The Complete Guide to a Healthy Amazon ROI for Sellers
March 12, 2021
Today’s eCommerce sellers are thriving. The acceleration of online sales has created the modern version of an online retail gold rush era, with no signs of slowing.
Even a glance at the stats reveals a bright future. In 2020, US-based etailers experienced an impressive 44% sales increase in Q3.
During that same period, SellersFunding clients saw an average 85% sales increase compared to the previous year. SellersFunding merchants selling across borders performed even better, with a whopping 95% increase in sales.
The best part for you?
Amazon Sellers have found a deep pot of gold! Research by market and consumer data firm Statista found that Amazon’s estimated market share in US retail eCommerce rocketed from 34% in 2016 to 47% in 2020. And in Q3 2020, Amazon made a shocking $96.15 billion dollars in net revenue.
Bottom line: There is serious money to be made on Amazon.
But increasing your revenue is just part of the equation. To succeed at Amazon selling, you’ll need to work towards a healthy return on investment (ROI) — and a vague idea of what this number is, isn’t going to cut it.
Let’s jump into the specifics of what you need to calculate, track, and enhance in order to boost your Amazon ROI and keep your business on an upward trajectory.
What Is Amazon ROI? (And What Does It Say about Your Seller Profit Margin?)
In case you haven’t already, at some point in your Amazon selling journey, you’re going to come across the term ‘ROI’. At its core, ROI is a performance measurement. It assesses the productivity of an investment — whether that’s the number of ad conversions, or the actual net profit after a month’s worth of sales on your seller marketplace of choice.
In Amazon selling, calculating your ROI involves taking the net profit, dividing it by the cost of goods sold (COGS), and then multiplying this figure by 100 to get a percentage amount.
For example, your Amazon ROI could look something like this:
3000 / 1500 * 100 = 200%
(Net profit) / (COGS) * 100 = ROI
An ROI of 100% means you’ve doubled your investment, an ROI of 200% means you’ve tripled it, and so on. The higher your ROI percentage, the better you’re doing at a.) increasing net profits b.) reducing COGS or c.) all of the above.
(Psst! Not a fan of math? Don’t sweat it! Use the Amazon FBA ROI Calculator in your Amazon Seller Central account to get to your real ROI).
Now that you know your actual ROI percentage (and not just some vague ball park figure in the back of your mind), you’ll want to keep a watchful eye on your Amazon profit margins and ROI to help you boost the money-making potential of your current and prospective products.
The Undercover Benefits of Amazon ROI
Did you know that over 50% of Amazon sellers generate revenue between $100,000 – $500,000?
Revenue is the starting point for Amazon selling success.
But unlike revenue, the benefits of Amazon ROI extend beyond being able to cover your business expenses or the luxury of having extra cash. A healthy ROI can be the catalyst to scaling your business because you’ll have capital to reinvest.
With a solid Amazon ROI, not only will you be able to explore more product lines, markets and advertising campaigns — you’ll also widen your funding options to help you invest back into the business on your terms. A healthy ROI will also open up more doors if you decide to sell your store in the future.
Now that you know why a healthy Amazon ROI is crucial to growing your eCommerce business, you might be wondering, ‘What’s a good ROI for Amazon FBA?’
Our answer: Aim to triple your investment.
This will give you extra room for costs like advertising and complementary products, while leaving some extra for you to grow with.
Amazon Seller Profit Margins: What It Really Takes to Build Enviable ROI on Amazon
To lay the foundation for great ROI, you’ll first need to do a full health check-up on your Amazon business.
This will help you rectify any missed opportunities or costly bottlenecks that could rob you of your hard-earned profits. Here are a few areas to focus on.
Get a Handle on Your Amazon FBA Fees
Love it or hate it, Amazon FBA fees are the costs we incur to do business. They can vary depending on your selling plan, category, item type, and warehouse storage length.
This can make it extremely difficult to know whether you’re being charged correctly.
