- On September 25, 2018
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Here at Seller Labs, we’re not accountants or financial planners . . . but we do work with experts in those fields, experts who happen to be some of the very best in the business. This week, we’re turning the blog over to one of those experts: Tyler Jefcoat of Seller Accountant. Enjoy Tyler’s five-part series on the 5 Keys to Increasing Your FBA Profitability. Check back all week for one key per day to maximize your Amazon FBA success.
The struggle for profitability is something that each and every business owner endures. There’s more to gaining profit than just ensuring your margins are manageable. What happens if your FBA shipment isn’t moving? You’ll incur Long Term Storage Fees and your margins will shrink. True profitability lies in both margins and sales velocity.
KEY 2: MARGIN + VELOCITY = PROFIT
Here’s a key question for every Amazon seller: For every dollar that you invest into your your business, how much do you get in return and how long does it take you to get your return? If you aren’t happy with the overall profitability of your company, one of two factors is probably the culprit: profit margin or sales velocity.
Most businesses need to fight for more margin. If your products produce margins of 15% or less once you account for fees, returns, CoGS, and advertising, then you need to look for new ways to differentiate your product either by building brand awareness or improving your designs. If you can’t find the needed margin by building your audience, it’s time to develop new products that are more profitable.
By the way, having to replace low-margin products doesn’t mean that you’ve done something wrong. It could be that a bunch of new competitors have entered the market and it’s time to adapt in order to stay profitable and relevant. Building the value of your brand and constantly adjusting your product catalogue in order to fight for margin is the name of the game for most merchants not named Walmart.
Walmart plays an extreme version of the classic high-velocity, high-volume game. Walmart’s gross margin is pretty consistently 24%, but its net profit was 1.74% in a recent quarter! Margins that low would crush almost any of us, but Walmart is so large that it can actually win the low-price battle fairly often and make it up with volume. The rest of us literally cannot compete.
As Amazon has grown and become involved in all aspects of the supply chain, it too is able to play the high-velocity, high-volume game. And since Amazon has access to some the cheapest capital in history, it (like Walmart) can sustain high-volume, low-margin products for quite some time. Since you and I are not Walmart or Amazon, our profit margins MUST be bigger and better to offset the lower volume.
Improving margins should be our first focus but sales velocity matters! Find ways to improve velocity by building brand awareness and by optimizing your advertising.
Tyler Jefcoat, Co-Founder and CEO of Seller Accountant, is a longtime accountant and successful business builder who excels in helping stressed out owners regain their lives while driving superior financial results.