Amazon Marketplace: What a great Amazon ROI strategy looks like

You’re ready to sell more on Amazon, you have stock, a great storefront page and an advertising strategy - everything is ready to go

It might seem like an obvious task, but going over your figures again before you “press the button” to sell more on Amazon, is a good idea. Many new sellers make the mistake of not factoring in the costs that come with online trading, which gives them a false (and higher) than expected Amazon ROI.

ROI is more than just the difference between the price you paid for an item and what you sell it for on Amazon. You need to factor in all of the Amazon fees to obtain the true Amazon ROI. You need to ensure that you have included:

• Seller account fee: How much do you pay Amazon every month for your seller’s account.

• Referral fee: The fee charged by Amazon on every sale, whatever your category, which is a percentage of the product’s price.

• Variable closing fee: The charge on shipping items, taken off the grand total of the sale.

• FBA (Fulfilment by Amazon): It makes life easier as a seller (and Amazon may be able to fulfil at a lower cost than you can), but you do have to pay for FBA.

For example, you’ve bought an item for £15 and sold it on Amazon for £25 via FBA. It would be easy to think that your profit is £10. But in reality, after the aforementioned fees, your ROI is more likely to be around £5. This is still a healthy return, but not what you were originally expecting, or had calculated if you’d failed to factor in the Amazon fees.

The 3x rule

If calculating these different figures sounds complicated or confusing, you could opt for a popular approach used by many new Amazon sellers - the “three times rule” or “3x rule”. In general, this strategy aims to create a 100% return on your investment.

The idea is that you buy an item for say £5 and sell it on Amazon for £15 (sale price = three times the original cost). In this example £5 is paid for the item, you roughly calculate to pay £5 in Amazon fees, and the remaining £5 is profit – creating a 100% ROI, which is a great result.

This 3x rule is sound, in theory, to get your Amazon business up and running, but it won’t work long-term because you won’t always be selling goods at 3x the cost price. Some sellers clearly make good profits from selling at scale with low margins. Plus, you may be operating in different Amazon selling categories with different fees, and prices, which will impact your ROI. Meaning you will need to adopt a more long-term ROI strategy.

A long-term ROI approach – be flexible

In short, you need to be flexible and accept that your ROI will go up as well as down. It’s likely that as time progresses, you may need to lower your ROI because there just won’t be enough items to buy at a lower price within the business to business market to fulfil the growing orders of your expanding business. Your ROI can, of course, increase again if you find new stock or items that can generate a healthy ROI.

The ROI or profit margin approach?

It can be helpful to understand that ROI and profit margins are two different ways of monitoring the success of your business. To put it simply, ROI focuses on the return of your investment – for example, you spend £1, sell for £4, but after all fees/costs are deducted your return is £1.20, giving you an ROI of 20%.

Where ROI focuses on what you invest in total, a profit margin is calculated solely by taking the difference between the selling price of an item and the original buying cost. No Amazon fees are included in a profit margin calculation and, as highlighted earlier, this approach can give you misleading profit figures.

Whilst it’s good to be aware of both approaches, most business owners favour ROI for an overall view. However, profit margins can be helpful for a quick calculation of what’s working well for your business and what’s not.

You may have an item that cost 50p, you sell it for £2 (creating a healthy profit margin of £1.50). But, taking an ROI approach, you can see that the item takes weeks to sell, hanging about in the warehouse, generating storage costs – and what about the other Amazon fees? It might be wise to lower the profit margin slightly and sell at £1.20 – to increase the ROI.

Ways to maximize profits on Amazon

Once your business is selling on Amazon or has increased sales on Amazon, you need to look at your ROI and see if you’re happy with the amount you’re making. If your business is delivering a higher ROI than expected, could you invest more budget in Amazon advertising? Although the cost may hit your ROI in the short term, it hopefully should generate higher sales and boost ROI in the future. The Amazon Flywheel tells us that the more we feed Amazon, the better results we can expect.

Alternatively, if you are disappointed with your ROI, you may need to reconsider your pricing strategy - lowering prices to nudge out competitors, or opting for Amazon bundle selling or other flexible approaches. However, be aware of lowering prices to a point where you are unable to profit. Again, use your ROI figures to make this decision.

Low margin, low-cost strategy

It’s worth considering that many successful Amazon businesses make very low margins. However, they also make the most of Amazon FBA and have stock sent directly from the manufacturer to the Amazon warehouse. This means that whilst they make a low margin, they never handle stock, don’t need to concern themselves with packing, distributing or returns. In fact, some of these businesses are run out of bedrooms or from beachside restaurants. Amazon costs may be higher, but their non-Amazon costs are much lower.

Let’s not get carried away though – Amazon is increasingly pushing towards dealing directly with brands rather than resellers, driving the lowest possible prices for customers and rewarding the brands with higher sales. This means that low-margin reseller strategies may become less viable for businesses without brand control.

If you do control your brand, it’s worth bearing in mind that low-cost passive businesses are a possibility when selling on Amazon (i.e. businesses remove their own storage and distribution costs and rely on Amazon’s superior logistics. Whilst their margins are lower, so are their costs. So ROI can sometimes come in at similar levels).

Final thoughts on ROI

A simple way to keep track of your accurate ROI is to check your sales and costs on a monthly basis. Bear in mind, prices fluctuate on Amazon, including costs for campaigns and keyword bidding, so by looking at figures at the end of every month you can give yourself a clearer picture of how your business is performing.

You can also track your performance, and ROI, over quarterly periods and even year on year. This approach will help you to see what’s selling and what strategies are working for you to help you maximize your profit margins, and ultimately your ROI.

Optimizon uses a machine learning approach to accurately track and interpret pricing strategies.

Finally, don’t get sucked into thinking that higher Amazon costs are always a bad thing. If you are taking advantage of Amazon FBA, whilst it is costly, it may be cheaper than you delivering the same services yourself. Customers are also becoming increasingly expectant for the next day rapid deliveries that Amazon offers.

As always, if you require any assistance with your Amazon selling, please reach out to the Optimizon team.