale) from Amazon advertising. If you are fully confident about the product value still after having deducted these costs, you could set a higher sale pricing beyond the market benchmark, and define an expected profit margin as you like.

Secondly – A good profit margin is an objective

The rude reality is selling activities on Amazon is dynamic and real-time to change. It means you would have on-going competitors on Amazon who are selling the same products or substitute ones day by day. They might have more features or sell at lower prices, which is affecting your store sales performance at the end. So, a mature product category can be easier to estimate the profit margin based on existing merchant selling performance and est.cost.

Amazon best sellers list in a different category and Google shopping insight search volume

amazon best seller

google shopping insight

If your product cost is not changed, the sale price setting is being affected by other merchants in fact, which forces you to lower pricing down due to sales dropping and affect your final profit margin if your price setting is too high or too low. Therefore, as an Amazon product sourcing specialist before launching on the store, she or he should research product selling performance, needs to forecast if this product is worthy to investing from a market perspective.

If it’s worth to investing, what expected profit margin should be. Otherwise, if the profit margin is too low to earn (Such as less than 5%) meanwhile your business doesn’t need additional products to increase store items anymore and sales volume, it should sunset before launching.

Finally – Good profit margin can resist uncontrollable factors.

Table B

product refund

Different from Table A, Table B also considers product refund rate cost which affects the final profit margin. As you might be aware of customer refund as an Amazon seller, Amazon still keeps 20% of the referral fees and the fulfillment fees are non-refundable (FBA). Also, your shipping fees from China to USA are non-refundable and it might also charge you additional storage fees if your reversed products are in stock for a long while. And most importantly, it very depends on what you are selling, some reversed product might be not re-sellable after customers opened up, or some reversed products can only fall into second hand, because re-package work might charge more costs and time, than giving up directly. Thus, you can’t control customer refund within the return windows you claim on the site, but you could select which products to invest with lower and stable refund rate, that can resist additional cost out of control

3 Tips To Sustain Good Profit Margin

First of all – Automate Product Repricing

Let me quote Table B here again. I’m assuming a profit margin 30% is your target, so camera accessory A can continue on Amazon store. Then, the avg profit margin 32.33% which means it’s still having the potential to lower the price when repricing is necessary. Honestly, even though you’re not repricing according to GEO, time frame, etc too often to devalue your brand, your competitors who are selling the same product would do it and seize your customers definitely and very often. In the end, due to sales dropped, your profit margin drops down as well if you don’t implement repricing. So, that’s why product repricing is so important. It ensures your pricing is reasonable in a competitive environment in front of shoppers and avoids losing transactions due to few cents higher etc. than your competitors.

product refund

So people say manual repricing is enough to drive sales and keep profit margin. I’ll say yes and agree if they’re saying macro aspect repricing such as by markets, by seasonality, by festivals, or other special promotion from a marketing calendar planning. However, when deep diving into micro aspects such as repricing with competitor A done, it’s impossible to execute by manual.

Take informed.co for an example.

informed repricingInformed.co is a smart pricing AI platform and can integrate with more than 13 marketplaces worldwide, such as Amazon, eBay, etc. As its name, it can help monitor your targeted specific merchants or a certain type of merchants in bulk, automate adjusting the listed product pricing on Amazon store, which keep competitive pricing among other merchants and maintain a good profit margin.

For example, if now you are selling camera accessory A at US$39,99, and probably US$38,99 is your bottom rate, so you should set up a min. & max original pricing you can earn the expected profit, and tell the platform AI to help and adjust accordingly among competitors.

Definitely, you don’t need to respond to all competitors with repricing all the time even they are selling the same products, because there’re many factors affecting a consumer makes a final decision, instead of only by pricing. For example, you don’t need to lower product pricing when some competitors in the result page are selling second hands, or out of stock or not an FBA member. Informed.co AI platform provides you the ability to exclude what factors even the same products with lower pricing appearing in the same page result.

Secondly – Optimise Product Cost

Inventory management is a key part of an Amazon seller because you are not willing to suffer from cash flow issues and lose money due to purchasing too many goods in advance and stored in stock. Worse than that, your product selling might underperform, or products exceed the expiry date which causes you to lose money. Even the camera accessory might not have an expiry date, but unexpected additional stock fees still charge you more cost. 

Sales Estimator Provided by Jungle Scout

jungle scout

In order to avoid that, I suggest you order the initial products by using a sales estimator, for example, which is provided by Jungle Scout. So you could minimize the risk of over-purchasing and reduce the lost weight once you bump into failure, unfortunately.

