If you're an Amazon seller, you're probably all-too familiar with the complexities of calculating your profit margins. Even if you regularly make thousands of pounds per week in sales, we all know not all of this is net profit. Understanding how to calculate your Amazon profit margins is crucial for working out your taxes, budgeting, creating financial reports, and ultimately growing your business.
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Today, we're showing you exactly how to do it. Read on to discover the simplest strategy for calculating your Amazon profit margin so you can gain an accurate view of your business's financial health.
The Difference Between Gross Profit Margins and Net Profit Margins
First and foremost, you must understand this key point before you move forward. If you're just starting out as an Amazon seller, you've probably heard these terms tossed around, but perhaps aren't entirely certain about what each means and the difference between the two.
To clear this up for you, let's take a look at them both:
Gross Profit Margin
A gross profit margin is your total sales revenue, minus your COGS (cost of goods sold). This figure is then divided by your total sales revenue and converted into a percentage. So, for example, if you sell a total of £300 worth of goods, and your COGS is £170, your Gross profit margin would be 43.33%. The calculation would look like this:
300 - 170 = 130
130 divided by 300 = 0.4333
X 100 to convert to a percentage = 43.33%
The higher your gross profit margin, the more profit you make per £1 you spend on your business.
Net Profit Margin
Your net margin accounts for all the costs associated with your business. If you pay salaries, debts, or rent, for example, or have marketing costs, this is where they come into the calculation. You can have a huge gross margin, but if your overheads are expensive, how much profit you make will ultimately decrease.
Your net margin shows exactly how your business is doing financially, taking all direct costs and indirect costs into account.
To work out your net margin, you need to take all of your business costs (including COGS, fees, and taxes) away from your sales revenue. You then divide this by your sales revenue. And, times it by 100 to convert it to a percentage.
It's pretty much the same calculation as a gross margin, but takes away ALL associated costs instead of just COGS.
Why Should you Calculate Your Profit Margins?
At first glance, it might seem like if you know your net profit margins, there's little point in calculating your gross profit margins. However, a gross margin shows the current and potential profitability of your products. Comparing this with your net profit margins indicates where you're spending money and what costs are draining your resources.
You should analyse your finances regularly and build a picture of your business's health over time. Financial reports can give you a good idea of where your business is heading, and where you can make improvements.
What is the Amazon Profit Formula?
Now you've got a good understanding of gross vs net, we'll move on to the main reason you're here; the Amazon profit formula. To work this out, you need to account for all costs and expenses, like in your net profit calculations. These might include:
- Shipping costs
- FBA fees
- Storage fees
- Referral fees
Add up all your expenses and subtract this amount from your total sales. Then divide this figure by your total sales figure to get your profit per sale.
Amazon sellers can use the Amazon FBA calculator to estimate the costs vs the profitability of their Amazon products beforehand. This revenue calculator is free to use and is good for calculating Amazon fees and the fulfillment costs associated with using Amazon's FBA. It also looks at the cost of other potential fulfillment methods.
If you're looking for someone to help you build your Amazon business from the get-go, A to Z Formula is on-hand. As Amazon experts, they can assist in product sourcing for your business. They'll work with you to grow your Amazon venture and maximise its potential, and that of your overall profit margin.
How to Calculate Amazon Profit Margin
To calculate your Amazon profit margin:
- Add up all your expenses, including COGS, Amazon fees, and operating expenses
- Take this figure away from your total sales revenue
- Divide the result by your total sales revenue
- Times this figure by 100 to convert it to a percentage
Step #1: Add up all Your Expenses
Begin your Amazon profit margins calculations by adding up all your expenses. Include everything, like product cost, Amazon fees, fulfillment fees, ads, any software you use, and any loans you repay, along with their interest. As well as recurring expenses, you might also have one-off miscellaneous costs you need to account for too. Don't forget to include these.
I'm going to use the figure £6,500 as an example of total costs for a month.
Step #2: Take Away From Total Sales Revenue
To keep things nice and simple here, let's pretend your total sales revenue for one month is £10,000. In this calculation, we'll take our £6,500 expenses away from our £10,000 revenue:
£10,000 - £6,500 = £3,500
This means your total profit for the month is £3,500.
Step #3: Divide by Total Sales Revenue
Now you need to work out how much of each pound (or other currency) you generate is profit. To do this, simple divide your monthly profit by your sales revenue, like so:
£3,500 divided by £10,000 = £0.35
This means that 35p from every pound that has come through your Amazon business that month is profit.
Step #4: Times by 100
Finally, times this figure by 100 to work out your profit margin:
0.35 X 100 = 35
Therefore, your profit margin is 35%. This means that 35% of your sales revenue for that month is profit.
What is a Good Profit Margin for Amazon Sellers?
This is all very well, but what exactly is a good profit margin? As stated already, the higher the profit margin, the better. That being said, higher profit margins don't necessarily mean more money.
