What Is a Good ROI for Amazon Sellers?
If you’ve been anywhere near the world of e-commerce, you know there’s money to be made on Amazon. Just how much money exactly, depends on a variety of factors.
When you’re just starting out on Amazon FBA, an ROI of 100% is often considered healthy.
You’re doubling your money, with plenty of room to adjust pricing and experiment with new products. Not too shabby!
But as you scale your Amazon store (and be sure to have your Amazon Storefront in good shape), the answer to what makes a good ROI becomes more complex. You might introduce products in completely new categories, expand into unfamiliar territories like Amazon UK, or begin working with a range of new suppliers as you refine your sourcing strategy — all of which can play a big role in determining your ROI.
In the following sections, we’ll take a look at how to find your Amazon ROI and practical ways to safeguard your success on Amazon as you grow your business.
Demystifying Your Amazon ROI
- What Is a Good ROI on Amazon?
- How to Calculate Your Amazon FBA ROI
- Aligning Your Amazon ROI with Your Selling Strategy
First Things First: What Is a Good ROI for Amazon Sellers?
Your return on investment (ROI) is the percentage of profit you make compared to the cost of purchasing and selling an item on Amazon. For example, if you purchase an item for $5, pay another $5 in fees and advertising, then sell the item for $20, you’re left with a $10 profit or 100% ROI.
100% ROI = $10 net profit / $10 CoGS * 100
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.
You can plug in your own numbers using this simple formula for calculating your Amazon ROI:
ROI = Net profit / Product cost * 100%
While this may seem straightforward enough, anyone who’s been at it for a while can tell you there’s a lot more to it than first meets the eye. Selling on Amazon involves a range of fees that can eat into your profit margins.
If you’re an FBA seller, here are just some of the Amazon fees you may need to account for in your ROI formula:
- FBA fulfillment fees
- Monthly inventory storage fees
- Referral fees
- Per-item fees
- Labeling fees
- FBA prep-service fees
- Return processing fees
- Stock removal fees
- Variable closing fees
Of course, that’s without even factoring in the impact that Amazon’s seller payment schedule and account level reserve can have on your cash flow.
(Not a fan of math? Don’t sweat it! Use the Amazon FBA Calculator in your Amazon Seller Central account to get a clearer picture.)
How to Calculate Your Amazon FBA ROI
Calculating your real ROI on Amazon is about more than increasing your net profits and reducing your CoGS. And unfortunately, it’s not as simple as following the widely cited 3X rule.
Today, there is more competition on Amazon than ever before.
Recent estimates show that Amazon is now taking more than 50% of sellers’ revenue, up 10% from five years ago. FBA sellers are paying more due to Amazon’s increased fulfillment fees and the fact that many sellers have to rely on Amazon Advertising to successfully compete for sales.
Even if you purchase a product for $5 and sell it via FBA for $15, your real ROI may be less than $10 once you include the full range of Amazon fees, advertising, and other costs.
With 73% of Amazon sellers using the Fulfillment By Amazon (FBA) service, calculating your ROI has never been more important.
Of course, it’s also important to remember that ROI isn’t the only metric that matters.
Currently, there are 60,000 Amazon sellers that generate revenue of over $1 million on Amazon. Depending on your goals and business model, increased sales volume at a lower e-commerce profit margin can also be a great way to scale.
Aligning Your Amazon ROI with Your Selling Strategy
No two Amazon selling strategies are the same. Nor should they be.
Whether you choose to go after a higher Amazon ROI percentage on a smaller number of products or scale your sales and revenue with smaller per-product profit margins, the result may still be the same.
With increased cash flow, you’ll be able to explore more product lines, markets, and advertising models — allowing you to expand your business on your terms.
Assuming the end goal is growth, here are a few key areas to focus on as you scale.
