Are your sales numbers mysteriously down? When you have a complicated Amazon business with varied SKUs you may find yourself struggling to figure out what’s going wrong. At Seller Accountant, we’ve seen several sellers assume that their performance is simply under par, not realizing that just a small handful of SKUs are actually killing their bottom line!
Look at it this way. If you only sell one product, that product’s performance equals your Amazon business’s overall performance. But once you start tossing other products into the mix, understanding how each of them is individually performing becomes critical.
And I get it. We’re human. Maybe you started your Amazon business selling a certain car charger. That car charger may even hold sentimental value for you. Hey, it’s the product that let you quit your job and change your life! But maybe that car charger just isn’t selling like it used to. (After all, one thing we all know as Amazon sellers is that technology changes rapidly!)
Pinpointing a Sales Decline
So, you’re seeing underperformance in your Amazon portfolio and you’re not sure how to pinpoint the culprit. What to do?
At Seller Accountant, we recommend grading your SKUs. To run a thriving Amazon business, you must examine every SKU and hold it accountable for its performance. Just one bad egg SKU could be the straw that ultimately breaks your Amazon business’s back. You could literally be losing money.
How do you grade SKUs? Perform what is called, in CFO-speak, a “Unit Economic Analysis.”
Plenty of software will integrate with your Amazon account and help you do this, but here at Seller Accountant we recommend that you do your own Unit Economic Analysis at least once, so you understand the process. It’s relatively quick and painless and could ultimately save your bottom line!
Fun Fact: Both SKUs and ASINs are numbers (or numbers and letters) used to identify individual products. SKU stands for “Stock Keeping Unit” and is your, the product owner’s, unique identifier for that product. ASIN stands for “Amazon Single Item Number” and is a 10-digit string of letters and numbers Amazon assigns to each unique product on the site.
What is a Unit Economic Analysis?
To perform a Unit Economic Analysis in your Amazon store, imagine that you sell just one unit of a given SKU.
- What is the unit’s factory cost?
- What is the fulfillment cost for that single unit?
- What is the Amazon commission on the unit?
- What am I spending to advertise on this single unit?
Determining these numbers allows you to build a mini-Profit & Loss report on each SKU.
How to Grade an Amazon SKU (In 10 Minutes or Less)
Technically, we call this a “Unit Economic Analysis,” but in trying to keep this blog as clear of finance-speak as we possibly can, let’s just call it “Grading a SKU.”
Let’s get started.
From your Seller Central account, go to Reports > Fulfillment > Fee Preview and download the Amazon Fee Preview Report.
This report provides you with the following:
- A list of your active SKUs under the header “sku” in Column A
- Your current sales price for each SKU, under the header “sales-price” in Column H
- The estimated Amazon commission on one unit, under the header “Est-fee-total” in Column S
- A bunch of other information you can delete or ignore!
In your favorite spreadsheet app, add a new column to the right called “COGS Per Unit,” and add your landed COGS for each unit. (Need help figuring out COGS for each of your SKUs? Read our blog post on “How do I calculate COGS in my Amazon Business?”)
Starting with your Sale Price, subtract your Estimated Fee Total and your COGS to get your Gross Profit. (Example: If your sales Price is $100, your Estimated Fee Total is $25 and your COGS is $25, then your Gross Profit on that SKU would be $50.)
From here, determine your Gross Profit Percentage by dividing your Gross Profit by your Sale Price. (In Row 4 of this example, that would look like this: $47.57/$149.60 = 31.75% Gross Profit.)
Next, add your advertising cost for that SKU in a new column. (Shown here as “Ave Ads”). If you don’t have the ability to split up your advertising cost by SKU, you can also use an average.
In the next column, subtract Ave Ads from your Gross Profit to get your final number. Let’s call this Seller’s Discretionary Income (SDE). SDE is the amount you have left over once you have bought, advertised and sold your products. Turn that number into a percentage by dividing your SDE amount by your sale price. (So, in Row 4 of this example, it would look like this: $32.57/$149.60 = 22% SDE).
As you can see, in Row 5, the seller is actually losing .37 every time he sells a unit of his SKU. Ouch. But wait, there’s more…
Add a column for “Number of Units Sold in the Past 30 Days.” Then multiply that number by your SDE on that product and you’ll get your Total SDE on that SKU from the past 30 days.
As you can see, when this seller finishes grading this SKU, he find he has lost .37 cents on 1250 sales! That’s $462.50 in lost profit. Just by nixing that underperforming SKU, this Amazon seller could scoop nearly $500 right back into his pocket.
I hope this example has illustrated why it’s absolutely vital to know the health of your individual SKUs.
Software for Grading Amazon SKUs
Now that you’ve manually assessed the health of your SKUs you may want to continue to monitor them. Fortunately, software like Helium 10, Sellics and Managed by Stats (to name just a few) will do this for you automatically so you can spend your time on more profitable business to-dos.
Seller Accountant Founder Tyler Jefcoat recommends that you spend no more than 40-45% of each SKU’s sales price on COGS and advertising.
If you are spending slightly more than that, consider strategies like negotiating with your supplier or freight hauler to lower your SKU’s COGS. (Remember, COGS are all the costs you incur to get your product to the buyer.) But if you are spending much more than 50% of each SKU’s sales price in COGS, it may be time to write that SKU off before it drags your entire bottom line down with it.
Also, set a performance goal for each ASIN. Carefully monitor its profit, target ad spend, and target monthly sales. This will allow you to keep an eye on a slow performer or nip it in the bud before it can become a losing SKU.
How do you monitor the health of your SKUs? Have you ever found a SKU dragging your bottom line down with it? Let us know in the comments!