With an average daily sales revenue of $1.29 billion, Amazon remains one of the most popular global e-commerce companies.
Odds are you are an active Amazon seller or perhaps want to become one. Yes, your high-quality products and marketing strategies play a crucial role in driving sales. But your business is more complex than that.
You must calculate pure net profit margin to assess where your Amazon business is heading and how you can improve its overall financial health.
Here’s everything you need to know about Amazon’s pure profit margin and ways to optimize it.
What Is Pure Profit Margin (PPM)?
Several variables affect your overall profitability, and you must understand them to maximize your business growth – whether you’re a seasoned or an amateur Amazon seller.
The common factors that impact your business revenue include the fulfillment and storage charges, shipping fees, operating costs, cost of goods sold (COGS), advertising fees, and expenses linked with returns.
Net profit margin or pure profit margin refers to the total income generated as a percentage of revenue. For Amazon sellers, it relates to the total profits to revenue ratio.
So, PPM is the percentage of profit produced from the revenue after considering your cash flow products, expenses, and costs.
Sellers calculate PPM to:
- Calculate how much of the company’s revenue translates into actual profit
- Check if the brand is producing enough profit
- See if they are maintaining the operational and overhead costs
PPM Calculation
Fortunately, there’s no secret sauce to calculating PPM. You need to divide your net profit by the total costs of sold goods.
Here’s a quick formula:
- Pure Product Margin = (Product Revenue – COGS + Vendor Funded Co-Op) / Product Revenue
PPM is an excellent KPI (Key Performance Indicator) because it provides an accurate picture of how well your Amazon retail business is going. This helps you determine where you lack as a seller and what strategies you need to optimize to stay ahead in your business game.
Tips to Maintain a Healthy Pure Profit Margin
Perhaps you cannot make important business decisions unless you know where you stand as a business owner. Your overall financial health speaks volumes about the efforts you’ve put in so far and whether or not they bore fruit.
However, you need to keep track of your profit and losses to maintain a sound pure profit margin – or your financial well-being.
This would require you to keep all your costs in check. Doing so will help you adjust your expenses and see what you can do to boost sales and increase your revenue.
Here are a few tips to lower your overall expenses and maintain an optimal PPM
Use A Reliable Product Sourcing Method
Product sourcing refers to finding products you want to sell, purchasing them from a retailer, and reselling them. Finding a manufacturer to fulfill your product needs requires paying high costs.
Nonetheless, the product sourcing strategy can maximize your PPM by lowering the costs per unit.
When you purchase from a wholesaler, you’ll find already manufactured products. Simply put, they are not private labels but from stable companies. Chances are, they might have a high competition on Amazon, and if so, you just got lucky.
Here’s how else the product sourcing method benefits your business.
- You get to reduce your direct and indirect costs, which positively impacts your financial profitability.
- You have the chance to customize your purchases instead of buying pre-designed products.
- Product sourcing doesn’t help you save money but produces more of it.
Build a Detailed Inventory Management Strategy
What made your customers turn to your competition to purchase the exact product you are selling? You need to alleviate leaks in your supply chain and devise a plan to move through the inventory.
This will help you keep abundant stock and prevent your consumers from turning away. Some popular inventory management strategies include the following:
- The Pull Strategy. This technique involves companies manufacturing inventory based on consumer demand. It is a suitable option for brands that want to keep the costs low, but it can create problems in the event consumer demand shifts unexpectedly.
- The Push Strategy. This involves brands producing as many items as they think consumers will demand. The push strategy requires the companies to wait for the requests, unlike the former. Besides, it reduces costs because you create more products in one go but follow more risk if you do not receive the desired orders.
- The Just In Time Strategy. This model creates products based on a demanding schedule and aims to deliver the final product when the consumer requests it. This strategy requires customers to have raw materials at hand, and they create products when demand comes in.
You need to determine how your products are performing on Amazon to pick the right strategy for your business.
Get to Know the Best Sellers
Keep an eye on your best-selling products; they are the items that boost profitability. Therefore, you can produce them in a surplus amount.
You must keep these items in stock. In case you fail to do so, see your pricing strategy. Do your homework to see the prices of competitor products in a similar niche.
Then, increase the product prices to boost your margin and access them regularly to determine changes in the volume.
Do Not Forget to Include the Selling Fees!
Amazon fee includes the charges that the ecommerce platform takes from the seller. These could be penalty fees, monthly charges, or other similar payments.
While every seller considers their shipping fee in their seller fee, they often forget about the charges of order fulfillment, storage, and other services.
Make sure you include all costs when calculating the PPM. Otherwise, you won’t be able to determine the precise details of your profit margin.
Wrapping Everything Up
A high profit margin on Amazon indicates you’re doing something right as a seller.
Increasing and dramatically shifting consumer trends require you to outperform your competitors and progress continuously as a business owner.
You must keep track of merchant processing and maintain a sound PPM to maintain healthy financials. Once you learn to control your business expenses and sell products at find products with a solid profit margin, you’ll be on a roll!
