When you want to shop online, where do you go? That’s right – Amazon. For many sellers, the logic is the same. As one of the biggest marketplaces in the world for web-based sales, many small businesses see the allure in what Amazon has to offer. Unfortunately, selling successfully isn’t always as easy as it sounds.
If you’re selling on Amazon, you may be losing more than you’re making, no matter how much in sales you’re bringing in each month. These simple steps can be used to ensure profitability, no matter what you have to offer.
Very little in life is free, and Amazon is no different. As convenient and simple as their interface might be, especially for new startups without the cash to invest in a sophisticated platform, the cost of selling may be higher than you realize. Yes, it may be possible to sell a few odds and ends without coughing up thousands for the privilege, but if you’re looking to move large volumes, the luxury of Amazon’s marketplace may result in hefty fees over time.
Subscription Fees: Want a professional selling plan? That will be $39.99 a month. Would rather opt out? That’s $.99 a sale. Pick your poison.
Referral Fees: Referral fees are a little more convoluted, ranging from 6%-15% based on the category of your goods. This percentage applies to total sales, including shipping fees and gift wrapping fees. Regardless of the amount of your sale, fee minimums start at $1 for most categories.
Variable Closing Fees: For most categories of digital media, including DVDs, books, and games, this fee is $1.35 per sale.
Fullfilment by Amazon Fees: If you want to use Amazon’s fullfillment services, you’ll have to pay a fee based on the weight, order handling, and pick-and-pack services, many of which vary seasonally and by the size and dimensions of your product.
If you’re not tracking these fees and what they’re costing you each month, it’s time to start paying attention. Referral, variable closing costs, and FBA fees are all tracked in Amazon’s Fee Preview report, but it’s important to add in your other Amazon expenses, like subscription fees and inventory fees, to truly understand what you’re spending just for the right to sell.
Also known as COGS in the finance world, your cost of goods sold refers to the total expenses directly attributed to the production and sales process. When selling on Amazon, this figure includes the fees detailed above, but the calculation doesn’t stop there. In addition, you need to note the shipping expenses involved in buying or producing inventory as well as getting your inventory from you to your buyers, and every step in between. This includes packing costs, postage costs, Amazon’s fulfillment center expenses, and any other prep, like bags and product labels.
There are a lot more costs that go into running a business than simply the expenses related to selling a product. You also have to factor in things like advertising, labor costs, technology costs, office costs, and any other operational expenses that go into generating revenue. In total, these expenses, expenses that can be directly linked to the cost of selling goods, are known as cost of sales, and, when subtracted from revenue, provide you with a gross profit figure.
For example, if you make $1,000 from selling on Amazon in a month, but spend $900 on labor, shipping, and Amazon fees to get there, your gross profit is only $100 for the month, or 10%. While this amount may be good enough for some people, other entrepreneurs will find a low GP highly undesirable. It’s up to you to set benchmarks, whether based on your own goals, industry averages, or a blend of the two.
If you only sell one product line, or stock keeping unit (SKU), on Amazon, this next step will be easy, but most sellers aren’t so linear. When you sell multiple SKUs, you will have to perform these calculations for each of them to determine whether your business is truly succeeding. In many cases, some SKUs will be bringing in a profit, while others will cost you far more than you’re making back. By tracking what works, what doesn’t, and what could use some tweaking, you’ll be able to take a realistic look at what you need to do to keep your Amazon business moving in the right direction.
When you attempt to run a business without keeping an eye on your financials, it may be far too late before you realize what’s wrong. Rather than listing and selling with reckless abandon, it’s important to take time out to take an honest, objective look at where your company is heading. Your business – and your wallet! – will thank you.
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