When you start on Amazon, the number 1 priority is usually to generate growth without thinking about profitability.
In its pursuit to generate growth a brand will inevitably improve its content, media campaigns, reviews management process… If all growth levers are correctly activated a brand quickly becomes mature on the market and will at some point see its growth stall.
On Amazon, with increasing competition, brands need to always be ahead of their competitors. Like any other channel, growth is not infinite, so at a certain level it is vital to start thinking about how to increase your profitability on Amazon.
Calculate your profitability on Amazon
Your profitability depends on your total cost (production, logistics, marketing, amazon cost…) and sales price, Amazon is not in a position to calculate this metric for you so it is something that a brand must calculate itself.
For a Vendor on Amazon, the profitability of a product is calculated by deducting the acquisition cost from the product margin.
For example: I have a product A with a 30€ sell-in. I know that my margin on this product is 20% (6€)
On this product A, I have a CPC (cost per click) of 0.5€, and a conversion rate at 10%. The acquisition cost for this product is 5€ (0.50/0.10). Finally, profitability on Amazon is 1€
On the contrary, if I have a product B with a sell-in of 40€ and a margin of 10%, my gross margin will be 4€. At equal acquisition cost (5€) I am losing money.
By taking the time to evaluate your product profitability you can assess if your media investments are making profitability for your brand.
For sellers, profitability calculation is a little more complex:
Pre-tax price - Logistic costs (FBA or MFN) - Amazon fee - Storage costs - CoGS (Cost of Good Sold) - Acquisition Cost = profitability of a product.
Once you have your profitability on Amazon for each product it’s time to get started!
Strategies to implement
Once you know which products are profitables on Amazon with the current strategy, a brand must make choices to improve this profitability.
Several focus are possible:
Focus 1: Increase your conversion rate in order to decrease your acquisition cost. Conversion rate is directly impacted by your product page, (re)evaluate with new eyes all the levers at your disposal to improve your product page and conversion rate (text, images, A+ page, reviews…)
Focus 2: Adapt your media strategy to improve profitability. Invest less on less strategic and profitable product, focus your efforts on profitable or growth generator products. Warning: always keep an eye on your global profitability and the products profitable TO Amazon (Net PPM)
If a product is not particularly profitable for your business but is for Amazon, you might risk decreasing your Net PPM (Net Pure Product Margin), which would be counter productive with your Amazon relations.
Broadly speaking we always recommend to disinvest products that are not profitable to you and Amazon (your profitability and Net PPM are low).
Limits of such strategy
The attribution model used today by Amazon (last paid click) does not allow a clear visibility of the customer journey. We know by which product people enter the journey but we don't know what they buy in the end.
The customer lifetime value. Some products are made to be repurchased several times during a given period, for example, a perfume refill, cat or dog food... In the case of a product that does not fir to this category (e.g. pillows) the acquisition cost remains incompressible.
For all "repetitive" products, the acquisition cost (which has a direct impact on profitability) can vary according to the number of purchases that will follow. For example, if a customer buys 20 refills of air fresheners a year, the initial acquisition cost of 5€ becomes in fact 5/20= 0.25€ over one year.
It is therefore necessary to be well aware of the customer's lifespan (repeat purchase rate available in Brand Analytics for vendors) in order to manage its media investments and profitability.
If a first purchase is not profitable but then leads to 10, 20 or 30 future purchases, then this product is very profitable in the long term.
Moreover, as we have already mentioned, it is not just a question of taking into account your own profitability but also the Amazon Net PPM. So be careful not to make decisions lightly, it is essential to have the most complete vision possible to succeed in reorienting your media plan in the best possible way.
As a Client Strategist, I always advise my clients to focus on a strategic scope including bestsellers and customer priorities. Within a few weeks we can already see results and define the next steps.
It's a very precise job, it requires regular follow-ups, having a complete vision and always evaluating the consequences of the changes made.
In conclusion I would say that the exercise is certainly complex but necessary to lead the battle on Amazon and maximize its growth while remaining as (or even more) profitable than its competitors.
Graduated from Business School and Centrale Paris, Jérémie has a consulting background and is an Amazon & eCommerce expert, passionate about building effective strategies for brands and business.