Achieving the 4 Levels of Amazon Profitability
As an online seller, you will, one way or another find yourself in a position where you’re making a lot of profit, but you don’t see the cash in your bank. Profitability has different levels. You don’t need to achieve them all to be profitable. But each level achieves a different potency. It makes sense that achieving them all could mean higher profits.
Level 1: Increasing Sales
It is probably the most obvious and straightforward way to increase profitability. It can be achieved by increasing the volume of sales or increasing prices. Both will have their own effects.
The reason why you’re getting less profit could be the outdated pricing system you have. Prices always change on Amazon, it’s better to have updated pricing for your products.
If you are not keeping tabs on your Stock Keeping Unit (SKU) you might leave money unutilized. Knowing which items sell and which don’t will help you increase profitability. You can drop ones that don’t and you can increase inventory for the ones that are doing well.
There is a third way to increase sales and that is adding new products or bundling products in your lineup. The bestseller often doesn’t stay the bestseller forever, competition is fierce. Amazon can even offer buyers more tempting deals. You might need to be on the lookout for new products that are trending.
Level 2: Decreasing COGS
The Cost of Goods Sold is the direct cost connected to your sales. They include purchase or manufacture cost of the product, freight, tariff and duties, and other miscellaneous expenses such as Amazon commissions.
Despite the popularity of the revenue numbers, the battle of profitability is often won in the COGS. There are high-selling products that generate low-profit. Between Product A which sells at $100 but cost $90, and Product B which sells at $10 but cost $2, which contributes more to the profit margin? Selling more of Product B will produce more profit at the least cost.
You can always renegotiate terms with your supplier or your freight hauler. Decreasing your COGS will increase your profit.
Level 3: Increasing Advertising Efficiency
If your margins are cutting too close, advertising costs will become a burden and can even cost you your profit. There are products that you can’t cut, maybe because it’s your best-selling product or because it represents your brand, but if their COGS is cutting your profit margins close, you might need to reevaluate the efficiency of your advertising.
If your COGS and advertising are more than 40%, you should rethink carrying this product. Considering your return on investment on your advertising will help you decide which products are worth keeping, or if you’re overspending on advertising.
Level 4: Cut on Overhead
Overhead is the expense you incur to pay yourself, contractors, employees, rent, and office supplies. The last level to increase profitability is cutting overhead.
While not all businesses are the same, there are 3 common overhead expenses for your Amazon business that comes to mind. First, Shipping expense. To decrease this expense, you can negotiate better terms with your suppliers to reduce fees as your volume grows. Second, recheck the optimization of your employees or contractors. If the job can be handled more cost-effectively, you should look into it. Lastly, seller tool expenses can easily add up. It’s those small expenses that can creep up on you and catch you by surprise. Auditing your software will help trim down unnecessary expenses.
Finding the right people
The real financial health of your Amazon business should not evade you. You can contact us with any questions on profit maximation. We can help you sort out how to optimize your profitability and improve overall financial health. With Mehanna Advisors, every little thing counts.