Profitability | How to Scale Sales in the Right Order
Profitability or growth. That’s the newest buzzword revolving in the Amazon world. But the real question is: can you achieve growth while maintaining profitability? That’s precisely what this article explores.
Below, you’ll find a guide on the sequential scaling of sales to ensure sustainable profitability. So, let’s review each of these points to outline the path to achieving peak profitability in the lead-up to Q4.
Amazon Key Order Metrics
So, what is the correct sequence for scaling while maintaining sustained profitability? Before we can dive into it, we need to have a comprehensive understanding of the metrics involved in Total Product Profit.
Here are the Key Order Metrics on Amazon to measure. Let’s review how to strategically utilize them to achieve profitable growth.
Price
Price Is a dynamic and variable number. It should be constantly tested and adjusted, whether through automated repricing tools or manual split testing. Keep it dynamic to maximize profitability.
Landed Product Cost
Landed product cost is relatively fixed. This metric encompasses everything from production expenses to inbound shipping costs. It remains relatively stable compared to other factors like advertising.
Amazon Selling Fees
These are also mostly fixed, except for the referral fee, which is a percentage of your product’s price. Ensure you charge the correct amount on eCommerce platforms to maintain profitability.
Advertising costs
These costs are variable and usually calculated as a percentage of revenue (Total Advertising Cost of Sales, or TACoS). Monitoring and optimizing ad spend is crucial for profitability.
Net Product Profit
The net result after deducting the price, landed product cost, selling fees, and advertising costs from your revenue.
Orders
Keeping track of order volume is vital, especially when price testing and adjusting advertising. Higher orders can lead to increased total product profit.
It’s essential to understand that this metric is influenced by various factors that can impact total product profit. While higher order volumes can often lead to increased profits, it’s also possible that lower order quantities can yield higher product profit, depending on your profitability threshold.
Variable Fees
Often overlooked but significant, variable fees include long-term storage fees, monthly storage fees, and other surcharges. These fees vary and can significantly impact your overall profitability.
Profitable Growth
The core premise here is profitable growth. It’s not beneficial to burn through 10,000 units to net the same amount as you would with 5,000 units, for example. Your goal should be to gather the necessary data to make informed decisions.
Once you’ve collected and analyzed the data, you can make strategic decisions that align with profitable growth. It’s all about having the data at your fingertips to make well-informed choices, rather than making decisions blindly.
Taking a step back, the interplay between these metrics becomes evident. Price and advertising are like two levers you can adjust to influence profitability. Costs and fees provide additional levers for monitoring and control.
If you increase your price and advertising spend while maintaining or increasing orders, your total product profit will likely rise. However, if your price drops while ad spending increases, profitability will decline.
Achieving profitable growth involves a dynamic approach to pricing, careful management of costs and fees, and a keen focus on order volume and variable fees. By balancing these factors effectively, you can maximize your total product profit and ensure sustainable profitability.
All Metrics Matter
One critical aspect frequently overlooked is tracking variable fees. Unfortunately, Amazon doesn’t always provide a detailed breakdown of these fees by SKU. It’s crucial to figure out where these variable fees are allocated and seek ways to optimize them.
Another commonly overlooked metric that sellers tend to neglect is landed costs. This is a crucial aspect where you have substantial control over regaining your profit margins. Landed costs can help you find ways to reduce your cost per unit without compromising on product quality.
While maintaining product quality is paramount, it’s equally essential to minimize the expenses involved in transporting your stock to a warehouse or fulfillment center. This is where you can significantly enhance your profitability and pave the way for sustainable growth.
Total Product Profitability
Now that you have a grasp of these metrics, it’s essential to understand how to use these metrics strategically to achieve total product profitability.
Keep in mind the significance of each metric and how they impact the overall product profit. Mastering this understanding will lead you to excel in maximizing profitability.
As we evaluate those essential order metrics, we should focus on the ones we can influence the most. For example, cost per unit stands out as a prime target for optimization.
Common Profitability Mistakes
Some of the most significant mistakes we commonly observe among sellers include:
Managing Cost Per Unit and Invoices on Spreadsheets. Many sellers struggle with effectively managing their cost per unit and invoices, often relying on cumbersome spreadsheets.
Neglecting Supplier Negotiations. Failing to identify opportunities to negotiate better prices and terms with suppliers can erode profit margins.
