Understanding the Numbers
The importance of understanding all of your numbers is crucial. We suggest before migrating to software like Hello Profit or Sellics to automate this process that you crunch your income statements manually on Excel.
Digging deeply into the data will give you a good base-knowledge of what Amazon charge and where you can improve.
To run a report, you will need to access a monthly transaction report:
- Seller Central
- Reports – Payments
- Date range reports
- Transaction report and then select the date range
Then you can upload the CSV file to Google Sheets or Excel.
You can then sort the data by transaction type, for example: orders, FBA inventory fee or refunds.
The next step is to enter your unit costs to work out the cost of goods sold on a product by product basis.
We can then multiply the unit rate by the quantity ordered to get the cost of goods sold (COGS) for each order. We have written a script for this process which is provided to all clients.
The rest of the process is reasonably simple, whereby you total up each section such as FBA fees, Selling Fees or Postage Credits:
We can then turn this into a P/L or Income statement for the period we are looking at (usually twice per month)
Looking at each number:
Sales – this is self explanatory.
Net Sales – this is deducting VAT or Sales Tax.
Gross Margin – Net sales minus the product costs.
Seller Fees – what Amazon charge to sell, it is 15% of gross revenue or 18% of net. The small disprencery here could be related to refunds.
FBA Fees – Shipping credits and Promos – This is what Amazon are charging to ship the products to the customer. The shipping credits (what non prime customers pay in shipping) gets cancelled out by a promotional rebate which means we bundle these costs together.
Other – this could be something like storage fees or shipping your product in bulk to Amazon using their partnered carrier UPS.
Refunds – customer refunds, note that a lot of these are paid back to the seller in the form of ‘Adjustments’
What Can We Effect?
Some costs like Selling Fees cannot be altered no matter how hard you try unless you want to do Seller Fulfilled Prime and have no life, so we do not focus on these. Refunds and ‘Other’ we tend to account 3-4% per month for. If you sell good products your refund rate will be low as will your storage fees as the products will be moving out of the fulfilment centres and not stuck there incurring fees.
Although low, Refunds and ‘Other’ are still considered, for instance we try to ship as many units as possible in a single box to FBA, but broadly speaking these costs have the lowest amount of focus due to being the least significant in real and percentage terms.
So we focus on three key metrics; Gross Margin, Cost of Advertising as a percentage of net revenue and FBA fees as a percentage.
When looking at a product to sell, we need to assess quite a few variables, with gross margin being one of the most important. We will always be aiming for 70% in the long run when the product is ranking well and has reviews. This might sound high, but if you look at the Income Statement above, you will see how a gross margin of 71% becomes 20% after all the costs are factored in.
To achieve 70%, you will need a good economical supplier, a good product which can insulate high price points and a product which has demand on Amazon. You can assess the latter with tools such as Jungle Scout.
We can only work with sellers with a solid gross margin due to difficulties to run a profitable Amazon account without it.
Cost of advertising as a percentage – running ads internally on Amazon is a must especially during the early phases. We aim for a true cost of advertising between 10 and 15%. This is enough spend that we are not losing out on growth and not too much that all margin is decimated (assuming you have products which are selling at a minimum of a 70% gross margin).
The good thing about advertising is the ability to scale it back or ramp it up depending on the page positioning of a particular product , profitability of campaigns and general strategy. We find the more money you are prepared to spend on PPC in the early phases of a product launch, the better the product will do long term.
FBA fees as a percentage – this is one of the metrics which is often overlooked as people think this is a fixed fee which they have no control over. This is not true. Firstly FBA fees are as good as fixed. If you see Amazons rate card you will see a few interesting things; the difference in cost to ship a standard parcel weighing up to 250g and up to 1KG is just 28p.
You will find a lot of customers order more than one unit or that certain products are bought at the same time. Each time a customer orders more than one unit, you will have to pay the FBA fee for instance someone orders 3 units at the 250g shipping price point you will pay:
£2.02 x 3 = £6.06
However, if you create a bundle with this product and sell it with a modest discount relative to the individual price, you will only pay one FBA fee and the rate will be only marginally higher i.e in this case £2.30.
You will make the same net profit for an order for £55 for a 3 pack bundled together as one unit, than an order for 3 x 1 unit packages at £20 each or a total of £60 but you will sell far more units due to the incentive to purchase together.
In effect we are trying to reduce the cost of FBA fees as a percentage of revenue by creating incentives for customers to purchase higher priced items. We can apply this same method to cross selling items which are popular together on the same listing as a bundle. We can also create similar items for high traffic listings to increase the average order value and profit per order.
We also highly recommend not selling products for less than £15 (or local currency equivalent), the reason being even the lowest FBA fees will be a big chunk of the selling price in percentage terms. For example a £10 product which costs £2.02 to ship has a FBA fee of over 20%.
PAN EU – this is only relevant for sellers in the EU. But PAN EU can significantly reduce FBA fees. This is the process where Amazon distribute your inventory across 7 countries so that they are domestically shipping. For example, if a customer in Germany places an order, the inventory is shipped from a fulfilment centre in Germany rather than exported from the UK or another country which saves time for the customer and expense for the seller.
As well as the five main markets in Europe, Amazon also store and ship from the Czech Republic and Poland. The fulfilment rates from Poland and Czech Republic offer a sizeable discount if you want to serve the German market.
The Distance Selling Thresholds which is the maximum you can export from one country to another before you have to register varies:
Something to be aware of is the different VAT rates as you will have to be signed up for VAT in each country to be eligible for PAN EU. For instance the VAT rate in Germany is 19% (whereas Poland it is 23% (May 2019) so the cost saving shipping out of Poland might not be more than the increased VAT liability than shipping from Germany for German orders. We do however offer a EU VAT service to help navigate this minefield.
We implore anyone who is selling in Europe and who is already VAT registered in one or more country to register for VAT in all of the PAN EU relevant countries to benefit from these savings. To put it into context, a client who was shipping 3000 or so orders a month from the UK to Europe saved over £5000 a month by doing this.
- Understanding how yours and Amazons numbers work is crucial to be successful selling on Amazon. You can get fancy with software to save time, but we suggest starting with the transaction reports so you are able to dive deep enough to understand your margin structure and their fee structure on a granular level.
- There is no point in trying to reduce Amazon Selling Fees, it is technically possible with Seller Fulfilled Prime but you do not want to be doing that if you intend to create freedom with this business. Other than that these costs are fixed but you need to be aware of what they are and how they affect your margin.
- You should not be selling for products for much less than 70% Gross Margin if you want to have any budget to advertise and still profit.
- Advertising within Amazon is a good way to drive sales and improve page positioning especially in the early phases of a product launch.
- You should be turning single units into multi packs to increase your average selling price and reduce your FBA fees in relative terms.
- If you’re selling in the EU – PAN EU is a must to keep FBA fees down. The alternative is the European Fulfilment Network and it is extremely costly.
If you would like help with any of this please inquire here