Whenever you’re running an Amazon FBA business or planning to start one, everyone wants to know the same thing: is it profitable?
This is a good question, as profit is the main motivation for starting any business, and a higher profit allows for more money in your pocket for less work.
In this post, we’ll go over profit, how sellers like to measure profit, and what you can do to ensure you hit your profit goals.
How much profit do Amazon sellers make?
When looking at other sellers on Amazon, you might be thinking, “Just how much profit are these sellers pulling in?”
Like most of these types of questions, the answer is “it depends.”
For some concrete numbers, Jungle Scout often surveys Amazon sellers to find out stats like this, and they’ve found that 52% of sellers have at least a 10% profit margin, and 27% have above a 20% profit margin.
If you look at their chart breakdown, you can see that each 5% increment of profit margin contains 10-15% of sellers… showing how widely profits can vary greatly from seller to seller.
Not only do profits vary greatly, but so do sales.
A seller can typically do $12,000 in revenue annually or even multiple millions in revenue annually.
So what is a good profit margin for an Amazon Seller?
Since most sellers (over half) get by with around a 10% margin, that should be the minimum baseline to keep a business running. Still, with a 10% margin, you’ll find it hard to grow your business and keep up with the demands of running an eCommerce business, like restocking and launching new products.
20-30% seems to be a good goal. Anything higher could even be a potential weakness because competitors can easily undercut your pricing with a similar product if you’re making so much profit.
Still, just aiming for a certain profit margin isn’t always helpful because of all the different factors that can dictate your margins.
Profit margins vary greatly because of the type of products sold, the volume of products, the level of competition in the space, overall revenue, operational efficiency, and other factors.
With so much variation, what’s the best way to know if your profit margins are good or bad?
There is a simple answer to this, instead of focusing on profit margins, Amazon sellers focus on their Return on Investment (or ROI).
What is Return on Investment (ROI)?
According to Investopedia, ROI measures the return on an investment relative to its cost.
ROI can be calculated by the amount of investment divided by the cost associated with that investment expressed as a percentage.
For Amazon Sellers, that would mean that for every dollar you put in, your ROI is your making back investment amount plus any additional profit.
So if every dollar you invest provides you $2, that would be an ROI of 100% ($1 dollar invested, $1 dollar to recoup investment, and $1 in profit).
This works well for Amazon FBA Sellers because you can more easily see the health of your product sales by seeing how much cash each product sale brings in, subtracting it from your costs, then easily calculating ROI from there.
What’s a good ROI for Amazon FBA?
While you always want a higher ROI, which translates to better profit margins, most sellers aim for at least 100% ROI.
That means for every dollar you invest into a profit; you are making $1 in pure profit.
Having at least 100% ROI means you are taking in consistent profits, giving you the cash you need to do important business tasks like restocking, paying yourself and any employees, and helping launch new products.
A simple example of this would be if you spend $1,000 to get a product live on Amazon, you should expect to make $1,000 back to cover your costs, then another $1,000 in profit.
While 100% ROI is fine and enough to sustain a business, most sellers recommend hitting 150%-200% ROI on all of their products to account for fluctuations in costs when running their business.
Unexpected rises in costs can kill your profit and ROI instantly, so keeping a higher ROI going at all times can prepare you for these unexpected cost rises.
Some aspects of running an FBA business where costs can change suddenly:
- Amazon’s Fees: Amazon typically raises fees across the board yearly, from storage to fulfillment. On top of that, they will create new fees like fuel surcharges and inflation fees.
- Sea Freight: Anyone who’s sold and lived through 2021 and 2022 saw just how high container shipping overseas could get.
- Raw Materials cost: Once you think you’ve got a sound system going for your business, your manufacturer hikes the price of everything they make due to rising material costs.
How to Raise Your ROI as an FBA Seller
You want a higher ROI as it gives you more cash to grow your business faster and pay yourself more, so let’s go over some ways to keep your ROI percentage high.
Raise Your Prices
Kind of obvious, but raising your price will directly lead to a higher ROI. This also leads to the risk of lowered sales and loss of organic ranking, but you would be surprised at how a small price increase will not hurt the overall sales of products you have established well on Amazon with good rankings and a lot of 5-star reviews.
Be More Efficient with Costs
Since ROI uses the cost associated with your investment as part of the calculation, lowering your costs will increase your ROI.
Some areas Amazon FBA sellers can reduce the costs associated with selling products:
- Keep as many services in the product’s country of origin as possible. This means things like product inspection, individual product labeling, bundling, and even getting products sent to Amazon FBA warehouses.
- Use efficient packaging. If your product is as efficiently packed as possible, it can lower fees for getting it to different places across the board. Amazon fulfills it for less money, and you can put more on a pallet to ship overseas.
- Keep your team lean. A single person can scale an Amazon business into the multi-millions of revenue alone with just the help of contractors when needed.
- Reduce the distance your products need to travel. Products must stop at many places before arriving at an Amazon FBA warehouse. If you can find an excellent location to store your products, somewhere near a port and an FBA main receiving warehouse, you can reduce your overall costs by a decent margin.
What Fees and Costs Amazon Sellers Encounter to Help Calculate ROI
So if you want to know the general fees and costs you will encounter getting products sold, here are the most typical fees a seller will encounter no matter what category they sell in:
- Product production fee: This is the cost per unit for your factory to make your products.
- Sea freight is the cost of putting your products on a boat or plane and sending them to your country. When shipping on a boat to the USA, you will likely encounter tariffs to get your products cleared by customs, which can run up to as much as 25% of what you paid your manufacturer to produce them.
- Delivery to the warehouse, 3PL, or prep service: Once your product hits the port, it will have to be transferred to either its final warehouse destination before going to Amazon FBA warehouses, and you can get a lot of different handling fees, temporary storage fees, and drayage fees at this point.
- Sending to Amazon FBA warehouses: This is your typical LTL shipment or UPS shipment to Amazon’s warehouses, where they become Prime eligible. While Amazon provides steep discounts for LTL and UPS shipments, it’s still a pretty decent cost.
- Amazon’s various fulfillment fees: Once your product sells, Amazon charges you a percentage of the retail price and a specific price to ship the product to the end customer based on its volume and weight.
- Storage fees: Amazon charges for housing your products in their warehouses, and the longer they live there, the more Amazon charges. Your 3PL will likely charge for storage as well.
- Advertising fees: Some categories require a lot of advertising due to being high competition, so don’t forget to factor this into your ROI calculations.
- Returns: Returns can take a huge bite out of profits adding significantly to costs, especially in spaces like apparel.
You can use Amazon’s
Seeing how much cash your product brings in and dividing it by all of its costs will give you your ROI.
ROI works well for Amazon since you are “investing” your products to get a return on them. And since a lot of selling on Amazon is hands-off for the actual seller, it adds to this idea.
So, if you want to be sure you’re not steering off-course when knowing if your Amazon business is profitable or not, devise an ROI calculation that works for your product catalog and see just how much your ROI is.
With the knowledge of knowing you’re sitting on decent enough profits, you can do more with your business, like take on funding to help grow at an even faster rate or even pay yourself more without worrying about your overall business’s health.