Many people who start a new Amazon business are caught off guard by the Amazon FBA fees. With big ticket items you can get away with not knowing how the numbers stack up. Sometimes. But sometimes in the excitement of making sales, we don’t take the time to evaluate what is happening behind the sale. We need to know our numbers!
Maybe it’s because I am an accountant by day, but to me it’s vitally important to know exactly what is going on. You absolutely cannot evaluate your Amazon FBA business by sales alone. We can make sales all day long, but if you lose a few pennies or even a dollar on each sale, that adds up and your new business will be out of business before long.
I also do not rely on what the scanning apps say. I do my sourcing online and I evaluate if I should buy a product based on my projected return on investment (ROI) which I will show you how to do. To do that, I need to know what I will pay for the item, what it is selling for on Amazon and the rank of the item.
The Amazon FBA Calculator Widget
Before I show you how to calculate ROI here is a simple tool to see if the item you are going to buy will actually earn a profit. This is easy to use and it’s free and you can download the widget to have sitting on your Firefox or Chrome toolbar. It’s called the Amazon FBA calculator widget. If you are on Amazon, you just click the widget icon and you’ll have it right there!
I will show you a little trick to make it very clear cut and tell you if you are making a profit on this item or not! Take a look at the screen shot here. I have a yellow highlight that shows the three numbers that I entered myself.
- Just ignore the column on the left, no need to enter anything there.
- Enter the price you want to sell for (Item Price). In this case $15
- Enter shipping cost (I average 50 cents an item so that is what I put)
- Here is my little tip/trick. In the Prep Service field I entered what I actually paid for this item, in this case it was $3.21. If I had actually used a prep service, I would have added that to this cost here as well.
As you can see I will make $5.98 on each one of these and I am quite happy with that result. I actually sold a case of 40 of these within a couple weeks but I can’t get any more. So maybe this is a BOLO for you!
If this is enough for you, then you can leave this article now before I get into the ROI Calculations!
Now for the Icky math!
I like to buy products where I will make a minimum of 5$ profit on each sale and also 50% ROI. That part is easy enough to figure out. I keep a spreadsheet on each shipment. In my spreadsheet, I record the item along with what I paid (called COGS or Cost of Goods Sold). Don’t forget to factor in the sales tax (if you don’t have a reseller certificate yet)!
So the basic formula when an item is sold is this:
Sell Price – COGS – AZ fees = Profit.
If I’m lucky, that figure is at least 5 bucks. This allows some wriggle room for other costs that are part of the equation but are harder to allocate on a per item basic. I’m talking about costs such as inbound shipping, FBA storage fees, and the like.
The other number in my spreadsheet that is important to me is ROI (return on investment). I want to make an ROI of at least 50%. In the FBA world some of my ROI figures are out of this world especially if I have bought an item for a dollar and then sold it for $40 (which I have done!).
To calculate ROI, simply take the profit and divide by cost and express as a percentage: Profit/Cost * 100 = ROI%
In the case of my one dollar item that sold for $40: (39/1) * 100 = 3900%
I wish they all could be that good.
But here is something more realistic, a sale from last night. I bought a Lego set for 26.99(including tax) and sold it for 49.97. Amazon fee was $12.80. So from a dollar point of view my profit was 49.97-26.99-12.80 = $10.18
From an ROI point of view: 10.18/26.99 * 100 = 38%. I fell short of my 50% ROI goal.
But still, what that number tells me is that for every dollar I spent, I got my dollar back plus another 38 cents. What you don’t know is that when I purchased the item I planned to sell it for $54.97 because the rank was pretty good and I was the only FBA seller. My original price was set to give me a 50% ROI but it did not sell after 2 weeks, so I dropped the price to 49.97 and it sold within a couple of days.
Some people hold out but I would rather have the 10.18$ in hand now rather than the $15 I was hoping for a couple months down the road.
So how do I evaluate products online before I buy them?
The biggest variable is the Amazon selling fees. For items under $15 , I estimate the AZ fees to be about 50%. Above $15 I use a figure of 33%. The higher the price of the item, the lower that fee and I have some items where the fee is around 22%. A good reason to choose higher priced items with a super low rank wherever possible.
So let’s say I am looking at a toy where my cost is a total of $15. I check Amazon to see what the rank is and what the competition is selling it for.
I see that it sells for $30. Do I buy it?
Cost $15. Estimated fees (33% of 15) $4.95.
Profit in dollars: Sell price($30) – COGS($15)-AZ fees($9.90) = $5.10.
My Amazon payout will be $20.10 on this item.The 5$ profit is pretty good wriggle room in case those fees end up a bit higher, and also to account for inbound shipping (for me about 2$ per item)
ROI: Profit($10.05)/Cost(15)*100 = 67%
I am happy to buy this item as long as the rank is also good.
What about a 3$ item on clearance that sells for $9.99? That’s triple the cost, most people would be tempted to buy that.
Profit in dollars: Sell price ($9.99)-COGS(3)-AZfees(5$)= Your profit is only $1.99, Amazon payout is approximately 4.99 on this item.
ROI: Profit($1.99)/Cost(3)*100 =67% Hmmm, that part looks good.
The 1.99 seems lousy but the ROI tells me that for every dollar I spend, I get that dollar back plus another 67 cents.
[cryout-button-color url=”#” color=”#47AFFF”]Do I buy this item? The answer to that is maybe! [/cryout-button-color]
There is only one circumstance under which I would buy this item. If the rank was so good that this item flies off the shelf in multiples every day and was super easy and light to ship, then yes I would buy it. Think Walmart. They make their fortune by selling a thousand items a minute with super low margins rather than 1 big ticket item a day with a high margin. If I knew that I could sell 20 of these a day, of course I would buy! It’s easy money.
Run these calculations on your recent sales. Are you making an ROI of at least 50%?
Try running these calculations on items that you currently have in your inventory. If you have stuff that is sitting there and not moving, consider adjusting the price to get your money out so you can buy good ranking items.
Are you thinking about jumping on the FBA bandwagon but have no clue how to get started? Or maybe you are already selling FBA but realize you need more information?
Here is how I started my Amazon FBA biz with almost no money!
Best of luck on making those Amazon FBA sales count!
The Amazon FBA program is a fantastic business opportunity and a great part time or full time business for the right person. It is not ‘Easy Money’ or a Get Rich Quick opportunity. It is a legitimate online retail business, subject to the real laws, rules and regulations of wherever you happen to live and the rather complicated and lengthy Amazon Terms of Agreement.
Do not start your Amazon business without first reading the Amazon TOS and without some basic knowledge of what it means to have a business and understand that with any business you must pay attention to basic business practises. And yes, this means things like taxes and insurance.