Show notes for this episode:
So how'd you make a profit with Amazon? Is it possible? How do you do it consistently? And how can you set up your business in such a way that it is profitable while you're running it? Well, this is a big question. Actually, it's not question I get asked very often when I'm talking to people about selling on Amazon. It's just not really something that comes up too often. I think it's because it's something that a lot of new Amazon sellers don't really think about too much before they get started.
Now when they're running their business and when they're getting moving, and when they're seeing the sales come in, this question of profit does come up and it is something they're interested in. Not beforehand, but this is something you should be thinking about beforehand. Or, this is something that you should be focusing on from day one, with any business you want to run.
Because I can tell you for one thing, running a big business, doesn't matter how much money it makes every year - that could be a 10 million a year business - if that business doesn't make profit, you might as well not bother.
If you want a 10 million pound a year business, and, you know, you make 10 million a year in sales, in revenue, and it costs you 10 million a year to make those sales, in other words, you break even, then what you've done is you've done 10 million worth of work for absolutely no reward.
You might sort of just done nothing that entire year, because it would have gotten you the same result. So we want to be thinking about profit from day one. We want to build this into our strategy and make sure our strategy enables us to make profit. Cause you know, you could have a 500K a year business and if it's going well, when you have healthy profits, you could be bringing over a hundred K per year out of that 500K or more.
But if it goes wrong, you might end up breaking even, you might end up making a loss, and it all comes down to the strategy in which you build your business. That's what's gonna make the difference.
So how do you create a profitable strategy? Well, let's talk about it. That's what today's episode is going to be about. So first of all, what do you want to do? Do you want to find a profitable product?
You want to find a profitable product. This is where it all starts. And to be honest with you, this is the number one thing everyone's looking for in the beginning. Like everyone focuses on the niche, right? How do you find these really hot niches? How'd you find this really hot product? Which products should I start with? How do I know it's going to sell? How do I know it's going to perform really well?
You know, all these things, it's on people's minds in the beginning when you're looking to get the business moving and yeah, it is a big topic. How do you choose that perfect product? Well, here's the first thing I want you to understand before you get too concerned about which products you go for.
Just because you have a great niche doesn't mean it's going to be massively successful. I've actually sold products in mediocre niches that didn't look that great on paper, but then the product has performed unbelievably well. Sold very well, better than the revenues that's being shown on Jungle Scout. It's more profitable than I thought it would be. And it's been a real success.
Equally, I've found niches that look like they should be perfect on paper and I've completely screwed up. So the product research process isn't like the game of running an Amazon business.
It's not about just finding the perfect niche over and over again, because even if you do find the perfect niche, it doesn't mean that the product is going to be successful. And this might be something that's a little bit hard to wrap your head around because you might think, well then if the niche doesn't matter, then why do we bother finding such a good niche?
Well, obviously the niche matters to an extent. The niche gives you a certain amount of potential to make money. If you find a niche where, say, there's products making, say, 10 grand a month in revenue, there's plenty of niches like that out there. Then now you have the potential to also make 10 grand a month in revenue. Now, it can happen. It doesn't mean it necessarily will, but it can. It's possible. It's also possible you can make a lot more, or a lot less. But it's possible.
So the point is, we don't know whether the product's going to be profitable in the research phase. We just know that there is potential to make revenue. So how do we get around this? And how do we check to see if the product will be profitable? Simple: test.
This is something that I've said loads of times before. This is something that you probably know that you should do anyway. Test the product first, before you go ahead and order 500 units, because the product looks perfect on paper and it looks like it's going to make you rich. Before you dive in, test small. And we're not testing just to see if the product will sell. We're testing all kinds of things. Really, we're trying to get data.
In fact, one of the things we're testing when we're importing a test batch, trying to get it to sell, is we're testing how much we can charge for the particular product that we source. Now, you might see a niche where there's sellers selling the product for 15.99, 25.99, 19.99, you know, all different prices. And you might pick a niche that enables you to sell a product that costs a lot more for the customer - 30 pounds or whatever, because you want those profit margins.
Well, the fact of the matter is, you won't actually know how much you can charge for your product until after you've sold it. Because the particular design that you offer to the marketplace, you might not be able to charge as much as somebody else's design, right?
For some reason, customers might just not like your products that you've imported, or they might love it, but we don't know these things until we actually sell it. So that's why we need to test.
So the first thing you want to do to make profit on Amazon, once you've found a niche that looks profitable, is to test the products within that niche. Now, the way I test is quite extensive, I don't just test one product. I often go for two or three different designs of that product in my test.
