Amazon seller profits

Start using Merchstation for free https://merchstation.com to start tracking your sales on Amazon and measuring some key indicators.

Amazon is one of the most popular e-commerce sites in the world. It has expanded to a global marketplace that offers products from all over the world.

So you have found a manufacturer, who is selling a product for $1.68. A quick look on Amazon shows that they are selling for $14.95.  That means there must be big profits right there - right? Well not so fast.  Let's actually go through the costs of this.

Firstly, to calculate profits for an online retailer, you will need to subtract your total costs from your total revenue. Here is the general formula for calculating profits:

Profit = Revenue - Costs

When using a sales platform such as Amazon, the net revenue received already has some amounts deducted from the gross revenue.

Net revenue is the sales price including sales tax less:

  1. Referral fee (typically 15% of sales price)
  2. Fulfilment fee (use https://sellercentral.amazon.com/hz/fba/profitabilitycalculator)
  3. Depending on region, sales tax may be deducted

To calculate gross profit, you want to deduct other direct costs associated with the sale, including:

  1. Cost of goods sold: This includes the cost of the manufacturing, delivering and making that item ready for sale.
  2. Direct advertising: Where possible, direct pay per click advertising that can be associated with that sale.

To calculate net profit, deduct other overheads including

  1. Storage fees: Some people might include storage fees in the cost of goods calculation.  There will be storage fees associated with your inventory, whether it is stored in Amazon or in your own warehouse.  Let's say that your inventory of 1000 lasts 3 months and you run down to exactly zero, then the average inventory would be 500 units over that 3 month period.  

  2. Operating expenses: This includes expenses such as rent, utilities, salaries, subscriptions and marketing.

  3. Depreciation expenses: Including trademarks
  4. Interest and taxes

Once you have calculated your total costs, you can subtract this amount from your total revenue to determine your profits. It is important to track your profits over time to understand the financial health of your business and identify areas for improvement.

 

When performing product viability, consider creating a spreadsheet containing:

  • Manufacture cost
  • Dimensions calculation to estimate number of cubic metres
  • Estimated freight costs
  • Import and customs duties
  • If using your own warehouse, estimate delivery cost per unit to Amazon

Use these figures to find your landed cost.

Estimate the amount and duration of storage per unit.

Calculate cost of goods as your landed cost plus estimated storage.

When calculating your product viability, include an PPC advertising amount to ensure that profitability is maintained

 

Start using Merchstation for free https://merchstation.com to start tracking your sales on Amazon and measuring some key indicators.

 

Product Viablity Example:

Manufacture cost each (FOB)$ 1.68
Est. Freight, customs, import duty, storage (each)$ 2.22
Est. Cost of Goods Each $ 3.90
  
Sale Price $ 14.95
Referral Fee $   2.24
Fulfillment $   5.85
Taxes 
Advertising Each $   2.00
Gross Revenue $   4.86
Net Income $   0.96
ROI24%

 

For Amazon PPC advertising, I find a conversion rate of 1 in 10 is quite normal, In this instance this would suggest a bid price of 0.20, which is very low.  So it is still important to produce quality listings as well.

 

Risks: 

  • It would be very easy to blow out on the advertising costs and lose money even though the cashflow is positive
  • This model is not considering returns.  Cost of goods may track a higher if there are returns.  Often the return product becomes unsellable
  • This model does not do competitive analysis.  You also need to understand market share and competition generally
  • Import duties may vary (see below)

Assumptions:

  • This is a private label model, importing and self-branding products from overseas.  A different model would be needed for wholesaling or arbitrage.
  • Sales tax is taken out by the marketplace (eg USA). For other markets, (eg UK, Europe, Australia) the seller may be required to register for VAT/GST and deduct this from the sales price.  This can be further complicated in the UK with the flat rate scheme for VAT. VAT in the UK is typically 20% and GST in Australia is 10%, so these sales taxes should be considered carefully at the viability stage.  If you do not register for VAT/GST in these markets, then you will have to (effectively) pay VAT/GST on the landed cost. So in a way you still pay.
  • Determining Import duties is complex.  The harmonized tariff schedule for the USA provides information about tariff rates.  Depending on the country of origin, the rate may vary.  For items of metal or steel coming from China, for example, are charged higher tariffs than the same item coming from certain other countries.  In the above example, I used a combined tariff rate of 27%. Each country or region (eg EU) has its own tariff rates so you have to have a very good idea of what is likely to be charged at the product viability stage.
  • Generally there is a lead time from manufacture through to being ready for sale.  This lead time could be up to 3 or 4 months from the placement of the order to being ready and available for sale in Amazon.  Once you sell an item on Amazon, you need to set aside the cost of goods amount for that sale so that you can succsfully place the next order.   We use Wise business accounts to manage our money and create bucket accounts to set aside the cost of goods.  Merchstation is also developing functionality with Wise to import transactions into the system, match out Amazon deposits etc. 
  • In most cases Wise accounts can be used to receive money from Amazon
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