Driving profitability on Amazon
Are you making enough margin to sustain your amazon business?
Making money on Amazon has never been harder. New amazon fees, cost price inflation and supply chain costs are putting pressure on margins.
But knowing where to save money is complex and daunting. There are so many different fees, charges, marketing costs and hidden expenses associated with selling. Consequently, many businesses don't know their profit at a unit level. 65% of our clients were actually losing money on every sale until we helped them navigate the various fees and ensure their product assortments were suited to the platform.
Healthy profit is key to success for any business and rising costs are having dramatic impacts on consumers and even businesses when it comes to goods, services, gas and electricity.
This is causing many to tighten their spending and particularly businesses finding any way to reduce unnecessary cost and to improve their profit margin by any means possible. For brands selling consumer goods, Ecommerce is typically a big part of their strategy and difficult to navigate. Most retailers build a joint business plan with a brand and work closely on commercials to ensure that it’s financially viable for both brand and retailer. Any brand that works with Amazon will be familiar with a very different relationship. Amazon enables the brand to manage their products and approach using their portal (Vendor Central) which for many brands can be a challenge. Navigating the various fees that are applied are also a challenge, building a P&L to capture all expected costs can help understand how viable a product is on Amazon and understanding whether moving to a different Amazon selling model is more cost effective and will drive profit gains.
Amazon is a complex marketplace with various ways to sell. Larger brands typically work with Amazon through a Vendor model, this compromises of selling directly to Amazon wholesale. A Vendor agreement will consist of an agreed Cost Price that Amazon will pay for the product and terms that are negotiated by the brand and Amazon that can vary typically anywhere from 12-30%. The terms consist of various additional services and benefits that the brand and Amazon agree upon. This could include marketing, content, advertising, promotions, operations and Amazon support (e.g. AVS). Vendor Terms should be reviewed in detail and each element scrutinized to ensure that the brand is getting the most effective deal that addresses all of their needs.
Brands can also sell through Amazon as a seller, meaning that they sell the product themselves but use Amazon as a vehicle for the sale. Being a seller has multiple options, a number of brands use FBA (fulfilled by Amazon) in which Amazon manages most of the logistics and storage of the products. The costs incurring for FBA include a referral fee, storage fee, shipping fee and additional costs that may be applied dependent on the product or it’s packaging such as relabelling if the labels do not adhere to Amazon’s requirements, polybagging if the product is a liquid and isn’t packed as effectively as possible and S&S if the product addresses a recurring need for the the consumer. All of these costs are dictated by the item details, such as weight or dimensions that impact the logistical and storage costs and pricing that is used to calculate a referral fee. Brands can also use FBM (Fulfilled by Merchant) which is where the brand still pays a referral fee but the brand handles the storage and delivery of the product to the consumer. This is often less enticing to brands due to not being able to gain a Prime badge that many Amazon customers look for. This can only be gained through regular proof of fast and efficient delivery but typically this costs more per unit which therefore impacts margins.
At Tambo, we typically build a view for all selling models for the brands that we work with. This gives a view of the profit margin and the profit that each product will drive through each model. More specifically giving a view at a unit level that includes all applicable costs capturing cost of goods, logistics, overheads and advertising costs forming a clear view to drive effective decision making.
Using our expertise internally we can model top and bottom line figures to give a view of the best model or whether we would recommend a hybrid model so the brand can effectively maximise profitability on Amazon. Tambo has the expertise to help brands navigate their commercial on marketplaces and the broader management of the platforms themselves.
As a result of our clients profitability challenges Tambo has been compelled to evolve and now take a Profit-first approach to all activity on Amazon, ensuring we and our Client Partners continue to trade successfully on the largest Marketplace in the world.
Are you a brand owner that has not yet fully explored the cost implications of trading on Amazon? If so, and the anxiety is building as we head into Q4, please get in touch to explore options
Joe Farley, Associate Director, Consultancy