Get a Firmer Grip on Your FBA Fees
Like it or not, Amazon FBA fees are the cost of doing business on the world’s largest e-commerce marketplace. Depending on your selling strategy, item type, and storage needs, these fees can vary wildly, leaving a dent in your Amazon ROI.
While Amazon does a pretty good job of calculating fees, it’s still a good idea to check your records to ensure you’re being charged correctly according to your product category, size, and weight.
Here are some key steps to take:
- Cross-check the amounts in Amazon’s official rate cards. You can find the rate card for your region here: US, UK, EU, AUS.
- If you suspect an error, contact Amazon support to request a re-measurement of your goods.
- Double-check to make sure you’ve chosen the right Amazon plan for your needs.
For example, if increased sales is the goal, the professional plan could help reduce your fees and ensure you’re eligible for the Buy Box.
Watch Out for Stranded and Poor-Performing Inventory
When improving your Amazon FBA ROI, it’s important to keep a close eye on your inventory.
While Amazon stockouts can be notoriously damaging to your product rankings and sales, you’ll also want to keep an eye out for any excess or poor-performing inventory.
Think about whether you need to:
- Reduce the price of slow-moving products to avoid long-term storage fees.
- Run promotions to generate more sales and customer reviews.
- Fix stranded inventory listings to start generating sales.
- Check the address on your removal order to avoid goods being marked as abandoned stock and disposed of.
Taking an analytical approach to your Amazon FBA fees can help you avoid costly penalties that may drain your ROI and help preserve your profit margins as you scale.
Improve Your Listings (and Products!)
Improving your listings is essential to standing out on Amazon. But when was the last time you updated your product imagery and copy?
Increase your Amazon conversions by investing in captivating images, value-driven infographics, and benefit-driven descriptions. And don’t forget the real star of the show — your products.
Here are some practical ways to get more out of your products and listings:
- Launch a consumer focus group to find out which products are performing best and why.
- Use your customer data to identify new opportunities for Amazon subscription boxes, product bundles, and other offers to increase your Average Order Value (AOV).
- Take advantage of Amazon Voice of the Customer (VoC) data to increase the conversion power of your listings.
A profitable product expansion strategy doesn’t happen by luck. Take time to develop a systematic approach to product research and listings optimization to keep customers happy, while boosting your total sales and ROI.
Optimize Your Ads to Drive Down Your ACoS
Underperforming ads can cause your Advertising Cost of Sales (ACoS) to skyrocket.
If you’re looking to boost your net profit percentage, you’ll want to get your ad campaigns in order as soon as possible.
Here are some tips to help you make sure your ads are performing as they should:
- Once you’ve found and validated your target keywords, optimize your ads. The average Amazon PPC conversion rate stands at 9.95%, CTR at 0.41%, and CPC at $0.71. Aim to reach or exceed these numbers!
- If you don’t have experience running profitable ads and don’t have time to learn, seek help from a specialized Amazon marketing agency or consultant.
- Reduce your reliance on Amazon ads by embracing other strategies, such as influencer marketing, affiliate marketing, search engine optimization (SEO), and email marketing.
By optimizing and diversifying your marketing and advertising strategy, you can test and track different channels to improve your total ROI over time.
Use Technology to Drive Growth and ROI “Automagically”
If the above steps seem like a lot of work, here’s some good news.
The right technology can help maximize your ROI on Amazon by automatically optimizing your listings, requesting refunds, filing claims, tracking inventory, and helping you make sense of the rich customer data Amazon provides.
Start by reviewing your e-commerce tech stack to make sure you’ve got the right tools.
For example, you could consider investing in systems and software that help you:
- Optimize your Amazon listings for improved rankings and sales.
- Automatically file FBA reimbursements on your behalf.
- Streamline your backend sales management processes.
- Pinpoint new opportunities in your Amazon data.
Of course, you want to make sure that each of your subscriptions adds value to your bottom line. Review your tech stack on an annual or even quarterly basis to make sure the results justify the investment.
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