In order to be successful on Amazon, it’s crucial for sellers to maintain high profit margins. More profit on every unit sold means more capital to grow your business faster and the ability to reach your goals even sooner.
However, many sellers struggle to find ways to improve their margins and maximize profits. To help you put more of every dollar back in your pocket, this article will cover five effective tips that can help you improve your profit margins and create a more successful business on Amazon.
1. Sweat the small stuff
Whilst it might not seem as glamorous as some of the topics we’ll get to, having a good handle on the finer details and logistical workings of your business is fundamental to growing your profit on Amazon.
Understand your margins
Before you try to increase sales, ensure you have a clear idea of what numbers you’re working with. By using a detailed reporting tool like sellerboard you can quickly and easily understand what costs you are paying at a SKU level and identify areas that can be improved. This kind of detailed information can help you make informed decisions on where to invest in better marketing, negotiate better prices, and potentially even cut SKUs from your inventory.
Stay in stock
One of the biggest mistakes that erodes profit for Amazon sellers is stocking out of key products. When learning how to sell on Amazon, sellers discover that launching a product on Amazon in most categories will require a marketing strategy that includes competitive pricing and aggressive sponsored products campaigns.
As time goes on and your listings gain more organic ranking for a wider range of search terms and more positive reviews you can begin to increase your price and improve your marketing efficiency. However, if you are constantly running out of stock on your most important items then this will mean you need to “re-launch” every time you’re back in stock to claw back the momentum of your original launch.
This leads to great inefficiencies in your business and is one of the most important things to overcome when asking how to increase profit on Amazon.
2. Improve your supply chain
Once you’ve nailed your numbers, the next step is to master your supply chain and ensure it is as efficient as possible. Here are a few quick wins to help you do that.
Improve your cashflow
As mentioned previously, stocking out is one of the biggest enemies of making profitable sales on Amazon. A new Amazon seller only has so much capital available and, due to Amazon’s delayed payout schedule, proceeds from sales can take some time to catch up with the level of stock needing to be re-ordered.
To help improve this some sellers look to utilise 0% interest offers when making inventory purchases or adding more personal funds into the business in order to get over the cashflow hump early on. It’s also highly advisable to avoid any unnecessary costs in your business and ensure you can funnel as much capital back into inventory as possible in the early days.
Negotiate with suppliers
Another way to improve cash flow is to negotiate with suppliers. Of course, there is room to negotiate with your supplier for a better price, but chances are you’ve already done that and got the best price you can. Aside from placing larger orders or shopping around for other suppliers to decrease your unit cost, you can also negotiate on terms.
Whereas most suppliers will expect 30% deposits and 70% balances paid on completion of manufacturing at first, many will be open to improved terms over time. My main supplier for a brand I own has recently agreed to a payment structure of 10% deposits followed by the balance paid when goods arrive at the port of destination. As you can imagine, this is a huge boost to our cash flow!
Use efficient payment methods
When starting your online business and paying small amounts for your first inventory orders the payment method you choose will not make a great deal of difference. But as you begin to spend thousands, and tens of thousands of dollars you will be able to find optimized ways to pay your suppliers. Whilst services like PayPal or credit cards may charge 3-5% on transactions, you can find currency exchange and transfer solutions that charge a fraction of this price.
Pro tip: the same can also be said for how you receive money. If you’re selling in more than one currency and allowing Amazon to do the currency exchange for you, you’re losing another 2-3% there.
Ship inventory efficiently
Most shipping firms will have minimum charges such as a set price up to 3 cubic meters (CBM), then a price per CBM beyond that. If you’re only shipping 1-2CBM you’ll still be paying the full 3CBM price, so you should always look to try and max out the minimum required volume. As your business grows you’ll also be able to consolidate shipments and look towards shipping full containers.
By following the above steps and improving your inventory management and cash flow you’ll also be able to avoid expensive air shipping and instead ship all orders by sea saving further shipping costs and adding dollars to your profit margin.
