CRaP stands for “Can’t Realise Any Profit,” and in the Amazon vendor space, it’s a popular term. To put it simply, these are products that do not make a profit. For a long time, Amazon’s focus was on gaining market share across numerous product categories, even if this sacrificed their bottom line. Now that Amazon is more established with large market shares in major retail industries, the focus has shifted to profitability. Amazon’s main focus now centres around their profit margins. Amazon will refuse a product if it is unable to provide them with a decent profit.
In this post, we look at the reasons products become unprofitable on Amazon and ways vendors can manage this to ensure minimal impact on their sales and product offerings. Before we look at the reasons and strategies to manage this, let’s break down how Amazon calculates CRaP and what happens when they deem items unprofitable.
How does Amazon calculate CRaP?
When Amazon looks at the profitability of their products they look at a variety of costs, only some of which are disclosed. When they calculate margin, they first look at the net margin: Retail minus product cost less contra COGs (allowances). Note the retail price is not the MSRP/RRP, but is based on the current market (lowest) price, so what other retailers and sellers are selling the product for. Amazon then looks at contribution profit: Net margin minus variable costs such as shipping and returns. The contribution profit can be very different from the net margin if, for example, the item has a high shipping cost.
Amazon will have a minimum profit margin they must achieve. This is not a set figure, because it is different across product categories and countries. This bottom line also changes frequently and is not disclosed externally with vendors. The profitability of each product is calculated automatically by Amazon’s internal pricing tool. If the market price fluctuates, you may find that one week your product is profitable and the next week it may not be.
What happens to CRaP?
If Amazon deems an item as CRaP, this means certain selling privileges may be taken away. The severity is based on how frequently the item is deemed unprofitable. For example, if an item is unprofitable only a few times due to Amazon dropping their price temporarily to match a time-based promotion, Amazon may only temporarily cancel promotions, remove products from Subscribe and Save, and pause Sponsored Ads campaigns. If a product is continually unprofitable, Amazon may stop raising purchase orders, regardless of demand, and discontinue the item from the range. Before this happens, Amazon will typically warn vendors about their CRaP products and request improved cost prices and/or allowances to cover any previous losses Amazon may have made.
What makes an item CRaP?
If an item becomes CRaP, the vendor will need to investigate why the item is not profitable.
Typical reasons include:
- Low margins: Vendors need to offer a good enough margin that Amazon can make a sufficient profit.
- Competitive market price: If the pricing on the product is very competitive with lots of price matching and heavy discounting, you may find that Amazon can no longer compete to win the Buy Box and make a profit at the same time.
- Short expiration date: Amazon will only order limited quantities if there is a short expiration date because once the expiration period comes to an end said products need to be disposed of.
- High minimum order quantity: Items with a high minimum order quantity can sometimes force Amazon to drop the retail price to ensure they don’t sit on large quantities of stock.
- High customer returns: If an item has a high rate of customer returns or free replacements, this will cost Amazon, impacting the margin.
- Low retail price points: Items that typically retail under the $10 mark will often be unprofitable due to the cost of shipping. For example, if the item retails at $10 and gets a net margin of 50%, the profit will be $5, but if the cost of shipping is $4, Amazon will only be making $1, or a mere 10% margin.
- Heavy and bulky items: Items that are heavy to ship, large, or an awkward shape (for example, an ironing board, or appliance) can be costly to ship. If these items do not have a high retail price, they may find they do not generate enough profit to cover the large cost of shipping.
Managing unprofitable ASINs
Once a vendor has identified why their items are unprofitable, they then need a solution:
- Offering competitive prices: This doesn’t mean giving Amazon your absolute lowest price, it just needs to be enough to ensure they can remain competitive and profitable.
- Manage assortment: Review your range and decide what items make sense to sell to Amazon via Vendor Central and what items should be removed. When reviewing the range, decide if items should be sold in multipacks or bundles. Alternatively, you could offer Amazon bespoke, exclusive products that will have no or limited competition. This means a higher market price that allows Amazon to make a higher margin.
- Review a hybrid (vendor and seller) strategy: If you remove certain items from the vendor side, look into listing these via Seller Central or work with a third-party seller or distributor to sell these items or your behalf.
- Manage overstocks: Reduce the minimum order quantities on items that don’t have the demand for Amazon to order in those quantities. Regularly review the inventory health report, and if you detect possible overstocks take action by running coupons or Sponsored Ads.
- Use Direct Fulfilment: Look at offering Amazon your products via their drop-ship network Direct Fulfilment, whereby you ship the product directly to the end consumer from your warehouse.
- Monitor and manage customer returns: If items have a high customer returns rate, investigate the reason for this. It might be a simple fix, where the product pages have inaccurate data or images (common listing optimisation errors), or a bigger issue with the packaging where the item is easily getting damaged, or even a problem with product quality.
- Tighten up your distribution channels: If the products are being aggressively priced in the market, you may want to start implementing strategies such as introducing distribution agreements or a MAP policy.
- Work with different Amazon programs: If you have products that sit well in some of Amazon’s programs (Like Prime Pantry and Prime Now), you may want to manage your assortment between the two like offering multi-packs in the grocery category and singles in the Pantry.
At eCommerce Nurse, our team can help you avoid CRaP from day one. We manage accounts for vendors, including inventory management, listing optimisation, translation, and more. Contact us today to find out how we can assist you.