Increase Amazon Profit Margin: All you need to make more money
Profit and Revenue are the key metrics of every business. You have a good selling record, and your brand is also getting popular on amazon, but it does not indicate that your business is also profitable. To maintain customer satisfaction and win the bid, some sellers reduce their profit margins to sell the product at a low rate. Protecting your amazon profit margin is important to succeed in this trading business.
New to old sellers on amazon faced so many challenges and were unable to understand how they could increase their profit margins. Sellers make it difficult to calculate the profit margin and get confused over all the challenges. The challenges are delayed profitability, competition overload, price wars, receiving amazon feedback, strict restrictions, and so on. Due to these challenges, sellers faced many difficulties in observing their profit margin.
If you want to improve your overall profitability, increasing and managing profit margins are the best way to achieve your business’s financial success. It’s important to figure out the profitability ratio, Net versus growth, and operating profit margins. For people who cannot calculate their profit margin or don’t know what is the profit margin for amazon FBA, this article is for you.
What is the amazon profit margin?
Amazon’s profit margin is the difference between business-generated sales revenue and your business costs. This is the way you can calculate your company’s profitability. If you want to get successful in your business, your profit margins should be higher.
In other words, we can say that it is the percentage of your business profit you gathered from each order. For Example, a 30% profit margin indicates $0.30 of profit you earn from every dollar of orders generated.
Profit Margin = (Net Income/ Revenue) * 100
Before calculating the profit margin, you must understand the break-even advertising cost of sales (ACoS).
ACoS is defined by the division between ad spend and ad revenue after that is converted into percentages. For instance, you spent $40 on an ad campaign and gained $100, so your ACoS will be 40%. If your ACoS is below your profit margin, that means your business is on a profitable scale. You are paying for the sale if it is greater than the profit margin.
How to find break-even ACoS:
- Visit the revenue calculator on your Amazon app
- Check your Product ASIN and search for that
- Select the particular product
- Include the cost of the sale
- Check gross profit margin
Types of profit margin:
There are 3 types of profit margins: gross profit margin, net profit margin, and operating profit margin.
Gross profit margin:
Gross profit margin is the difference between your business’s total Revenue and the cost of goods sold, or COGS, divided by the Revenue. You will get it as a percentage.
With gross profit margin, you can determine how much money is left after excluding the costs of making and shipping the product.
The formula is
Gross profit margin = (Total Revenue – COGS)/ Total Revenue * 100
For Example,
We sell a toy car for $100 on Amazon, and the COGS is $25 per unit.
Gross Margin = $25/$100= 75% gross margin.
Operating profit margin:
Operating profit margins are similar to gross profit margins, but there is a key difference. When calculating the gross profit margin, we include the cost of goods sold. Still, when calculating the operating profit margin, we include the operating costs of running the business, such as rent, labor costs, payroll, utilities, advertising, and insurance.
Operating profit margin = (total revenue – (COGS + Operating Costs) / Total Revenue) * 100
For Example,
We sell a toy car for $100 on Amazon, and the COGS is $25 per unit.
Gross Margin = $25/$100= 75% gross margin.
For operating profit margin, we need to run all the costs, including Fees, Ads from Amazon. Say this is $50. Thus, ($25+$50) / $100 = 25 operating profit margin.
Net profit margin:
Net profit margin is the net income you gathered from your total Revenue by deducting all business expenses such as COGS, operating expenses, taxes, and interest payments.
Net profit Margin = (Total Revenue – Total Costs)/ Total Revenue * 100
Identify a good profit margin for your business:
Identifying a good profit margin is very important because if you are looking for a higher margin, you increase your product price, which may affect your selling number. However, a good profit margin depends on several parameters, such as your industry, location, and personal conditions.
For Example, industrial banks obtained the highest avg net profit margin of 51.8% in 2019, where the usual profit margins were around 8.5%.
Retail obtains lower profit margins rather than other sectors. The average Amazon profit margin for brick and mortar retailers is 0.5-4.5%. On the other hand, e-commerce retailers gained around 6.5% as an avg net profit margin.
Amazon FBA profit margin calculator:
Regarding profit margin, we generally consider the Gross Profit Margin. We calculate it by deducting the COGS or costs of goods sold. That means,
Gross Profit = Net sales – Costs of Goods Sold (COGS)
Net Sales is the sales revenue your business creates on amazon after accounting, returns, discounts, coupons, and several deductions.
Gross profit margin = (Total Revenue – COGS)/ Total Revenue * 100
We need to determine the net profit margin as well. By eliminating COGS, debts, operating expenses, and taxes from total Revenue, we get net profit margins.
Net profit Margin = (Total Revenue – Total Costs)/ Total Revenue * 100
For Example, we are selling a coffee mug for $20, direct costs are $5, and indirect costs are $5.
Gross profit margin = $20 – $5/$20 * 100 = 75%
Net profit margin = $20 – $5 – $5 / $20 * 100 = 50%
7 easy ways to increase your amazon profit margins:
As a reseller, you should know that competition is getting ferocious on Amazon nowadays. Thus, your profit is not higher than the previous. As a result, many sellers are not running their businesses as efficiently as they can. Even so, many sellers don’t have good knowledge of listings and are not running operative promotions. So it can be an advantage for you. Here we will discuss some effective and easy ways to increase amazon profit margin.
