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How to Pull the Four Levers of Amazon Profitability

Amazon Profitability

Nearly every business owner has been there at some point. If my sales figures are so huge, where’s the cash flow? If you’ve ever found yourself in this spot, a dig through your business’s financials likely shows that the problem is profitability.

Happily, making more sales is only one – albeit the flashiest – lever you can pull to help your Amazon business generate sustainable profits. In this article, we’ll talk about how you can increase your sales, but also pull those other three lesser-known levers for Amazon profitability.

Lever 1: Increasing Sales Growth

One of the most obvious levers to pull to increase your Amazon business profitability is to increase sales. This can mean:

  • Increasing prices – Prices change on Amazon constantly. If you aren’t keeping a close eye on your SKUS (either manually or by using software), you may find yourself leaving money on the table.
  • Selling more of your existing products – Which of your SKUS are most profitable? For a quick sales boost, considering stocking more of them or putting resources such as advertising and Amazon’s A+ Content program behind them.
  • Adding new products to your mix – Every Amazon seller knows that a bestselling SKU doesn’t last forever. Trends change, the market gets saturated, or Amazon itself comes in and offers buyers a more tempting deal. Savvy sellers are always on the lookout for new products.

For many sellers on Amazon, sales are already great. In a letter to shareholders, Jeff Bezos revealed that in 2018 Amazon’s 3rd party sellers made up a bigger share of sales than Amazon itself. That’s all well in good in the big picture, but are all those individual Amazon sellers profitable?

As Seller Accountant Co-Founder Tyler Jefcoat always says, “Sales is vanity. Profit is sanity.” So that takes us to:

Lever 2: Decreasing Cost of Goods Sold (COGS)

COGS is the direct costs associated with your sales. These include:

  • Purchase or manufacture price of your product
  • Freight costs to get the product to you
  • Tariffs and duties
  • Miscellaneous fulfillment expenses, such as Amazon commissions

Hot take: COGS are more important than sales.

You read that right. If you just look at your sales figures and then toss the rest of your financial reports in the circular file, you are missing out on a true picture of your Amazon business’s financial health.

The SKU that looks like a real winner when it comes to sales figures may also be the SKU that is pulling your profits down into the red when it comes to the cost of purchasing or importing it.

The good news is that you can likely pull the COGS lever today to increase profitability. Read more on how to calculate COGS in your Amazon business.

From there, kill or sell off products that don’t have enough margin and negotiate pricing on your profitable products. Once you’ve completed that step, cut the fat off your logistics. For example, can you negotiate with your freight hauler?

Decrease COGS, increase profit.

Lever 3: Increasing Advertising Efficiency

It’s very hard to be wrong when saying, “You are probably over- or underspending on advertising.” Like COGS, your ad spend is a delicate balance between paying just enough to attract eyes and clicks to your product, and paying so much that you eat into your ROI.

That’s why you should always look at your advertising expenses in context with COGS. What do I mean?

COGS and Advertising Example

You have found a product that costs you a grand total of $5 to purchase, have shipped, and prep for Amazon. But you can sell that product on Amazon for $50. You are in luck! You still have $45 of margin and have room to use some of that margin to buy advertising.

But on the other hand, say you figure out your COGS on one of your other bestselling products and find that while it may sell for $50, it costs you $40 in COGS just to procure and ready the item to sell. In this case, advertising can quickly cut into your margin. If you’re not careful, you may even find yourself underwater on COGS and advertising without realizing it.

Pro tip: If your COGS + advertising on a given SKU is more than 40% of the sale price, take a hard look at whether that SKU is performing up to your store’s standards.

Taking a hard look at the ROI of your current advertising in relationship to your COGS will help you pull this profitability lever.

Lever 4: Decreasing Overheard

Once you have a handle on sales, COGS and advertising, the number you are left with is your Seller’s Discretionary Income (SDE). This is the number you use not only to pay yourself, but pay employees and contractors, rent warehouse space, purchase seller tools, and even keep the office supplied in coffee and printer paper.

The final lever you can pull for profitability is decreasing your overhead. Every business is different, but here are a few examples of ways e-commerce businesses can save money:

  • Shipping – Have you negotiated with your carriers? Some carriers can reduce fees or otherwise give you a break on shipping costs as your volume grows.
  • Contractors – Are your contractors doubling up on any work? Are you using all of their allotted hours? Could this work be outsourced in a more cost-effective way?
  • Seller Tools – It’s easy to pay $9.99 here or there for a SaaS product only to realize that those little expenses have added up.  Audit your 3rd party apps and seller tools to determine if your needs have changed, and then adjust accordingly.

As online sellers, we are all also buyers at heart. But you might be amazed at how, while you were busy maximizing sales and targeting the right keywords, overhead expenses have crept up on you. Take a hard look at your overhead to maximize profitability.

Seller Accountant has been busy talking to Amazon sellers like you about the real financial health of Amazon businesses.  Sign up now to receive:

  • A free copy of our eBook Solving the Cash Flow Crisis
  • A free copy of our upcoming How Profitable Should Your Amazon Business Be?
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How do you pull the four levers of Amazon profitability? Let us know in the comments!

Need assistance? No time? Contact us for a free e-commerce accounting consultation.

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