It is incredibly difficult to be successful in any sales space if you do not have a firm grasp of your margins. In order to properly understand your margins and what your profits should be, you need to know where you are spending your money and the steps you can take to shore up that spend to maximize your profitability.
Margins differ from business to business and market to market, but the general approach laid out in this post covers the most important general points to consider when analyzing your business’s profitability.
From Amazon to other digital marketplaces, here is everything you need to know about margins:
Your Amazon Margins
Your Amazon margins are largely dependent on what you are selling and your business model, but knowing all the details will help you understand what needs to be done to expand your customer base and increase your profits.
To calculate your margins, or decide what you want your margins to be, you need to make sure that you are accounting for any and all fees you may be incurring.
There are two types of margins that you need to consider: your operating profit margin and your gross profit margin.
Your operating profit margin is the percentage of every dollar that comes back to the business. For example, if you have made $100,000 in a sales, and after fees and expenses you are left with $25,000, you have an operating profit margin of 25%.
Your gross profit margin looks at a bigger picture and helps you to understand the overall efficiency of your operations. It looks at the money you have after a single sale. It considers all fees along the supply chain, including your Amazon fees.
Unfortunately, selling on Amazon is not without its costs. The exact fees you incur will depend on how you are selling the products and the categories your products fall into.
Here are the main fees you will see on Amazon:
Selling Plan Fee: The Individual Amazon Seller Account, for people looking to sell only a few items a month, is a basic plan that charges a per unit fee of $0.99 per item sold. The Professional Amazon Seller Account does not have a per item fee and instead charges $39.99 a month.
Referral Fee: Because Amazon is essentially referring a customer to your product listing, they are going to take a cut from any sales you make. These referral fees are calculated as a percentage of the total item price. The exact percentage you will be charged depends on the category you are selling in. For example, Home & Garden charges 15% while Kindle accessories go up to 25%.
Variable Closing Fee: This fee is subtracted from the overall sale. This fee is used towards the shipping details of your item. For media products, it is a fixed rate of $1.35. For non-media products, the fee depends on shipping price. Domestic standard rates are $0.45 plus $0.05 per pound and the domestic expedited shipping is $0.65 plus $0.10 per pound.
FBA Fees: If you are using Fulfilled by Amazon, there will be associated fees there as well. Two in particular: the fulfillment fee per unit and monthly inventory storage fee per cubic foot. These fees fluctuate slightly over the course of the year. The fulfillment fee is slightly higher from January to September and lowers during the holiday season from October to December. It is worth noting, however, that the inventory storage fees go up from October to December. For a closer look at Amazon’s FBA fees, check out the charts found here.
What’s A Good Profit Margin?
Calculating a “good” profit margin on Amazon can be difficult because so much of that calculation depends on your product, your category, and your business goals. Some categories earn more than others. Online retail net margins, for example, hover around 3% but that does not mean you are not able to earn more.
Once operational costs are covered, reinvesting some of your profits back into the business is a wise idea. Advertising, marketing, and branding are all important elements to attracting customers and growing your business. If you want to maintain your current position, investing about 5% of your total revenue into marketing should do the trick. If you want to grow your business, up that 5% to 10%. It is important to stay flexible with this budget. You may find yourself engaged in campaigns that are working really well and you may want to put a little more spend behind it, others may not do so well and pulling out would seem like the wisest option.
In a constantly shifting online marketplace, being rigid in your marketing and advertising budget can be a disaster, especially for small to medium businesses. Do not be afraid to test the waters and then spend according to what works best.
Staying on top of your margins is one way to ensure you always have a “good” margin. Monitor your sales and see which products sell organically and which may need some advertising help. If you are stocking a lot of products that do not sell very strongly, consider doing away with those and focusing your efforts on the products that do sell. If you are carrying a large inventory, consider offering sales or promotions to clear this out and cut back on unnecessary storage fees.
Fees In Other Marketplaces
You may have read the above Amazon fees and thought to yourself that it must be more profitable to sell in other marketplaces. The unfortunate reality is this: no matter where you sell, you will incur costs and fees. For a quick look at cost and pricing associated with other marketplaces, check out this post.
Behind Amazon, eBay is the biggest online sales space. They charge a monthly fee that ranges from free to $299.95 and on top of that, they take 10% of the total sale price per item sold, and charge a sliding fee per number of listings. Even selling from your own site will not be without expenses. You will likely have to pay web hosting and then there are advertising costs, inventory and warehouse costs, shipping costs and staffing costs. Same for a brick and mortar store. There’s rent, electricity costs, banking fees, staffing costs -- on top of general inventory maintenance costs.
Once again, the margins you earn will be based on the market category you occupy and the amount you spend on advertising and business operations.
But in these marketplaces, as on Amazon, if you pay attention to the data that comes your way, you should be able to adjust your spend and purchase orders to maximize your profits.
For businesses who also operate bricks and mortar locations, paying close attention to your prices will help you increase sales and revenues. Consumer surveys from the last few years have found that sales from physical locations remain strong but that customers often check prices online before buying in-store and will not make a purchase if they can find it cheaper elsewhere. It can be hard to stay competitive with online sellers given some of the extra overhead that comes with a physical space. But, the convenience of taking their purchase home that very day can earn you a little leeway in price.
Calculating your margins is easy. Knowing how to operate within them to maximize your profits is the hard part. There is no one size fits all solution to your business operations. What works for one brand, may not work for you. Markets change and with that change, interest in your products can fluctuate. Be smart with your money. Know where every cent is coming from, and where every cent is going. This is essential for finding your own sweet spot, that place where you routinely earn a consistent profit. Once you have done that, you can take a look at what you should be investing to grow this profit even more!