For example, you might have two different companies. One with a profit margin of 15% and the other 35%. But, because the company with the 15% margin sells cheaper products and you have allocated a larger advertising budget to it, the number of products you sell is considerably higher. This means the business with a 15% profit margin might be more profitable over the course of the month than the 35%.
Big companies can thrive with low profit margins because they sell large volumes of products. If you're a newbie, small, or even a medium sized business, you probably won't have that luxury for a long while, if ever. So, as a general rule of thumb, the higher your profit margin, the better.
Back to the point of what exactly is a good profit margin. To some degree, this will depend on the product and, as already discussed, the volume of units you sell.
A common question is ‘is 30% a good net profit margin for Amazon FBA’?
The answer to that is 'absolutely'! 30% is considered an excellent net profit margin for Amazon sellers. In fact, between 15% and 25% is a good margin to shoot for.
Conversely, regularly hitting below 8% could have detrimental consequences for your Amazon FBA business. So keep above this as best you can.
6 Ways to Increase your Amazon Profit Margins
If you've worked out your profit margins and are falling below the 'good' threshold, don't worry. I'm going to go through some ways you can increase it.
1. Source in-Demand Products
Sounds kind of obvious, right? But, the more people want your products, the less you'll need to spend on promoting it. It also reduces the chance of being stuck with ongoing storage and FBA fees because they'll be in and out quicker. This will bring down the costs associated with each product and increase your profit margins.
However, you must also ensure your products are good quality. This means sourcing them from reputable suppliers, and even testing them out yourself before selling.
2. Use FBA
Amazon FBA brings both you and your customers a multitude of benefits. Although it costs you more per product, you'll save a lot of time and money on storing your products and posting them individually as they sell.
Furthermore, customers are more likely to buy from an Amazon FBA seller because they get the 'Prime' benefits that go hand-in-hand with it. This includes free delivery and the knowledge that their product will be delivered by Amazon, a trusted and world-renowned company.
Around 73% of Amazon sellers use FBA, so there's lots of competition out there. However, signing up for Amazon FBA puts you with the competition, rather than below it.
3. Use the Right Software
Depending on where you are in your Amazon seller journey, you might be using or considering different software to help with your Amazon business. For example, inventory management or expense management software. You might also consider using a software like Link My Books. This consolidates your Amazon financial data and sends it across to your accounting software.
Other possibilities include product sourcing tools, automatic bidding software, and analytics software. Although many of these come with a cost, they could also increase your earnings, efficiency, and productivity, often making the gains outweigh the cost.
4. Get the Price Right
Consider changing up your pricing strategy to boost your Amazon profits. Look at how other Amazon sellers are pricing their products to get your product cost just right. You want to avoid pricing your products too high but also too low as well.
Sky high prices will put customers off buying from you. But, lowering your price too much not only brings your profit margin down, it can also damage the trust buyers have in the quality of your products.
If you must undercut your competitors, do it by only a little. Alternatively, you might consider running special discounts now and again to encourage purchases.
5. Get Rid of Old Stock
Have you got stock gathering dust in Amazon's warehouse? Now's the time to shift it. There are quite a few effective ways of doing this. And although you might lose money initially, you'll be removing those items that would have been a long-term drain on your resources. Here are some ideas to get rid of inventory that just won't budge:
- Launch special promotions
- Bundle items together for a discounted price
- Increase your ad spend
- Sell your stock to competitors or liquidators
- Ask your supplier if they would consider refunding you
- Request that Amazon sends your stock back or destroys it
- Give them away as a freebie with every purchase
6. Stay on Top of Your Amazon Accounting
One of the best things about selling through Amazon is its almost limitless potential for growth. You can sell thousands of products that you don't even need to handle yourself. However, with this huge potential, comes some notable difficulties.
Staying on top of your Amazon accounting can quickly become confusing. This is especially true if you sell across different Amazon marketplaces, when you're subject to different tax rules and regulations. We recommend using a good accounting software, like Xero or QuickBooks, so that you can stay on top of your accounts.
With these software, you can get detailed cash flow insights, along with income and expense management tools that'll help you gain more control over your margins.
How Link My Books Makes Recording Amazon Sales Simple
Link My Books significantly simplifies the financial management of your Amazon business. It takes all your financial data from Amazon, breaks it down, and sends it across in summaries to your Amazon accounting software. Link My Books conveniently (and automatically) works out your COGS, profits and losses, and your taxes according to where in the world you sell.
If you've been manually recording your Amazon sales data in your accounting software, consider signing up to Link My Books. It's quick, easy, and free to try. Bag your free trial today.
Key Takeaways for Calculating Amazon FBA Profit Margin
Working out your net profit margin is essential for any Amazon business model. While the calculations are simple enough, bringing your margins down is another matter altogether.
Amazon FBA sellers utilise tactics that decrease fulfillment costs and processing costs, while pricing their products competitively and hitting their sales targets. Using the Amazon FBA calculator can also help you make the right decisions to get high profit margins.