HOW TO ENSURE THE PROFITABILITY OF YOUR AMAZON SELLER BUSINESS

HOW TO ENSURE THE PROFITABILITY OF YOUR AMAZON SELLER BUSINESS

Introduction

Amazon Marketplace provides an attractive platform for third-party sellers due to its vast customer reach and robust logistical capabilities. But to achieve lasting success, sellers must be able to set the selling price of their products at an optimum level – a level that is attractive to customers, competitive on the marketplace AND, most importantly provides the seller with a decent profit.

Amazon Marketplace is a competitive platform. Sellers must find ways to stand out from the crowd while still maintaining profitability. Understanding how Amazon's fees and cost structures affect your bottom line is essential to setting your price at the right level to pay all of the costs associated with your product sales, to have enough money to pay for marketing and to make a profit from your endeavours.

What should you consider when calculating product level profitability

The short answer is “everything”, but that’s not very helpful, is it?

The fact is that profitability isn't merely the difference between your product's selling price and its direct cost. To calculate true profitability, one must consider other factors like Amazon fees, shipping and fulfilment costs, advertising, and returns.

By taking all of these factors into consideration you can make sure that you set your selling price at a rate that makes money on every sale.

To Calculate the actual profit on the sale of a product my formula is this:

Your ‘Per Item’ profit is the amount remaining after all the deductions are made, in this example £6.05 – 6% of the  £100 sale price compared with ‘Gross Margin’ of 75%.

ESTIMATE expected profitability before you start selling – THEN UPDATE

It’s easiest to calculate the profitability of products that you have already sold as the costs have become known quantities that you can see.

However, you need to set a price to start selling on Amazon, to do that you can estimate the costs in advance and then fine tune the calculation when you have real world data from actual sales.

We have a spreadsheet available that you can use as a template for these calculations, email me if you would like a copy (roger@etailsupport.com) .

A quick note here on cost estimation – it’s very normal for entrepreneurial folk like us to have a sunny and optimistic outlook on the world, when you start estimating costs you need to put that behind you and estimate with a cold hard head – estimate as closely as you can, but if you overestimate costs rather than underestimating them you will make money rather than losing it.

Each one of the six types of cost that that you need to deduct from your selling price to understand your true profit will be calculated separately – the rest of the document tells you how to do that.

Sales Tax or VAT

In 2023 almost every sale that you will make on a major marketplace will be subject to sales tax or VAT – the rates vary but sales tax and VAT have caught up with Amazon almost everywhere.

For sales made in Europe VAT is normally around 20%, but that’s 20% ADDED ON to the price of the goods to give the total selling price with tax, and it’s the total with tax included  that is the price that you set on the Amazon site.

So to calculate the amount of tax in your selling price, use the formula.

Amount of Tax in Selling Price = Selling Price – (Selling Price /(1 + (VAT Rate% / 100))

As an example if your selling price is 29.99 and your VAT rate is 21% the calculation would be

 Amount of Tax in Selling Price = 29.99 – (29.99 /(1 + (.21))

Which is the same as 29.99 – (29.99/1.21), Which works out to 5.20

The great thing about VAT and other Sales taxes  (if there is one) is that you know exactly how much it will cost in advance, no estimation required here!

lANDED cOST

Next you need to work out the landed cost of your goods.

'Landed cost' is a term used in logistics that represents the total cost of a product once it has arrived in the warehouse that will ship it to your customers. If you use FBA that will be the Amazon warehouse, if you fulfil your own orders or use a third party 3PL then it will be that warehouse.

When products are purchased from overseas suppliers for resale, the landed cost includes not just the original price of the product but also other expenses associated with getting the product ready for sale in the buyer's market. The point of calculating the landed cost is to reveal the complete cost picture to ensure profitable pricing decisions are made.

