ADI INFOSYS | Spetember 04, 2021
In this article, we’ll discuss profit margins for Amazon sellers, including what makes a reasonable return on investment for goods sold on Amazon and what constitutes a reasonable profit margin to strive for as an Amazon seller.
When calculating your Amazon return on investment, it’s critical to account for Amazon fees and the cost of shipping your goods to Amazon FBA warehouses. These costs have a significant impact on the profit margins you will earn as an Amazon seller.
In other words, ROI is more than just the difference between the price an item sells for on Amazon and the price you can obtain it for.
This may seem self-evident to some of you, but many novices are unaware and invest in merchandise that has little chance of profiting. If you are completely new to Amazon selling, Please contact us for best product launching guides & free consultation.
When you first begin selling on Amazon, the fees and statistics may get daunting as you attempt to determine how much money you are making and what you should be doing to increase your earnings.
Understanding your ROI and profit margin will help you with this.
ROI is calculated as profit per item divided by the cost of the item. Therefore, if you purchased an item for $10 and made $10 profit, your ROI would be 100%. If you made just $2 profit, your ROI would be 20%.
Whether or not your ROI is “good” depends on a lot of factors.
The biggest mistake that many beginners make is not factoring in Amazon fees.
For instance, novices may think that if they purchase an item for $15 and sell it for $25 through FBA, they will earn a profit of $10 with a 67 percent ROI – this is not the case! After accounting for all FBA selling and shipping costs, the real profit would be less than $5, implying a return on investment of less than 30%.
The most often used approach by new sellers seeking a good return on investment on Amazon is to search for products that may sell for treble what they paid for them.
This is often referred to as the “three times rule” or “three times rule,” and it generally results in a 100 percent return on investment. This is a secure and healthy Amazon FBA profit margin since it enables novice sellers to omit particular fee computations while still profiting.
This rule states that if you purchase an item for $5, you should be able to sell it for $15. In this case, you pay $5 for the item, Amazon charges $5 for shipping and handling, and the remaining $5 is your profit. Profiting $5 on a $5 purchase results in a 100% ROI, which is an extremely acceptable rate of return on investment.
A profit margin of 100% on Amazon is a decent starting point for those new to selling on Amazon, but you’ll ultimately need to adopt a more sophisticated approach if you want to optimize your Amazon earnings.
If you are regularly spending your whole sourcing budget on goods that offer a 100 percent return on investment, you should certainly continue sourcing 100 percent ROI items for as long as feasible.
At some point, though, you will be unable to spend your whole sourcing budget on products with a 100% return on investment. Your budget will expand to the point where there are just not enough products on Amazon that offer that level of ROI. That is when you must reduce your acceptable return on investment if you want to grow your company as quickly as feasible.
Here is a graphic (click to expand) illustrating how much money you will earn if you start with a $100 sourcing budget and achieve your target ROI each month while reinvesting all profits:
Thus, you can see what reinvesting all of your earnings would achieve if you could spend your full sourcing budget each month and have every item sell again.
Now, based on the chart above, I’m thinking you’re going to run into difficulties continuing to spend your whole sourcing budget on 100 percent ROI by month 7 and will encounter extremely significant opposition around months 9 to 10. There are many reasons for this, but one of the most important problems will likely be locating enough products that provide a 100 percent return on investment.
Below are two examples that illustrate my point in this article.
Several underlying assumptions include that this person is able to spend $5,000 on goods that provide a 100% return on investment and $10,000 on items that provide a 50% return on investment each month.
Example #1:
Example #2:
This is more of a theoretical point than a practical one, since it is extremely improbable that you would be able to locate the exact same quantity of inventory each month and sell it all inside the month. Additionally, the numerical values utilized are arbitrary.
You may adjust the source budgets as necessary to make them work for your particular circumstances. Simply redo the calculation. While this is somewhat speculative, I think there is actual benefit in examining the preceding scenario when determining the necessary ROI for product sourcing.
Now, a few observations on the preceding instances.
To begin, if you reach a point where you are happy with your earnings and hours worked, you should never contemplate lowering your ROI in order to raise your income.
However, if you regularly have a portion of your sourcing budget remaining at the end of each month and want to increase your revenue, I believe it is worthwhile to explore reducing your ROI somewhat to accomplish this.
When comparing the two instances, it’s worth noting that the individual in example #2 would spend less time sourcing $5K in cost of goods to resale than the one in example #1. Each person would scan the same amount of things, but in example #2, the individual would purchase a substantial number of goods that would have been left behind in case #1.
Thus, reducing your ROI is unlikely to add significant time to your original sourcing efforts, and may even reduce them. Reduced ROI will almost certainly increase prep/shipping time due to the extra products, however the time savings from sourcing will help offset this increased time.
There are also extra dangers associated with reducing your needed ROI, including prices falling to the point where you can no longer profit, and returns eating into earnings more substantially. Bear these risks in mind if you choose to accept a lesser ROI.
If you are new to selling on Amazon and looking to get your first sales, I recommend checking out our Launch Accelerator.
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That concludes our remarks for today. What kind of return on investment do you want while sourcing?
What other variables should be considered? Do you have any questions for us?
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