The smart, savvy way to do business is by the numbers. Every entrepreneur strives to make good decisions based on the best information they have. But not everyone has a background in data science or a degree in finance.
Maybe math wasn’t your thing in school and maybe numbers simply put you asleep. Don’t worry, we’re going to change that. Right here with this post. So, grab some coffee and take a seat. You’re going to want to read this from beginning to end.
You are excited about your first product, nervous about whether or not it is the right one and utterly confused about if the calculations you are doing are correct.
Then the sales start rolling in and you get excited!
- But how much of that is actually going into your pocket?
- When do you start making money?
- Are you making the right spending choices?
And most importantly…
Are you profitable?
Everybody cares about profit, let’s talk about profit. It should be easy, but a simple profit calculation doesn’t actually exist.
There isn’t simply one type of profit, there are THREE types of profit. The reason there are three is because each help to frame decisions around which product(s) to buy, how to promote them and how to run your business.
Let’s start with a few definitions
Gross Profit is not often used, but it’s best leveraged for product sourcing. Meaning, you would use it when you are looking a group of products, either across a range of suppliers or when choosing a new product.
Technically the definition is Total Sales Minus Wholesale Price Plus Shipping Cost to FBA Warehouse, but a simpler way to think about is without getting mired in the terminology is that it’s there to give you an idea of the most viable (read profitable) product.
Operational Profit is all about selling costs. It’s consists of things like Amazon Fees, refunds, promo rebates and ad spend. As you can see, all things associated with generating sales of that product.
Technically the definition is Gross Profit Less Selling Costs. So, once you’ve acquired the product, Operating Profit takes into consideration everything you would need to do to get that product into the hands of a customer.
Net Profit is what’s left over after you pay your debts and the tax man.
Technically the definition is Operating Profit less Interest less Taxes. This is what you get to take home at the end of the day or reinvest into your business.
Which Type of Profit Matters?
The short answer is – all of them. It would take a textbook’s worth of reading to talk through all the details. So, instead that, we going to focus on the most important one for expert FBA Sellers. Namely, Operating Profit.
Operating Profit is a gold mine for making decisions.
This is where the nuts and bolts of your business are represented. When you pull apart these numbers apart, it helps you you start to understand where you are underspending/overspending and how much room you have for improvement. Whether that’s on a individual product level or at a business level, it gives you instant visibility.
Experts love using it for that reason.
What you need to start leveraging Operating Profit, is ASIN level data. While you can get this data in Amazon Seller Central, it’s not in a format that makes it easy to work with. Which can make it very challenging to hone in on whether or not an individual product is actually making you money or if you need to tweak your marketing to start making more cash.
That’s why we have put together a really simple calculation to help you calculate Operating Profit. It’s what you should use when making promotion decisions for your product. Let’s take a look at how to use it.
Analyze Your Marketing Spend with Operating Profit
Let’s say you want to change your marketing and promotions strategy to sell more units and make more money. It is easy to throw money at the problem, but do you know if it is helping your bottom line at all?
That is where ASIN level Operating Profit can really help you figure that out. Let’s take a look at how to calculate that.
Say you are currently:
- Selling your product at $25
- Are buying wholesale and shipping it to the Amazon Warehouse for a total cost of $4
- Selling 100 units per month (or about 3-4 units per day)
- You have a $10 per day PPC budget
Since we want to look at the product level (which means we are looking at a Modified Operating Profit), the only figures that need to be taken into account are the sales and costs that are directly associated with the product.
|Make sure to include:
||But you can ignore fixed costs like:*
*These costs apply to your entire business,not just one product, so we exclude them.
Your Modified Operating Profit will looks something like this:
Let’s say your goal is to increase your Best Seller Rank (BSR). Your BSR will help your ranking in Amazon’s Search Algorithm and land you more organic sales over time. One way to do this is focusing on increasing your sales rank (or in simple terms increase your sales per day).
You can choose the number that matches a goal you have for your business. Or if you aren’t sure what a “reasonable” number looks like it’s helpful to take a look at your closest competitors.
For example, say your closest competitor is selling around 200 units a month (or about 6-7 units per day) and you want to match this volume.
The question is how much can you afford to spend on promotion and still maintain your current profitability?
Taking some estimates and using the same formula, you can figure out about how much space you would have for marketing your product. Let’s take a look:
Investing in marketing can cause a short term dip in profits, but can be beneficial in the long run as it can increase your BSR and organic rankings.
You decide that you want to continue to make at least what you are now ($1350 Operational Profit), that means you have about $1650 to spend on marketing.
$3000 – $1350 = $1650
In order to get there, you decide on a mix of PPC and promo rebates that you hope will get you the sales velocity you want:
You set up your promotion in AMZ Tracker and up your PPC budget for a month. After 30 days it is time to recalculate your operations profit and see if it worked. It looks something like this:
Was it a winning strategy? Let’s break down some of the numbers in a little more detail.
You have increased the number of sales from 100 to 161 units
- Of those 61 new sales:
- 25 are from the Product Promotions
- 30 are from PPC
- And you have 6 more organic sales than last month
You didn’t hit your competitor’s level of sales but did manage to improve your sales velocity from 3 to 5 units a day.
- You are now making more revenue and increasing your BSR Rank
- But your profitability did take a small hit ($117 less Operational Profit)
As an added bonus, you have two months of data to work with and insight how your marketing allocation affects your bottom line. This insight gives you the power to change and adjust your strategy month over month until you find the right mix for you business.
Ready to give it a try in your business?
This exact same calculation is used by FBA sellers to compare profit month (or week, or quarter!) so you can manage your products with ease.
Using this calculation helps you:
- Save money by pinpointing where you are under or overspending
- Simplify cause and effect relationships by tracking trends over time
- Uncover changes in your product life cycle so you can adjust your marketing spending as it happens and not months down the line.
Again, there are a lot of challenges to get this data out of Amazon Seller Central and then still, you would have to put it in a format that provides the numbers for you. Amazon Seller Central does not have the capability to do this, you would need to do it manually.
We get that that numbers can be overwhelming and there can be a niggling doubt about whether you are doing the calculations correctly. But we also know the value that this adds to your business.
That is why in our next metrics post we are going to walk you through how to do this yourself with excel or google sheets. A step by step guide for how to get this information out of Amazon Seller Central and into your hands.