Overlooking Logistics and Freight Costs. Some sellers don’t explore multiple logistic and freight forwarding options or maintain a list of reliable freight forwarders for competitive quotes.
Lack of Clarity on Supply Chain Costs. Not fully comprehending the costs from the supplier to the warehouse and failing to minimize these expenses can impact profitability.
Incomplete Understanding of Logistics Costs. Some sellers merely store logistics cost data without fully grasping its implications or differentiating between the lean unit cost and return on investment.
Inadequate Visibility on Cost of Goods. Failing to have a clear view of the cost of goods line item on the profit and loss statement can lead to missed profit opportunities.
Blind Trust in Amazon’s Accuracy. Relying solely on Amazon’s inventory management without monitoring pick and pack fees can result in unnecessary expenses.
Failure to Pursue Reimbursements. Neglecting to seek reimbursements for lost or damaged inventory and not reinvesting this recovered capital into growth activities like advertising and inventory replenishment.”
Consider how crucial it is to address these issues within your business to maximize profitability as you approach Q4. Addressing these areas can significantly enhance profitability and pave the way for more sustainable growth.
When it comes to profitability, traditional education often focuses on sourcing products, optimizing listings, inventory management, and driving revenue growth. However, maximizing profit margins is a critical aspect that’s frequently overlooked by sellers.
The Solution
It’s not just about making money; it’s about keeping as much of it as possible. Using an Excel spreadsheet is no longer sufficient, which is why we introduce SellerVue.
SellerVue is designed to help sellers widen the gap between marketplace expenses and revenue, ultimately allowing you to retain more of your hard-earned money,
Now, how does this tie into the concept of scaling in the right order? We’ve identified key metrics and common mistakes that hinder profit retention.
The money left on the table due to incorrect cost per units, overcharges by Amazon, unmanaged variable fees, ineffective pricing strategies, and suboptimal PPC management isn’t just a financial loss. Such mistakes affect your ability to launch new products, run successful ad campaigns, and expand your team.
Compound interest works both ways, and failing to recover as much money as possible affects how quickly you can scale profitably.
So, our philosophy for scaling a business profitably involves a specific order of priority:
Maximize Profit Margins. Tighten up your operations to ensure you’re keeping as much money as possible from each sale.
Optimize Business Operations. Improve efficiency in every process, ensuring each one is as effective as possible.
Use that extra cash and your systems to scale up so that you are scaling profits.
With these elements in place, you can scale up without a leaky bucket.
By following our simple strategies, one of our clients increased profitability by 3.40% for a Net Profit Increase of $97,667.01.
The Challenge
The fundamental principles of a profitable business always remain consistent, whether you’re running a retail store, an e-commerce business, or an Amazon storefront. It all boils down to knowing your numbers and knowing them well.
Without this knowledge, you’re essentially gambling in Amazon’s casino, where the house always wins.
The challenge isn’t that businesses are incapable of following this advice; it’s the sheer magnitude of the task. Constantly updating and tracking numbers in a dynamic environment can be overwhelming. It’s like playing a never-ending game of Whack-a-Mole.
So, how do you tackle this? You have three options:
Hire a qualified employee. Employ someone skilled in managing these aspects to track and handle them continually.
Leverage automation tools. Use a tool like SellerVue that can automate and track these processes for you, saving time and effort.
Do nothing (not recommended). Continue using spreadsheets that may not be effectively managing your costs, bleeding profits along the way.
Final Thoughts
This article is crafted to ensure that you’re poised to be more profitable than ever as you enter this Q4. Most of our Amazon revenue and profits are generated during this key quarter. Thus, Q4 is a moment where you must stay focused on your growth and profitability.
Are you interested in learning how to manage your costs effectively, optimize your margins, and reclaim as much of your cost of goods sold as possible? Then consider signing up for a free account with SellerVue.
Plus, you get a free call with an advisor to discuss all the ways you can increase your profitability with selling on Amazon ($997 Value)
SellerVue can help you identify opportunities to maximize your margins, effectively manage your cost per units, and retain more profits as you work toward a more profitable business. Book a call with us today.
Author
SellerVue specializes in boosting sellers’ profit margins by optimizing cost of goods sold, by recovering 2% -3% or more of revenue through precise profit recovery strategies and cost per units calculations.
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