So I might grab like a pink one, a blue one, and one with a slightly different design.. it's a bit bigger, for example. That way, I'll know whether the marketplace responds to the pink one or the blue one or the bigger one.
Also, I might test different bundles. I might bundle it with something. I might bundle all three with the same thing and have different designs. I might have the same design three times, but bundle it with different stuff. I might test it not bundled with anything.
So we're just putting our hooks out there to see what fish we grab to see what's going to be the most effective method moving forward. Once you've tested quite extensively, what you'll get is you'll get information on the product. You'll know if it's going to sell, you'll know what price you can charge, you'll know which design of the product sells the best and which one sells for the most.
Cause what you can do is just keep putting your price up until customers stopped paying it. At a certain point, you know, they won't give you any more money for the product. They just won't pay it. They'll think it's a rip off. Whatever it is, just below that point, it's probably what you should be charging because that way you'll be the most profitable, right?
So once you've tested your product, now, what you can do - I guess this would be step three - is use that price and work backwards to calculate how much profit you'll be likely to make after all of your expenses. All right.
So let's say I've got a bunch of clients who have just done their test batches right now. Every week we're getting a new client posting in our community and in my coaching program saying that they have made a sale. The first sale of their test batch.
The first sale is always really exciting. It's the most exciting part of the entire program. And in a lot of cases, it's when you've gone from this all being theory - looking at Jungle Scout, looking at databases, looking at Amazon, watching videos, listening to podcasts - to here's some money that's gone into your bank.
There's a big step. And that's the first thing that people have a big challenge with. Getting sales on Amazon. That's the big first hurdle for Amazon sellers. The second hurdle is, well, now we've made some sales, how do we turn this into an actual, real profitable income? How does this work?
So this is the process I go through. I say, okay, now you've got some sales. You know how much you can charge because customers have actually paid the money, right? You've got proof there. You can charge £18 or whatever. So now let's go to a supplier, get a quote for a larger amount where the price per unit is going to come down, let's run all the numbers, and see what the profit will be like.
Let's go for an example. Let's say you've got a product and you managed to sell it for £20 and it sold for £20 pounds several times, and it looks like £20 is a good price point where you're going to get a decent amount of sales but still be able to charge a lot. They wouldn't pay £25, £27, £22. Or maybe you put the price up to £22 but it's sold very slowly. But in £20, it ticked over quite well. So that's a good price we can charge, we can make consistent sales, and it’s high enough. Great. So how do we work out if £20 is going to be profitable or not?
Well, pick a number over 300 and go get quotes from suppliers for that amount of units. So 500 is usually a very good number to go for, cause that usually brings the cost per unit down, mainly because of the shipping. Just ask suppliers for that number of stock. So go to a supplier and say, I want to order 500 units of this product. Can you please give me a quote, etc.
And then you get all of the expenses for one product, getting it into Amazon, and getting it selling, and you take it away from £20 pounds and see if there's any money left. Very simple. But we have to do these maths first before we go and place the order. Cause if we have a plan that could work on paper, then there's a chance it might work in practice. But if we have no plan, then really it's all pie in the sky. And this is how Amazon sellers make no money.
So, £20, you've got your quote from your supplier. Let's say, I don't know, they're going to give it to you £5 per unit and getting it shipped over is going to cost maybe £2 per unit. So £7 for the product and shipping. The first thing we want to figure out is the cost of landed goods.
How much is it going to cost to get the products bought and shipped over? So the product cost and the shipping cost will be the first two things we think about. Also, you want to think about duty and VAT. Because you can't just import stuff without paying any taxes. We need to pay some money to the government as well. Duty is usually a percentage of the product plus shipping, plus insurance.
So if the whole product import costs say £2000, the shipping was, say, £800. The insurance was £200 pounds. There's a total of 3K. And the duty will be, say, 10% of that 3K. So maybe, whatever it is, that would be what, £300 pounds for the duty.
The percentage depends on the type of products that you actually import. You don't have to worry about this stuff, but this is a glimpse of what it's like. Certain products are cheaper in terms of duty than others. So duty and then the VAT is all of that, 20% of it. So £3,300. VAT is 20% of that cause 3,300 pounds – let me do it on a calculator quickly - times 20%.... £660 would be the import VAT.
So that's a total of £3,960 cost of landed goods - the cost of getting the products to you. Now, if there's a fee, getting the products from customs to you or to wherever you're shipping it to, you need to include that as well, which is haulage. But let's just pretend it's included in this fee. £3,960 for cost of landed goods.
