What is your Amazon Return On Investment and how can I improve it?
Updated: Feb 14
Measuring your a profit on Amazon isn’t as simple as the difference between what you pay for a product and how much you sell it for.
To calculate your true ROI (Return On Investment), you need to factor in all costs you incur by selling on Amazon. That includes how much you pay for your account every month, the referral fees charged by Amazon on every sale, the charge on shipping items and whether you pay for Fulfilment by Amazon (FBA).
You might have bought a product for £20 and sold it for £40. But rather than your ROI being £20, if you factor in those other costs, then the figure is more likely to be around £10.
Understanding this is crucial to your success on Amazon. Here Thompson and Holt managing partner Stuart White looks at ways that you can improve your Amazon ROI and therefore the profits you are making.
What is the Three Times rule?
Thompson and Holt managing partner Stuart White: “The Three Times, or 3x rule as it is often referred to, is based around the notion of creating a 100 percent return on your investment. Broken down, if you buy an item for £5, and sell it for £15, you roughly pay £5 in total Amazon fees. That makes your profit £5 - or 100 percent of your original outlay. It’s a great result but one that isn’t always obtainable because it often isn’t possible to sell goods at three times their cost price. Also, different Amazon selling categories have different fees. But it is a good basic principle to aim for.”
Try and stay flexible
Thompson and Holt managing partner Stuart White: “As everyone has seen over the last two years, markets and situations can change very quickly. Sometimes you might have to accept that your ROI will be lower because of market changes, at other times it might present opportunities for it being much higher. Stock availability is another issue that Sellers have had to contend with. Being flexible and able to adapt to changes in situation that you can’t control is really important in the current climate.”
Is ROI or profit margin approach best?
Thompson and Holt managing partner Stuart White: “It’s good to be aware of both approaches. Profit margin doesn’t take into account your Amazon fees., and most Sellers favour ROI because it gives a better overall view of how your business is operating. It also factors in things such as items being stored in warehouses for weeks on end, which cuts down on your bottom line.”
How to capitalise on strong ROI
Thompson and Holt managing partner Stuart White: “If your product has a higher ROI than you expected, it might be time to re-invest some of that profit into increase advertising and promotion to take your business to the next level. That might hit your ROI in the short term, but it could general more sales and increase it in the future.”
Thompson and Holt managing partner Stuart White: “The best way to fully utilise ROI is by updating your figures on a monthly basis, so that you’re aware of any changes to the way you’re operating. Amazon’s fees move on a fairly regular basis which can impact how much money you are making. Having a clear, up-to-date financial picture is crucial to your success. And don’t always buy into the notion that higher Amazon costs are always a bad thing - sometimes those fees can work out cheaper than you carrying out those services yourself. Work out carefully what benefits your business most.”
If you have found yourself suspended while selling on Amazon, contact Thompson and Holt for a free LiveChat to get your Seller business back online as quickly as possible.