3. Optimize your product for profitability
Whilst your manufacturers of course want you to be profitable so you can continue to place more orders, they are far less concerned with your profit margin than you are. That’s why it’s essential that you take the time to optimize the end product according to your goals.
Optimize packaging for fulfilment fees
A small increase in package size can lead to a large increase in Amazon fees. I once sold a bath pillow and my manufacturer told me they were increasing the size by just a few centimetres as this would improve the experience for the customer. “Great!” my new Amazon FBA seller brain thought.
Little did I know this extra size would bump this product into the small-oversized category and almost double the Amazon fulfilment fee. With this in mind, you can proactively work on ways to decrease the volume of your products by creating smaller packaging and saving on costs.
Using sellerboard is a great way to identify how much you’re paying for fulfilment across all your products and if there are ways you can reduce these costs.
Remove unnecessary parts
You can also consider what is within your product and how much of it is essential for creating an excellent experience for your target audience. If there are items within or aspects of your product that are surplus to requirements then make sure you get them removed. The physical cost of the materials and the potential shipping cost savings will be more than worth it.
4. Increase your selling price
The obvious route to increasing Amazon profit margins is to raise your prices. But it’s not quite as simple as that, and there are some things you need to do in order to make that a successful strategy. Here are a couple of things to consider.
Justify a higher price
You can’t just set a ridiculous price and expect to make sales. If you’re going to price your products at the higher end of any given market then you need to give customers a reason why they should buy your product at a premium.
If you want a high profit margin but still want to make more sales and maintain a good sales rank then you need to clearly differentiate your products with premium packaging, extra features, and sometimes even a unique design.
Bundle products together
Additionally, you can look to bundle items in one package. Let’s say you’re looking to sell a hammer but on its own, you will struggle to make a very high profit margin. You know that customers who buy hammers also buy screwdrivers, so rather than sell these two items separately you could look to package them together helping you increase sales and save fulfilment fees leading to higher profit margins.
5. Improve key metrics
Once your foundations are set, your product is sourced, and your price point established there are still more areas you can improve your profitability. Let’s look at three key metrics that when improved can quickly increase your profits.
Improve your CVR
Conversion rate, or CVR, is one of the most important numbers in your Amazon business. Simply put it’s the number of sales you make in relation to how many customers visit your product listings. If you have 100 visits and 15 sales, your CVR is 15%. A study by MarketPlace Pulse stated the Amazon-wide average as 12.5%, but regardless of what your number is you should always be looking to improve it.
Things that improve your CVR are on-page aspects on your Amazon listings such as high-quality product images, detailed product descriptions with sales-focused copy, and more reviews. Each of these aspects is extremely valuable in driving more Amazon sales and increasing your profits so you make more money.
Improve your CTR
Click-through rate, or CTR, is a key metric in the digital marketing world. It measures the relevance of your product in relation to relevant keywords and tells you how many customers are clicking through to your listing from the Amazon search results page. By improving this number you will get more visits to your products and show Amazon your product is desirable and help it move up the search results rankings.
Improve your ACOS
ACOS is a key Amazon metric and stands for Advertising Cost of Sale. In essence, it represents how effective your sponsored products ads are on Amazon. It’s calculated by dividing ad spend by ad sales and multiplying by 100.
For instance, if you’ve spent $40 on ads and made $200 in sales, your ACOS would be 20% (40/200*100). By learning how to improve your ACOS with good PPC management you can decrease your customer acquisition costs and improve overall profits.
Conclusion: Think long term
It’s important to take a long term view when attempting to increase profits on Amazon. Applying all the strategies shared in this article will help improve your margins, but it will take time. The more you test your listing to reach more potential customers and provide excellent customer service to generate more online reviews the more established your products will become.
In time as you boost sales you’ll be able to increase order quantities and drive down your unit costs and shipping costs to further increase your profits. Keep focused on the big picture, stay patient, and apply these best practices to ensure your profit continues to grow year over year.