Now, if you've got 500 units, you just take that amount and you divide that by 500. So we've got £7.92 per unit in this particular imaginary example. £7.92. That's your cost of landed goods per unit. Then you take the Amazon fees for the product. So one thing you can do is go to Google - just type in FBA calculator. I'm doing this now so I can show you FBA calculator. And obviously if you're in the UK and you want to find the UK one, you can type in FBA calculator UK on Google, and you'll find the UK one.
Basically, just find a product that's similar to yours. Cause we want to get the right fees for your type of product. Each category has slightly different referral fees, which is like the percentage Amazon takes, like a commission.
So I'm going to type in my favorite product of the moment - spatula. Search and just choose one that looks a bit like yours. Then we'll get a similar weight, a similar category and everything else, and we'll get similar fees. And we're going to type in the price. So we're going to charge £20 pounds for ours. And then hit calculate, and I can see here, Amazon tells you, the net profit you'll get after fees and the total of the fees.
So with this particular product, there’s a set of three spatulas, selling on Amazon fee of £3, which is the referral fee. The FBA fees for this per unit will be £1.73. It’s total fees of what is it, £4.74. So we have to take away £4.74 from that total. Cool. So now we've got the cost of landed goods, and we've got the Amazon fees. First two things we have to figure out.
Next thing, cost of advertising. For every sale we get, we need to run a bit of PPC advertising to figure out, to get the product visible, to get people to click on it and buy it. So I would aim, maybe, for £2 per sale, cause we're aiming for a 10% average PPC cost of sale.
It's not going to be like that in the beginning. It's going to be horrendous in the beginning. It's going to be running at a loss for the first couple of weeks. But on average, over, say, a few months, it will be about 10% if you do everything sort of right.
So we're going to estimate £2 per unit packaging. I'm going to say we didn't spend anything on packaging for this, but if you did have packaging, you have to think about that two promotions. Now this is an interesting one. You can give away 10% of your stock for free to people with voucher codes. And what that does is, every time they use a voucher code to get your product for free, Amazon sees that as like a full-on sale. So it boosts the organic reach of your products, makes your product go up the search results, basically.
So if you're going to do that, which is usually a good idea, factor that cost into your expenses. So the way we figure this out is we take the cost of landed goods, plus just the FBA fee. There's no referral fee, because 15% of nothing, if we're giving the product away for free is nothing right. We just want to pay that 1.74, whatever it was for the FBA fee.
So in this case, we take 7.92, which is the cost of landed goods plus the Amazon FBA fee, which is £1.74, and we get around about £9.66, something like that. So for every single promotion, is going to cost us £9.66. So if we do 10% of our stock, which is 50, times that by 50, which gets you to £483, then divide it by the number of stock you're going to sell per unit cost. So we divide that by 500, right? So it's going to be an extra pound per unit. It's going to be allocated to the promotions, in this case.
Then a prep. Are we going to have any prep costs? Well, I'm going to say, no, we're not going to have any in my particular example, but you might do. If you're sending it to a prep center, what do they charge you? £1.20 or something per thing.
Another thing – overheads. If you want to get really scientific about this stuff, figure out your monthly overheads. So for example, it could be Amazon fees - £30, maybe then you pay Jungle Scout, £20 pounds a month or something. Maybe you've got some other overheads. Maybe it could be a, I don't know, £20 or maybe £50 a month for other stuff, softwares, other things, I don't know, Google G Suite, fees for your email address, stuff like that.
Total of maybe a hundred pounds a month overheads or whatever. And then you could divide it by the amount of products you aim to sell each month. So if it's 10 sales a day, it could be 300 sales a month. Then you could divide a hundred by 300 and you could say, well, it's going to cost me 33p for each product I sell in overheads.
Now, this becomes a bit obsolete once you start to import more products, because if you have two products, three products, four products, then obviously it's not going to be 33p anymore. It's going to be like 5p per sale dedicated to overheads. So it might not be worth calculating this stuff, but it could be good to know anyway.
And then the final thing, just so you're ahead, is to calculate the VAT. Now you're not going to pay VAT until you have say, a threshold, which is 86,000 a year I believe, or it could be 87, I can't remember - goes up all the time. But it's good to know, will this product be profitable when you do pay VAT?
So to calculate the VAT that you're going to charge for each sale, you take the price. So £20 and you do 16.6% of that price. You do, say 20 times 0.166 which is £3.32. Because what will happen is, you will take the £20 pounds and remember, that is the price plus VAT is included in there. So you'll be charging £16.66 plus £3.32, which will get you to about £20 pounds. £3.32 is the VAT. £16.66 is the cost of the actual product. These rounded numbers. It doesn't totally add up to £20, but this is all as close to an estimation as we can get for now.