Here are some of the components that should be included in your landed cost:

1. Supplier Price : This is the initial cost you pay to the supplier for the product itself. This is often referred to as the ‘Factory Gate Price’.
2. Freight Charges: These are the costs associated with transporting the goods from the supplier to your warehouse. It includes the expense of shipping the goods, whether by sea, air, or land.
3. Insurance Costs: If you take out Insurance to protect against loss or damage of goods during transport you should include that in landed cost.
4. Customs Duties and Taxes: When importing goods, you will have to pay duties and taxes to the government in the jurisdiction where the warehouse is located. For imports into the UK or EU you should include the costs of Duty here, but not VAT as that is normally offset against the VAT charged on sales.
5. Customs Broker Fees: If you hire a customs broker to handle customs clearance, their fee will be part of your landed cost.
6. Inspection Fees: Sometimes, goods need to be inspected before they're allowed into a country, or at the factory to ensure that they are of the correct quality before they leave. If an inspection is required, the cost is included in the landed cost.

Landed Cost per item

It’s important to work out the landed cost on a PER ITEM basis, so if you buy 10,000 products and bring them into the country in a container you take the cost you paid for the 10,000 items, add on the Freight charges, insurance cost, duty, fees etc for the whole batch and then divide that total by 10,000 to get the landed cost per item.

By calculating the landed cost per item you can better understand the real cost of goods, a clear understanding of landed costs can inform decisions about where you source from, as well as help identify opportunities for cost-saving in the supply chain.

REVENUE RELATED COSTS

Revenue related costs, as the name suggests are the costs that you incur when you sell the product, these are fees that you do not incur unless you sell the product, but you always incur when you do.

When selling on Amazon these costs are normally made up of Amazon Referral Fees (Amazons’ commission on each sale), pick and pack fees and shipping fees.

Amazon referral fees

Amazon Referral Fees vary by product category and there is a minimum referral fee per item which affects low price items specifically. A full list of fee percentages is attached, but they do vary by marketplace and over time, so check your seller central account for an up to date fee table when estimating costs in advance and use an amazon sales report to get the real fees once you start selling.

It is really important to understand that Amazon calculate their commission fee on the amount the customer paid for the product, including any sales tax or VAT.

In the example above with a selling price of 29.99, which includes 21% Vat of 5.20, if the Amazon commission fee was 15%, this would be calculated as 15% of 29.99 (not 15% of the sales price excluding tax = 24.79) and so would be 4.50. 

Therefore, the actual commission fee on the excluding Vat amount would be 18.2% (being 4.50 / 24.79)

Note about product categorisation

There is obviously a temptation to select a category with the lowest Amazon Referral Fee, be very careful with that – Amazon can bill you for extra fees on transactions that have already happened if they think that you have mis-set the category of your product on purpose.

Note about sales tax and VAT

Amazon will withhold sales tax and pay it over to the appropriate authority in many cases, if you have the appropriate government authorisation to collect tax (called a VAT registration) they will pay it to you and you will have to pay it to the authority in turn – we have a whole white paper on European VAT for eCommerce sellers, email us if you would like a copy sales@etailsupport.com

pick and pack fees

Many sellers chose to send products into an Amazon warehouse for them to ship to the customer on the sellers behalf. This service is called “Fulfillment By Amazon” (FBA) its very effective and it helps you get better ranking for your products on the Amazon Web Site. However Amazon charge you for everything that they do with your products.  The fees cover charges for their staff to pick your product, pack it for the customer and deliver to the customer as well as costs to store them and so on. 

Note about STORAGE FEES

It is important to understand that FBA fees do not cover storage whilst in their warehouse; this is charged separately by Amazon once per month based on actual usage for the previous month. 

Whilst storage isn’t a revenue related cost as you will pay it whether you actually sell any of that product in a month or not; we recommend that you include an approximation for storage within your overhead costs as you know that you will incur these costs in order to be able to sell through FBA, the unknown is how long it will be for.

FBA fees are calculated based on the size and weight of a product and are dependent on the country in which the FBA warehouse is located  – a full list of these can be found in Amazon Seller Central, they can and do change every quarter so always get up to date info.

Note about STORAGE FEES

Storage and shipping fees are based on dimensions set in the Amazon system by Amazon, they weight and measure an individual unit and fill out the data in your product record – you also enter this data when you set up the product, but Amazon use their own measurements for biling, not the product details that you enter when you send the products to FBA.  We recommend that you check these regularly to see that you are not being overcharged.  If you’d like some help with this, it is available please contact us via sales@etailsupport.com

Overcharges can be claimed back, but only for 90 days into the past, so check these figures every month or so to be sure.