The other way I’d like to share with you is shipping fees optimization. Take my case as an example. After having an estimated first order amount, the next step is to ship the products to the Amazon warehouse in the USA (LA). Normally there’re two methods to ship the goods, one is air shipping and the other is sea shipping. Compared with air shipping, sea shipping takes 13 ~ 15 days from China to LA, but the pricing is lower than air shipping when the size and weight of the goods are all same. 

Table C

shipping fees estimator

The question is whether we need to use the same shipping method for all goods. As we have already known how many sales approx. per month, so you could calculate how many avg. per day. Thus, we could set up a formula to calculate in Table C, how much budget to allocate between sea shipping and air shipping fees. After all, we don’t need to send all in one to the USA.

Thirdly – Leverage Amazon Advertising Resources

On the profit margin calculation table, advertising such as cost per sale is a key element to impact the final result. But please don’t think even a second to give up advertising, because no matter how perfect and exclusive your products are, a successful business must be able to reach the target audience at the right place and the right moment. 

Here are some tips for you to optimize CPS.

1. Amazon SEM + SEO strategy

amazon commission rules

In terms of transactions, Amazon could earn a certain % commission from each transaction between seller and buyer. Thus, CTR and CR are two very first metrics that Amazon ranks higher or lower a seller product. 

Amazon sponsored product ads is a must-have advertising strategy, no matter you are a brand seller or reseller because it’s one of the best approaches you could control the keywords selection and buying strategy to increase CTR, drive traffic and transactions flexibly in the Amazon store. 

However after a while, you have invested in SEM, probably the product has become a star in the spotlight thanks to a huge amount of review, high CTR, and CR. Thus, SEO ranking naturally goes up, and at this moment whether to appear SEM and SEO both the same product information and images on the same search result is a time to make a call. The reason is even without SEM, SEO can play a role in maintaining the transactions, so it might be wasting SEM dollars in terms of a single view of the product unless you have other marketing purposes, such as seasonal promotion. For the purpose to lower cost and maintain a profit margin, I suggest you could shift this ad budget to the other product.

2. Amazon sponsored brand

amazon sponsored brand

Along with point 1 above, now you have golden and star products on Amazon. But from the consumer perspective, whether they can remember who is selling this product is a question still. The reason is many shoppers on Amazon marketplace might care more about the product quality, pricing and fulfillment conditions, refund mechanism, instead of the store name. This would be a bad cycle and looping if you are not handling well, because existing customer lost rate might keep rising and impact your profit margin when competitors selling the same products or substitute services with lower pricing, better-giving conditions.

So Amazon sponsored brand is one of the most proper approaches to build brand awareness, for the purpose to not only drive new customers but to keep repeating purchasing rate from existing customers when they search the product keywords and can see your brand store information and your golden product information in SEO rank.

3. Amazon DSP

Potential customers usually won’t suddenly search your featured products and your brand. They search because they might be considering to buy similar products or they hear from other referrals about your business. And most importantly, you reach them frequently with personalized messages.

The beauty of Amazon DSP has two sections. The very first is before consumers search the product, you can positively reach targeted potential consumers through Omni-channels and by using different ad formats, for the purpose to drive awareness, store traffic, and educate them about your brand. The other section is to retarget cart abandon consumers with exclusive product combinations and pricing in the seasonal promotion. Both of the approaches are positive to reach rather than being passive to wait.

So if your profit margin is ahead a lot than your target, you could reach the target audience to educate them ahead of your competitors and convert more transactions at the end, or you could reach those abandoners with a more attractive offer to grow sales.

4. Amazon attribution

Along with point 3 above, Amazon DSP might be not indirectly contributing to the last click sales, because most of the conversions are from Amazon sponsored products and Amazon SEO. In fact, it’s not rational and fair to justify Amazon DSP is lowering down the profit margin and we should invest in Amazon search more. Apart from Amazon DSP, you might come across the same picture on other non-search centric channels.

Amazon attribution is a measurement solution to measure transaction attribution from Amazon marketing, or off Amazon digital channels. So when consumers check out on your seller store from Amazon SEO, you could know where else this consumer clicked or visited before through DSP, Facebook ads, etc other advertising messages. Then you could calculate the profit margin if increasing or decreasing the dollar investment on non-search centric channels, for the purpose to maintain a profit margin.

Conclusion

Profit margin is very important to a business, we don’t suggest to cut off all investment and growth opportunities, but the point is how to optimize the investment in finance table by leveraging resources. Hope the tips above are helpful.

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Louis Lu

By Louis Lu

Growth Hacker & Digital Marketer, with a proven record of over 11 years experience in 20+ Asian markets, and 24,000+ connections in Linkedin

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