How to Optimize Your Amazon Seller Business

for Profitability

James Thomson and Alasdair McLean-Foreman

February 9, 2016

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James Thomson

• Former Amazon insider, 5+ years

• Business head of Amazon Services

• 1st FBA Account Manager

• Category Manager of Sports 3P business

• President of PROSPER Show2

Alasdair McLean-Foreman

• 13+ years of Amazon Marketplace experience

• Started first e-commerce company from Harvard dorm room in 2001

• One of the first Amazon Marketplace sellers in sporting goods category in 2003

• CEO and Founder of Teikametrics

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Building an effective pricing strategy requires a clear understanding of 2 issues:

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COSTPRICE

Margin follows from managing both price and cost carefully:

6COST

PRICE• Competition-based

• Cost-based

• Value-based

MARGIN

• Acquisition Cost

• Commissions/Fees

• Indirect/Hidden Costs

• Amazon Marketplace

pressures on margin

• Individual product P&L’s

• Unit Economics pricing on

Amazon is driven by how you aim

for the Buy Box:

– How can you use FBA to improve

your pricing effectiveness?

– How do your Seller Metrics impact

your pricing decisions?

– What’s the role of re-pricing tools?

• How do you incorporate a

view of all of your costs into

your pricing strategy?

• Why is Cost so difficult to

understand when selling on

Amazon.com?

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COSTPRICE

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1. Sourcing

- What to buy in the

future

- Decisions on which

vendor to use

2. Vendor Management

- What terms from

suppliers you’ll

accept

- What wholesale

prices you’ll negotiate

down

3. Inventory

Management

- How long to hold

inventory

- What to liquidate, and

never restock

4. Pricing Changes

- How to price down,

vs. how to price up

- When to price up, vs.

when to price down

- When it’s worth

winning buybox, vs.

waiting

This will drive your decisions on:

PRICE

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You’re stuck with too much slow-moving, low-margin inventory

You run out of capital to invest in inventory that would actually benefit your bottom line

You allow your suppliers to dictate too many of the terms

You spend your time working really hard to make money for yourself, only to find you made a lot of money primarily for Amazon

PRICE

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Amazon is looking for sellers that emulate it

• Strong metrics convert into more opportunity to win Buybox, and allows you to price higher and still win Buybox

PRICE

Buy Box priority over MFN

sellers

Win the Buy Box with

equal or even higher price

than the next MFN seller

Reach estimated 40+

million high-sales Prime

customers

Gives you the ability to do

re-pricing up or down

automatically

When using Re-Pricers:

• The goal: Price low

enough to win Buy Box

but not lower than you

need to be

• Be deliberate and

careful in your rules

• To set the price floor

profitably, you need to

know your all-in costs

FBA Benefits Seller Metrics Re-Pricing Tools

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COST

How do many Amazon sellers

unfortunately think about “Cost”?

+ Wholesale cost

+ Inbound / outbound shipping

+ Amazon commissions

+ FBA fees

= $ PROFIT…… but…….

Initial Costs

….Meanwhile,

• Overhead costs

• Hidden costs

Are consolidated at end of year,

and subtracted from total profit

Comprehensive Costs

Pick your timeframe: e.g., past 6 months, past 12 months

Add up all of your indirect costs including:

- Warehouse/storage/3PL costs

- Utilities, insurance, book-keeping, payroll & benefits

- Business travel, corporate business tax

- Product samples, web development, etc.

Pinpoint which costs apply to all channels vs. only to Amazon (e.g., FBA Inventory placement, Amazon Lending fees, Amazon sales tax collection fees)

Identify what portion of all units you sold were on Amazon marketplace

Divide total Amazon overhead costs into number of units sold on Amazon

That will give you overhead cost per Amazon unit sold = OVERHEAD ALLOCATION

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COST

Example:

• Overhead costs specific just to Amazon =$20k

• Other Overhead costs applied to your overall business = $175k

• Total units sold = 100k

• Portion of total units sold on Amazon = 80%

• Total Amazon overhead = (80% * $175k) + $20k = $160k

• Overhead per Amazon unit sold = $160k / 80k units = $2.00

Overhead Costs:

1. Pick your timeframe: e.g.,12 months

2. Add up all of your indirect costs including:

- Warehouse/ 3PL costs

- Utilities, insurance, book-keeping, payroll & benefits

- Business travel, corporate business tax

- Product samples, web development, etc.

