Healthy profit margins and a hefty ROI are the stuff of every Amazon seller's dreams. But what does that mean? Read our introductory guide to find out.
November 28, 2022
It's critical to maintain a healthy ROI when building your Amazon business. The best way to do this is to keep your costs minimal and your profit margins high. Not sure where to start? Let's unpack these numbers together.
What Is A Good Profit Margin For Amazon FBA Sellers?
In short, your profit margin tells you by what percentage your sales revenue (or income) exceeds your cost of goods sold. There is no "best" profit margin - every business is different, and many other factors determine how profitable your business is on the whole.
However, you generally want to aim for the highest profit margin possible.
About a third of Amazon sellers earn profit margins above 20%. That means if you're making profit margins above that, you're already at the top of the pack. 20% is an excellent place to start if you’re looking for a solid foundation.
Profit Margin vs. ROI
So how do you calculate your profit margins? And what does ROI have to do with it?
These two numbers are related but not equal.
Profit margin is the percentage by which your sales revenue exceeds your cost of goods sold. This number will differ for each product you sell. To calculate your profit margin, you use this equation.
For example, let's say you sourced a dog collar from China for $1/unit and intend to sell it back for $8/unit on Amazon. To find your FBA profit margin, we'll first deduct expenses from the resell price to determine the "net profit." Note that the sourcing cost is not the only cost to deduct here - taxes, FBA Fees, shipping fees, and other costs must also be considered here. These expenses are part of the "COGS" or "Cost of Goods Sold."
$8 Resell Price (Net Sale)
-$3 Shipping Fees
-$1 FBA Fees
-$1 Other Fees & Taxes
$2 Net Profit (Per Unit)
Now, we'll plug those numbers into the equation to find the profit margin.
($8-$6) / $8 = .25 or 25%
Your dog collar is hitting a 25% profit margin in this scenario. That's great - especially considering this item will likely sell easily.
ROI is a related metric, but it's a bit more complicated. ROI stands for "return on investment," and it is calculated by dividing your net profit by the COGS.
Let's say you invested $5,000 over a period of three months into your Amazon FBA store once you consider inventory, FBA fees, shipping costs, marketing, support, and other hidden expenses.
Within those three months, you've generated $15,000 in sales. Your net profit is $10,000 ($15,000 in sales - $5,000 in expenses). That means your ROI is equal to $10,000 / $5,000, or 200%. In other words, you've earned back 200% of your initial investment.
Both ROI and Profit Margin are important metrics to understand where your business stands and how healthy your FBA store is.
As you're starting out, your ROI may not be impressive. Startup costs are no joke - which means more expenditures at the beginning. This metric will improve with time.
Your profit margin, however, cannot start low. You must carefully set your pricing to ensure that you have a healthy profit margin from anything you sell. The quickest way to a high ROI is a collection of products with high-profit margins.
How To Maximize Your Profit Margins
So how do you ensure that your profit margins are where they need to be? Here are a few tips to keep those margins high.
- Perform market research. Only buy inventory after you have thoroughly researched the product in question. What is this category's average profit margin for Amazon FBA business products? Is this a growing niche? How is this product different from others in the industry? Is the price per unit low enough to earn a profit? Is this product small and light enough to reduce storage and shipping fees? These are questions you need to have answered before you spend thousands of dollars on products and shipping.
- Use the 3X (or 4X) rule. In general, you want to be able to sell your product for at least 3 times the price you bought it for. If you're sourcing for $5, you should sell it for at least $15. In today's economy, you may want to be more aggressive with this pricing and use a 4X rule - but evaluate the marketplace first to ensure you aren't giving your competitors an edge. When dealing with items under $1, you can also go beyond the 3 or 4X rule.
- Remember The Fees. Many Amazon FBA seller go into Amazon FBA completely blind to all the fees associated with an Amazon store. Not only do you have standard business expenses like sales tax and shipping fees - but you also have to pay fees specific to Amazon. The monthly Amazon subscription, FBA fee, Amazon seller account fee, storage fee, PPC cost, and more.
- Consider The Item. Some items with lower profit margin may outperform items with higher profit margin. There is a balance to strike here. Your goal is not simply to find the product with the highest profit margin but to find a product with a reasonable profit margin that will sell in large quantities. Selling 1,000 products at a 15% profit margin will have better results than selling 2 products at a 40% profit margin. Consider this when choosing your product.
It's essential to understand the metrics that affect your Amazon FBA store. Both profit margins and ROI are critical to success, but they are affected by different factors and should be looked at independently. Start by increasing your profit margin - ensure you get a reasonable return on every item you sell. As your business grows, find ways to reduce expenses and increase sales to get that ROI where it needs to be!
Julia Grant is a copywriter specializing in e-commerce and small business, helping businesses expand their reach with copy that clearly communicates their message and converts. She is a certified translator and interpreter and prides herself on providing culturally relevant content in both English and Spanish.See more posts from this author