Note that if a customer orders 2 of the same product, Amazon will charge you 2 * the relevant fee, whether both items are put in the same box to ship to the customer or not.

Note about OTHER 3Pl warehouseS

If you use a different third party warehouse to ship to customers (rather than using FBA) you will incur pick and pack fees from them.  These are usually charged as a set fee per order, plus a fee per item on the order, plus the shipping charge from the courier.

IF you run your own warehouse

If you run your own warehouse and ship to your customers yourself, rather than through FBA or another 3PL; you will still be incurring costs to pick and pack each customer order.  It is just that instead of getting a fee per order from another company, you will incur weekly / monthly salaries for the staff doing the picking.

You should estimate these costs on a per order basis and include them in your calculation.

SHIPPING COSTS

If you use FBA, shipping costs are included within the FBA fulfilment fee for each order. If you use a 3PL or your own warehouse you will need to pay a courier cost directly of through your 3PL, having good software to choose the best courier and service for each shipment is VERY important – for most eCommerce businesses shipping is the third biggest cost after product purchases and advertising, so minimising that cist can be the difference between making a profit and making a loss.

eTail Support can help you to do that with automatic shipment selection and label generation built in to your ERP, contact us to learn more.

To estimate the shipping cost for each item choose your courier and get a quote to ship a single item using the weight and dimensions of a shipped item – as a guide Amazon Shipping is normally around the same cost as Royal Mail for small items and the same as EVRI for larger items. Once you have real life data for shipments of a specific item you can simply add up the shipping costs for that item on each channel and then divide that by the number of items shipped to get the sipping cost per item.

Advertising costs

Advertising costs are by far the hardest cost to estimate – in fact they are not that easy to calculate when you have good historical data – that’s because, if you use brand adverts or adverts for a range of products it’s not always clear what part of the costs of a campaign should be allocated to each product.

For estimation I suggest using the following metrics.

First find out how much each click on one of your adverts will cost – then assume that it will take 30 clicks for someone to buy the product (approx. a 3% conversion rate) – That’s pretty standard for online Pay Per Click (PPC) advertising. So Advertising cost will be 30x your PPC bid

Once you start to get data take the total cost of advertising your product over a period and divide that number by the number of items sold in the same period – then you have your cost of advertising per item sold.

Share of overhead

Not everyone includes overheads into item level profitability calculations, many overheads, like the cost of call centre staff, purchasing people and management costs are hard to divide up on a per item basis, but other costs like the cost of staff who work exclusively on managing a particular marketplace can easily be divided up between the items sold on the marketplace.

The more directly attributable overheads that you include in the profitability per item, the more accurate your calculations will be.

Warehouse staff rent and other costs, if you have them, should be included in the cost of shipping an item under revenue related costs.

A good example of an overhead that should be included in the calculation is your Amazon Monthly subscription fee, its not a lot, but its important to include all of these costs, especially if you only sell a small number of items.

POST SALES COSTS

There are of course costs that you can incur after an item is sold and delivered to the customer.

Returns is the most obvious one of these, especially on Amazon where returns are both significant and costly.

Properly calculating the cost of returns on a product level can help you to understand the benefits of product quality as well as the specific profitability of the product.

When selling on Amazon, the cost of returns will be significant.

The cost of warranty claims if they are applicable and the cost of product liability insurance or warranty insurance should also be considered here.

To estimate the cost of returns, first consider – if you sell 100 items, what proportion of the items that you seem will be returned for sellers on Amazon – 10% is normal, 30% is high.

Then consider how much you will lose on each returned item, it is likely that 25% of your returns will be junk with zero value, 50% will be able to be refurbished at a cost and 25% will be OK for resale at a discounted price (like 75% of normal selling price)

Once you have a total cost for returns on a batch of 100 items sold you can divide that by 100 to get the returns cost per item.

Once you have real data for each product that you sell these figures can be refined.

Currency Conversions

When selling on markets outside of your home market you will need to factor in currency conversion costs – expect to lose around 2% of the selling price to currency conversion.

If you buy in a different currency from the one that you sell in, you should factor in a further 2% on top of the factory gate price into the landed cost of goods for this.

AMAZON CATEGORY COMMISSION FEES

Sellers also pay a closing fee of $1.80 on all media sales.