3. Divide total Amazon overhead costs into number of units sold on Amazon

OVERHEAD ALLOCATION per Amazon unit sold

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COST

Return-Related Costs:

1. Seller Central Reports

Payments All Statements View, to

find:

- RefundCommission

- FBACustomerReturnPerOrderFee

- FBACustomerReturnPerUnitFee

- FBACustomerReturnWeightBasedFee

- RemovalComplete

2. For write-down costs, track what %

returned items you can sell again as

“new”

Amazon’s Refund commission fee

FBA refund shipping: from customer to fulfillment center (for certain categories)

FBA disposal fees, or fees for return shipping from fulfillment center to seller

The seller’s internal processing/handling fees

The seller’s write-down / write-off costs

Any opportunity costs of stock-outs

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COST

1. Seller Central Reports Payments All Statements View, to find these costs:

• Refund commission fees: “RefundCommission”

• FBA refund shipping: “FBACustomerReturnPerOrderFee “ + “FBACustomerReturnPerUnitFee” + “FBACustomerReturnWeightBasedFee”

• FBA disposal fees, or fees for return shipping “RemovalComplete”

2. For write-down costs, track what % returned items you can sell again as “new”

3. Do you have internal handling fees for returned items?

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COST

You sell an item on Amazon at 15% commission. After all initial costs, you have an apparent $10.00 profit on that item.

BUT: You calculated your overall allocation as $2/unit sold

SKU has a 25% return rate, and you recover 60% of expected new selling price (customers returns rarely in new condition, or in its original packaging). So return-related costs are 25% x (1 - 60%) x $50 wholesale cost/unit = $5/unit.

On all returns, Amazon keeps 20% of the original commission as a return fee. So add 25% x 20% x $12.50 = $0.63/unit.

So for a product you have refunded once and then sell, your apparent profit of $10.00 has fallen by $7.63, a drop of >75% of your believed profit on this item.

And, if that product is a softlines item, you’ll have to add the

$80.00 price on Amazon

- $50.00 wholesale cost

- $ 5.00 inbound/outbound shipping

- $ 2.50 FBA fee

- $12.50 Amazon referral fee

$10.00 Margin

- $ 2.00 overhead allocation

- $ 5.00 return-related costs

- $ 0.63 average FBA returns fee

$2.37 Margin

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COST

You sell an item on Amazon at 15% commission. After all initial costs, you have an apparent $10.00 profit on that item.

BUT: You calculated your overall allocation as $2/unit sold

SKU has a 25% return rate, and you recover 60% of expected new selling price. So return-related costs are 25% x (1 - 60%) x $50 wholesale cost/unit = $5/unit.

On all returns, Amazon keeps 20% of the original commission as a return fee. So add 25% x 20% x $12.50 = $0.63/unit.

A once-returned product causes profit of $10.00 to fall >75%

If product is a softlines item, add the cost of customer’s return shipping to FBA to the fulfillment center (e.g., $2.50)

$80.00 price on Amazon

- $50.00 wholesale cost

- $ 5.00 inbound/outbound shipping

- $ 2.50 FBA fee

- $12.50 Amazon referral fee

$10.00 Margin

- $ 2.00 overhead allocation

- $ 5.00 return-related costs

- $ 0.63 average FBA returns fee

$2.37 Margin

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COST

COST

By identifying other dimensions of each SKU, you can roll up profitability:

- by brand

- by buyer

- by supplier, etc.

If profitability is challenged along any of these dimensions, you can take very specific actions along those dimensions

SKU Brand Buyer Supplier Unit Profit 1 Brand B Mary Better Stuff LLC $ 0.40 2 Brand B Mary Better Stuff LLC $ (0.30)3 Brand D Mary Best Stuff Corp $ 3.00

4 Brand D Mary Best Stuff Corp $ 5.40

5 Brand A Bob Cheap Stuff Inc $ (1.40)

6 Brand A Bob Cheap Stuff Inc $ 0.50

7 Brand C Bob Cheap Stuff Inc $ 4.30

8 Brand C Bob Cheap Stuff Inc $ 2.75

1. Overhead cost calculations

2. Automated tools for comprehensive cost view across your Amazon business:

• Teikametrics http://www.teikametrics.com/amazon-fba.html

• ERP and inventory/order management software providers

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COST

1. Solid customer metrics play an under-rated key role in Amazon pricing strategies.

2. Figure out your overhead allocation to apply to each SKU you carry.

3. Re-examine whether each SKU you currently carry is, in fact, profitable from a total-costs perspective. Modify your approach to sourcing new products so as to keep total-cost profitability clearly in mind.

4. Consider Buybox benefits of FBA. Which of your products are not yet in FBA?

1. Focus on growing your profits faster than your sales revenue. This is about making YOU money, not Amazon. Prioritize profits over sales!

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