So you've got all your expenses now. You've got the cost of landed goods, the fees, the PPC, the packaging, the promos, the prep, the overheads, and the VAT. Also might be worth mentioning that before you charge VAT, there is a VAT cost on top of the Amazon fees. So if you're paying £4.74 per unit sale for fees, then actually you're really going to be paying £5.68 because there's 20% on top of Amazon fees, which they don't put in the calculator.
Now, if you're going to calculate what it's going to cost when you're charging VAT, you don't have to worry cause you can claim that back. But if you're going to calculate what you're going to make before, then you do have to take it into account.
So let's do these numbers and let's see if it's going to add up. And I've got a feeling we're not going to make too much profit in this particular example, but that's good. You will have instances where you add everything up and you realize I'm not going to make any profit and then you need to change your strategy.
So let's go ahead to 7.92 for the cost landed of goods plus Amazon fees, 4.74, plus two pounds for the PPC, plus one pound for the promotion per unit average, plus 33p for the overheads on average per sale, plus 3.80 that we will be having to pay in the future. It gives us a £19.29 total expenses to make a £20 sale.
So imagine if we imported these 500 units, cause we could see that they were, I don't know, £5 each. And we were selling them for £20. Imagine if we didn't do all of this maths. We've imported all of the stock, made all the sales, seen all that happen, and at the end of it, we've had 70p per unit in profit.
Now tragically, a lot of Amazon sellers do this. They don't do the mass before they place the order. And then they end up making 70p per unit. And they're thinking, well, you know, I'm making all these sales, like I see all the money coming in from Amazon, but why don't I have anything left in my bank at the end of the whole year? It's because they haven't done these numbers.
If you have this situation, it's not the end of the world. It doesn't mean your niche doesn't work. It doesn't mean that your product's going to fail. It just means you just have to get these expenses down somehow - usually by contacting more suppliers, getting more quotes, and figuring everything out, squeezing those margins.. And so you can make a healthy profit.
For example, £7.92 per unit, we could probably get that down considerably by doing sea shipping, right? Or by ordering stuff from a different supplier who can give it to you instead of £5 per unit, maybe £3 per unit. Right? In fact, the variation between different suppliers’ cost per unit can just be astronomically different. And that the quality can sometimes be better even when you're paying less.
It's really bizarre because remember, China's a massive place, right? And there's these factories all over the country and their cost of materials are going to be different depending on where they're based, and the cost of labor would be different. You know, it all varies. So keep getting quotes until you hit the nail on the head and you get maybe a healthy 20% profit margin after all this stuff. So really we want to see, say, £4 per unit in profit or something like that. Three or four pounds maybe.
Now when we're talking about profit, it's worth noting that actually, just because something makes less than 20% profit, doesn't mean it's a bad product. If you have a product that's making 10% profit, but it's selling very consistently and it's not a massive hassle for you to import and source, then why not sell it? Why not make 10% on a product - it's still profit, right?
You know, you might have something that sells very, very slowly, but it makes a very healthy profit, it makes you 40% every time it sells even though it only sells maybe once a day, that's fine too. As long as you're not putting too much money into stock so you have to wait for like years to get it back. That's okay too.
So there aren't too many hard and fast rules here with what percentage you should be making. But as long as you are making profit, as long as you know how much profit you will make before you spend money. And as long as you know how many units to order, and when you're going to see the money back, then it should be fine.
Remember, this is the game when you're selling on Amazon. Choosing niches is not the game, the niche you sell in, in many ways, it doesn't really matter actually. You can make a mediocre niche very profitable if you're smart, if you get your numbers right, and you offer something into that niche which is very special.
You can also pick an incredible niche and completely screw it up by getting this stuff wrong. And yes, the niche might look incredible, the demand might be sky high, the competition - no one might have found out about it yet. But if you do all this stuff and you make 70p per sale, then you're screwed. You're not going to be able to sustain a business because one hairline increase in any of your margins, you're making a loss now.
So do these numbers. I hope this gave you a good overview of how it's possible to make a profit in an Amazon business, and how it's possible to not make a profit. And remember, this is the game - getting these numbers right.
I hope this is helpful. If you want more help, go to ecommercefreedom.com, book an Amazon Accelerator call with me, and we can talk about your goals a little bit, come up with a plan, see if maybe I can help you with those goals. And yeah, we can talk a little bit in depth about how to do this stuff and how to get started without procrastinating too much. Right? Just get moving.
My clients, on average, import a product within their first week of working with me. That's what we want. We want to get something in and selling very fast. We don't want to faff around. Because you can listen to 400 of these podcast episodes and make no money. You can import one product and you can make a grand a month. Who knows? So can't wait to catch up with you. Hope you enjoyed this episode and we'll catch up very soon.