Use a credit card for inventory purchases:
Most sellers pay through a bank account or PayPal, which is okay for the small business owner or when your business is in the first phase. But when you are running your business at a higher stage, it will be better to use a credit card to get notified about your expenses and reward points and cashback. But please make sure to repay the credit card bill on time.
Buy-out supplier:
Suppose you’ve noticed that your supplier only has a limited number of items left. In that case, it may be beneficial to purchase the rest, specifically if your seller doesn’t work with many Amazon sellers.
The main advantage is that you obtain all the residual products while competitors wait for the next purchase, so you are the only vendor for a while, giving you a chance to win a Buy Box. You can generate further sales and increase your profits by driving prices up until the market levels out. Another plus is that you can exchange a deduction by serving to buy anything because merchants love a no-sales guarantee.
Repricing Software:
It is the most important way to improve profit margins on Amazon. Amazon prices are always changing, and you must follow these to stay competitive. But instead of doing it manually, find out wherefore you should use Amazon’s Repricer instead. This allows you to fully automate price changes and run them in the background, freeing you up to spend your precious time on
other parts of your business.
Reduce your operating costs:
One of the impressive ways to improve profit margin is to reduce operating costs. Operating costs obtain so many expenses like payroll, rent, and utilities. It’s important to choose which expenses you have to cut down. You can reduce labor costs, utilities, maintenance fees, and employee benefits to enhance profit.
Optimize your productivity:
If you don’t have good inventory control, you could end up with a surplus item that won’t sell.
In this case, you can use the discounts to transport your inventory. Markdowns can significantly reduce profit margins. But! A robust inventory management structure can support you avoid overstocking an item on a discount shelf.
You have to check
- Fast shipping
- Create personalized ad campaigns
- Increase the order value.
Increase your selling price:
Price increases give you a chance to make extra money from each sale, which in turn increases your profit margin.
However, pricing can be a touchy subject. Your pricing approach is based on several factors, including economics, competition, and your aim market. Conduct a competitive analysis before making a decision. Find out how the competitors rate their goods and services. You want to serve competitive prices, but if the products are underpriced compared to your competitors, you may be underselling.
A price increase can upsurge the perceived worth of your brand. If you decide that an increasing pricing system is an accurate decision for your company, start small. Price increases around the world can shock your customers.
Improve your key metrics:
After reducing costs and increasing prices, there are lots of key metrics you have to keep in your mind in order to increase your amazon profit margin. One is improving your CVR, the second is Improving your CTR, and the third is improving your ACOS.
Things to remember while calculating amazon profit margins:
There are such things that you should remember while calculating your amazon profit margin, such as:
Think long-term:
With short-term thinking, you cannot increase your profit; you need to think for the long term. The long-term goals include:
- Multi-channel selling
- Expand business
- Improve customer satisfaction
- Enhance product portfolio
- Improve brand loyalty.
When you outsource your inventory through an Amazon FBA Prep center like AMZPrep, you can increase your profit margin in the long term.
Customer acquisition cost (CAC):
The growth of a business depends on how it can attract new consumers and make sales from old consumers. Customer Acquisition cost is the total expenses sustained to obtain an average consumer, including storage, shipping, marketing, and sourcing.
Reducing CAC increases profit margins, which is a moral sign of a brand’s health, marketing efforts, and customer service.
Constant monitoring:
Constant monitoring is another way to protect your margins. When you constantly monitor the key metrics of your business, you will find out the opportunity to obtain more profit.
Final Words:
If you want to make more money, you should maximize your profit margins, increase your productivity and eliminate all unnecessary expenses. Improving profit margin is an important step for all e-commerce sellers. With a solid plan with these tips, you can improve profit margins on Amazon. Try to keep the focus on customer satisfaction and your expenses so that you can obtain profit in the long term.
Frequently Asked Questions:
Q. Is Amazon FBA profitable?
Answer: Amazon FBA is a great way to make a profit without thinking about customer support or shipping. However, an FBA prep center also helps you to make more profit.
Q. Does Amazon have a good profit margin?
Answer: Profit margin is the percentage of total Revenue after deducting all the expenses. As of September 2022, amazon’s net profit margin is 2.25%.
Q. Why is Amazon profit margin important?
Answer: The key metric of running a business is maximizing profit. Profit margins determine your business health as well as your long-term growth. So it’s important to find your profit margin to prepare your business accordingly.
Q. How do I increase my margin?
Answer: There are lots of ways to increase profit margin, such as;
- Reduce purchasing costs
- Reduce operating costs
- Increase product price
- Manage inventory
- Improve CTR, CVR
Q. What does a 25% profit margin mean?
Answer: A 25% profit margin means a business obtains $0.25 from each dollar of sales it creates.
Q.Is a 100% profit margin possible?
Answer: Profit margin means the difference between the Revenue you generate and the cost of a product. Your profit margins never exceed 100%. It is only possible when you can access a product that costs you nothing.