While Amazon does a pretty good job of calculating fees, they aren’t perfect. So, it’s crucial you check your records.
Ensure you’re being charged the correct fees for your product according to your product category, size, and weight.
Cross-check the amounts in Amazon’s official rate cards with the amount you’re being charged. If you suspect an error, contact Amazon support to request a re-measurement of your goods. Check out the rate card for your region here: US, UK, EU, AUS.
Also, make sure you choose the right Amazon plan for your goals.
For instance, If you’re aiming to drive sales in your business, the professional plan is the way to go. Choosing the right plan will help you avoid unnecessary fees that cut into your profits.
Finally, think about your inventory. Develop a strategy for managing your stock, increasing sell-through rates, and decreasing refunds to keep in line with Amazon’s ever-changing Inventory Performance Index (IPI) threshold.
NOTE: It’s crucial you keep your IPI above the threshold to avoid costly repercussions like inventory limit reductions.
Also, watch out for any stranded and poor performing inventory.
Think about whether you need to:
- Reduce the price of performing goods to avoid long-term storage fees (which are significantly higher than monthly storage fees).
- Run promotions to generate more sales and reviews.
- Fix stranded inventory listings to start generating sales from your product.
- Check the address on your removal order to avoid your goods being marked abandoned stock and disposed of.
Taking an analytical approach to your Amazon FBA fees will help you avoid penalties that can drain you of your ROI.
But in a capital-intensive business like Amazon selling, FBA fees aren’t the only cost to keep an eye on. It’s also important that you stay up-to-date on your expenses to avoid cash flow issues and synchronize your balance sheet with your biggest Amazon ROI goals.
Let’s look at some of the other areas to review and optimize for peak Amazon ROI.
Use Technology to Drive Growth and ROI
If you’ve spent any amount of time in eCommerce, you’ve probably received an avalanche of advice on how vital it is to tap into tech tools that help you: gather accurate data, deploy the best keywords, launch timely promotions, get more reviews and more.
But beware. Subscriptions may not look like much, but over time they can add up to eye-watering amounts.
Our advice? Avoid overkill.
The right technology can be a big help in maximizing your ROI on Amazon. But do you really need three keyword research tools. Or can you work with one?
Question every expense to ensure each of your subscriptions adds significant value to your Amazon business. You might even want to set a repeating calendar task to review your subscriptions on a quarterly basis and cancel any that are not adding value.
Negotiate Better Rates with Your Suppliers and Freight Forwarders
As your sales volume grows, your next move is to renegotiate stock pricing.
Speak with your suppliers to establish better rates. Then, do the same with your freight forwarders.
For example, can they freeze the amount you pay in shipping once you hit a certain cubic meter or weight?
Be fair in your requests so you don’t damage the relationship, but remember that it doesn’t hurt to ask. One simple shift in terms can be a great way to raise your ROI with minimal effort.
Avoid Bad Exchange Rates and International Transaction Fees (Like The Plague)
Every Amazon Seller who’s been there knows that whatever you do, you don’t want to get trapped by sky-high exchange rates and fees — these will absolutely cut into your profits and ROI.
Luckily, there are now numerous options for receiving and executing payments affordably (our Digital Wallet is just one option that can help you save a ton of cash).
With the right tool, you can receive revenue from various sources like marketplaces, platforms, customers, and even your own bank account in up to 37 different currencies at the lowest possible cost (and almost always significantly lower than what Amazon charges to convert your currency for you).
Don’t settle for outrageous fees. Click here to find out more about how Digital Wallet can help boost your ROI!
Optimize Your Ads to Drive Down Your ACoS
In the game of eCommerce, all it takes is a few unprofitable ad campaigns and before you know it, you’re hemorrhaging money.
Underperforming ads cause your Advertising Cost of Sales (ACoS) to skyrocket, putting a ton of negative pressure on your Amazon ROI. So if you’re looking to boost that net profit percentage, you’ll want to get your ad campaigns in order, stat.
