Managing an Amazon FBA business can often feel like going in 100+ different directions at once. But it doesn’t have to be that way, if you focus on what matters. And what matters in your Amazon business is proper understanding of your financials.
Too many podcasts, interviews, and YouTube videos are talking about advertising, PPC and ways to increase traffic — but none of these things matter unless your key business finances are held in check. Advertising is important, but it merely accelerates your cash cycle. If the cash cycle is negative, you’ll just end up accelerating losses.
At Sellerscale (the #1 financial analytics dashboard for Amazon FBA sellers), we treat each product as an investment.
We believe that a key question any seller should ask themselves on a daily basis, is “Am I getting ROI — (return on investment)?” and have access to real-time data that is able to provide an answer.
Unless you have a solid understanding of your financials — what’s your profitability level, what are your unit economics, and so on — you are operating blindly and this question will be hard to answer.
But it doesn’t have to be this way. In this piece, we’ll explore the key costs and fees that a seller should be aware of. We’ll also talk about how you can make future product decisions based on these metrics.
Revenue is not profit
It’s obvious. Yet, Amazon business owners forget to keep track of their profitability.
It makes sense why this happens – Amazon doesn’t have COGS (Cost Of Goods Sold), so you can’t see your profitability in the Seller Central dashboard. Profitability is something every seller has to figure out on their own.
It’s also a highly dynamic metric. Your profitability is dependent on many costs and fees that change with time and as your business grows.
One of Sellerscale’s first users was making over $40K/mo in revenue on his account. But it wasn’t until he plugged in his numbers into our app, that he realized he was actually losing money on hidden costs and fees.
This happens quite often: Sellers are so focused on increasing revenue figures, they forget to take into account that at the end of the day, it’s the bottom line that matters. If you lose money — you’ll eventually run out of cash, and will have to close your business down.
This doesn’t have to be you.
There are the main costs and fees to keep track of in your Amazon business, which you should keep track of. And there is a way to forecast these metrics before you launch a new product.
Amazon FBA costs to keep track of
Key metrics every Amazon seller should always keep track of are:
- COGS (Cost Of Goods Sold) — the cost of your product to be manufactured. This is pretty straightforward. FBA Fee — a fee that Amazon will charge you to fulfill a single unit of product to a customer.
- Storage fee — the storage fee is based on the daily average volume in cubic feet per month and varies between the two seasons. In Sellerscale, you’d get this metric automatically in your dashboard.
- Referral fee — the referral fee is a fee Amazon charges you every time you sell a product.
- PPC Cost — how much money you spend on advertising.
- Refund cost — in case you had refunds, Amazon retains no more than $5 for that line item as a refund administration fee.
- Amazon seller subscription — even the small expenses, like monthly subscription on your seller account are important to keep track of.
- Compensated clawback — this is a cost you incur when Amazon takes back the money they paid you earlier as a reimbursement.
- Disposal fees — these are what you pay Amazon if you want to get rid of your inventory (destroy/dispose of it).
- Long Term storage fees — in case you have any. Items stored for 6 months or longer, will be charged long term storage fees.
As you can see, there are a lot of costs you should be tracking and monitoring.
You don’t have to use a dedicated software app to keep track of those — you can set up a managerial accounting system of your own in an Excel spreadsheet.
In fact, that’s exactly what my partner and Sellerscale’s CEO, Paul Faguet, did when he ran his Amazon FBA company. He kept track of all of his costs, and per-unit profits in a dedicated spreadsheet — which later became the basis of our platform.
It looked something like this:
Excel spreadsheets are relatively easy to set up, but it might be hard to keep track of these metrics in real-time. At some point you might want to expand to existing solutions on the market that help you see your key business data in real-time.
For example, this is what the breakdown of costs looks like in the Sellerscale dashboard:
The Sellerscale dashboard.
The key is to be aware of these metrics at all times and not let them take you by surprise. As we say in our company, it’s always cheaper to do due diligence ahead of
The costs we’ve covered above are important not only to assess your current business situation, but also for potential profitability.
Don’t forget to assess your future profitability
But what separates sellers who become ultra-successful from those that take on (often, unnecessary) risk is proper financial due diligence.
Not only should you estimate demand for new products, but also think ahead to all the potential costs and fees that each product will incur. And because every product situation is unique, they will have unique costs as well.
For example, one of the biggest mistakes Paul made in his first FBA business was to overlook the storage fees that a meditative pillow can have. He assumed that because the product was light, it shouldn’t be much. But Amazon storage fees depend on the length, width and height — and his pillow, although light, ended up incurring high storage costs. In addition to high storage costs, his product wasn’t differentiated enough, and so his ACoS was high (which means he had to spend a lot of money to generate sales).
All of these costs added up and almost led Paul to shutting down his first business.
You need to understand your potential profitability ahead of time. To do that, figure out as many costs as you can that your future products will incur, write them down, and calculate the essential metrics. This is called “unit economics analysis”.
Too many sellers estimate demand or even calculate their overall profitability. But it’s really important to dig deep into your revenue, profitability and costs associated with every sale.
Remember that each product is an investment — more information will only give you a competitive edge. Here are some unit economics metrics you want to assess in your analysis of future products:
- Daily unit sales — This is the number of units you expect to sell (or sell) every day, on average.
- Average order value (AOV) – how much money you make on each order, on average. You calculate this simply by dividing the total revenue by the number of orders on any particular day (Daily unit sales).
- Unit landed cost — this is your total cost per unit of manufacturing and delivering the product to an Amazon fulfillment center. This includes packaging, package inserts, tariffs, etc. In other words, this is your fully loaded cost of making and delivering one unit of product to the warehouse.
- ACoS – Advertising Cost Of Sales. Very important metric for all Amazon sellers to keep track of. It shows how effective you are in your advertising. It indicated how much you need to spend on advertising to generate $1 in revenue. For example, if you spend 30¢ to generate $1 of PPC sales, your ACoS is 30%. But low ACoS is not always bad: sometimes you need to spend money on advertising as an investment to build sales rank.
- Per unit profitability — how much money you make (net) on every unit sold.
Not only should you keep track of your current products’ unit economics, but use them to help you assess your future product’s potential.
To make it easier, you might want to try out this free Chrome Extension from Sellerscale. You don’t have to be a registered user, and it will simply be an addition to your traditional analysis that you already perform when scouting new products. In case you decide to go with Sellerscale, all of your potential products will be added to your account’s dashboard.
Bottom line: prior to committing to any product, make sure you model out their unit economics, understand your ROI, margin, in addition to all of your costs and fees.
Interested in trying Sellerscale?
Amazon financials can be difficult, but the FBA business is not particularly a black box. There are concrete levers you can pull and variables you can influence to make more money and improve your business health.
At Sellerscale, we are dedicated to doing just that. With our easy-to-use, beautiful dashboard, you’ll never have to worry about your Amazon finances and keep track of everything you need in real time.
Exclusively for eCommerce Nurse users, you can join us for a 14-day free trial (no credit card required), and then apply a promo code: SCALE250 to get a 50% off the first 2 months after a 14-day free trial at www.sellerscale.com.
We wish you profitable selling!