When Shai Atanelov was hired by a company in the toys and sportswear space to improve its profitability on Amazon, its profit margins were close to 13%.
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“The first thing we did was remove more than 60 products that were not profitable enough and had low margins. We began focusing on our best-selling products responsible for most of our profits and built a system to make sure we reorder them in the correct amount,” Atanelov says of the profitability turnaround.
The company’s margins on Amazon are now closer to 24%, nine months after implementing this and other strategies to boost profits on the channel.
While Amazon has become a significant sales channel for many brands, the growing multitude of selling and fulfillment fees narrow profit margins, making Amazon more and more costly as a sales channel. Fortunately, many brands have found ways to increase their profit margins when selling in this mega-retail marketplace. Here are three ways brands can reduce fees and other costs to increase their profit margins.
- Check how much Amazon is charging you
One of the easiest ways for brands to increase profit margins is to identify inaccurate charges by making sure Amazon is charging correctly for shipping costs. For example, FBA (Fulfilled By Amazon) shipping fees vary based on package sizes, but automatic categorization or human error can dramatically impact Amazon charges.
There are cases of one item having two shipping weights simply because an order was filled at different Amazon fulfillment centers. Sometimes, a color variation on identical products results in disparate descriptions because the weight information is input separately, also leading to variable shipping costs.
Atanelov says that six of the company’s products were being charged more than double in FBA fees because they were measured incorrectly. The fix was simple: He requested Amazon remeasure the products and reimburse them for the mistake.
It is up to brands to check the size, weight and description of their Stock Keeping Units (SKUs) regularly so they don’t waste money on inequitable charges.
2. Manage your invesntory properly
Slow moving products on Amazon dip into profits, making inventory another critical area to examine, but a shocking number of national brands don’t know how much inventory they have stored with Amazon, or how long it’s been there.
Atanelov says that his company used to have major inventory issues, especially when it came to managing more than 100 products. “Many SKUs had excess inventory in Amazon and many were out of stock for too long. This caused unnecessary FBA fees and also many lost sales. Once we got our hand on the pulse of reordering correctly, our profits began to rise.”
Amazon recently changed the way they structure inventory storage fees, making storage costs substantial if product turnover is drawn out too long.
They’re now discouraging inactive product inventory by increasing fees and changing their long-term storage fee structure from billing every six months to every single month. This new arrangement increases fees by a whopping 6% on average.
Peter Denbigh, cofounder of the Watch Ya Mouth card game which is sold on Amazon, says that while Amazon’s fees can be an expensive, it’s still a worthwhile channel because the traffic volume and shopper conversion rates are so high relative to other channels. To improve profitability, “we pay close attention to our fulfillment process to ensure we don’t get chargebacks, and we focus on being in stock. We watch data closely and adjust our operations and amazon marketing accordingly,” Denbigh says.
The bottom line is that Amazon has fulfillment centers, not storage warehouses. Amazon doesn’t want to store your products a second longer than they have to, so they use penalization fees to motivate brands to move inventory quickly.
3. What’s your success metrics
The main concern for most brands is profit, but measuring success based on this number alone is a mistake if the brand is also focused on growth. If a brand is working towards other growth objectives, such as developing their brand equity or customer loyalty, then additional variables need to be considered.
To see the true measure of profitability and success when selling on Amazon, companies also need to consider:
Brand equity: Some customers prefer certain brands and will seek them out on Amazon, regardless of promotional or competitor prices on the same type of product. If a brand isn’t available, they risk losing those preferred sales to the competition.
Market share: If brands want to stay competitive and maintain their market share, they need to perform in every arena–including Amazon. Brands should remember that competitors face the same challenges, so dropping out in this major retail space counts as a loss in the overall market.
Acquisition costs: The way a brand earns a customer’s business differs across every sales channel–from Amazon, to their e-commerce store, to their brick & mortar partners. This variability makes customer acquisition costs a vital component to consider when looking at profitability. Lower costs to earn new customers may justify smaller profits per item.
Customer lifetime value: CLTV refers to the frequency of purchase, multiplied by the profit of each purchase. This means that brands need to track CLTV across different purchase channels. While Amazon doesn’t report this data natively in its dashboard, brand managers can cobble together their own system to calculate CLTV using a combination of Amazon reports and their own tracking spreadsheets. By comparing this data across various sales channels, brands will be able to offer consumers the choice of shopping on their preferred channel.
Colin Darretta, CEO and founder of Wellpath, finds customer acquisition cost to be a critical metric for his brand on Amazon. “Because almost everyone has an Amazon account, conversion rates are significantly higher on Amazon than on owned channels. Therefore, customer acquisition cost on Amazon is often materially lower than in an owned channel,” Daretta says.
As you can see, overall profits tell only one part of a larger equation. Brands need to remember that profitability comes in numerous forms, which can be harder to measure. If they can adjust their thinking, they’ll be better equipped to handle the competition in this digital retail marketplace.
Stay Profitable By Considering Context When Selling on Amazon
With the rising costs of selling on Amazon, it’s tempting to consider scrapping this sales channel altogether. What brands need to realize is that, unless they want to risk losing a major portion of e-commerce sales, neglecting Amazon isn’t a viable option.
A better solution is for brand owners to approach each sales channel uniquely and shift their views on marketing, customer acquisition, sales, and profitability appropriately for each marketplace. For example, traditional e-commerce sales leverage email campaigns as part of their marketing strategy. However, that methodology doesn’t translate well to Amazon since brands aren’t allowed to remarket to Amazon’s customers.
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Verifying catalog information, checking for inaccuracies, and removing sluggish inventory are great first-steps when decreasing costs and improving profit margins.
Along with maximizing profits, it’s also important for brands to expand their understanding of profitability to get the full value of selling on Amazon. In the overall picture of a brand’s success, immeasurable elements like reach and exposure can far outweigh profits alone.