Once you’ve found and validated your target keywords, focus on optimizing sales to increase your ad conversions. The average Amazon PPC conversion rate stands at 9.95%, CTR at 0.41%, and CPC at $0.71. Aim to reach these numbers or better!
If you don’t have the skill set to run profitable ads and aren’t interested in learning, seek help from an Amazon marketing agency or consultant. Also, don’t be afraid to look for other ways to advertise, like influencer marketing on social channels such as Instagram and YouTube. You could even try out Facebook and Google ads as your sales climb.
Remember, having a diversified marketing strategy that lets you test and track different channels will help you improve your overall ROI over time.
Improve Your Listings (and Products!)
Amazon sells over 12 million products — and that’s excluding services, wines, books, and media.
Improving your listings is essential for standing out amid the noise and winning the attention of potential buyers. Since customers can’t see or touch the items in real life, listings are their way to experience your products before hitting the ‘buy’ button.
Make their experience memorable by investing in showstopping images, infographics, and benefit-driven descriptions.
One more thing: As sellers, we often spend so much time thinking about our listings and ads that we neglect the main star of the show, our products!
Remember, you can improve your product continually and incrementally. This will help you attract new buyers and keep your existing customers happy, all while boosting your sales and ROI.
Shop Around for an ROI-Friendly Funding Partner
The leading cause of small business failure is a lack of cash flow, with a shocking 82% of owners citing cash flow problems as the reason they closed their doors for good.
Thanks to innovations in the funding industry, it doesn’t need to be this way. Look around for specialized eCommerce funding options that will meet your business needs, while keeping you on a steady path toward healthy ROI.
Here are a few things to look for to make sure you find the right funding provider for your Amazon business.
Competitive Interest Rates and Low Fees
Fees and interest rates can rack up quickly, ensure your funding solution is fair and affordable with no tricky terms or unclear approval processes.
Flexible Credit Limits & Quick Turnaround
Look at the funding provider in question and ask:
- Do they have flexible borrowing limits, lengths, and repayment amounts?
- What does the repayment schedule look like?
- How does it stack up against funding from Amazon Lending?
- Can they approve funding requests quickly?
Whether it’s buying in bulk to prepare for Q4, getting ahead of the Chinese New Year, or jumping into a new market or product line at just the right time, flexibility in funding is key.
These factors are crucial to ensuring your business maintains the working capital it needs to grow and generate a healthy ROI on Amazon, no matter how big your growth goals.
Proven Track Record
Your funding provider should have specialized experience working with growing eCommerce businesses (bonus points if they’ve been there themselves). This will ensure they understand the unique challenges you face as an eCommerce owner and have purpose-built products to support your growing business.
The last (but hardly the least) item on your funding provider ROI checklist is good old-fashioned integrity.
Just because traditional banks aren’t usually an option for eCommerce sellers, doesn’t mean you can’t have the kind of warm, personal relationship you’d expect from a local lender.
Look for a funding partner with a strong emphasis on customer success and don’t be afraid to conduct a background check on prospective lenders. You need to know with 100% certainty that they take values like honesty and ethical trading seriously, and that they haven’t been involved in any situations that could bring your own integrity into question.
Cash Flow Is King When it Comes to Healthy Amazon Margins
For sellers who know how to make the most of it, Amazon is the gift that keeps on giving. But to succeed, you’ll need more than steady revenue — generating consistent ROI is a must.
To achieve this goal, keep a keen eye on things like your FBA fees, costs, supplier relationships, inventory limits, marketing expenses, listings, and products.
Remember that just like sales and expenses, Amazon ROI fluctuates. Focus on improving your approach continuously, and you’ll be well on your way to the kind of ROI that keeps your Amazon shop moving in the right direction.
Need ROI-friendly funding? SellersFunding’s Credit Line may be just the thing. We offer eCommerce businesses the capital they need to reinvest in their business on their terms. Check it out for free today!