One thing that has always shocked me is how many business owners don’t have a good grasp of their figures! I get emails from countless Amazon sellers who simply don’t even know all their costs and how to calculate basic profit margins and returns.
Now I’m not saying you need to be a math whizz to run an Amazon FBA business, obviously not. But you 100% do need to know your figures perfectly! Otherwise how can you even assess product opportunities and make changes to your products’ pricing if you don’t know your margins and ROI?
So in today’s post I want to do a basic intro into calculating profitability, which you can then apply to your own product research and Amazon business.
Amazan FBA Cost Accounting – What are the costs you have to take into account?
Well for me personally step 1 is calculating my landed cost for a product, which means the final price for me to get it into the UK in hand and ready to sell.
This can be broken down into (a) product cost – this is the price you pay your supplier in China (or whichever country) to manufacture the product for you, including any packaging and (b) shipping – this is the total cost to get your products from your supplier to you (so shipping and customs clearance costs) and can vary hugely depending on whether you use courier, air freight, or sea freight. https://andrewminalto.com/courier-vs-air-sea-freight/ and (c) import tax. For UK sellers import tax will be made up of VAT, which is currently set at 20%, and import duty, which ranges depending on the product but is generally around 5%.
One important point to note with import tax is that the VAT is charged at the very end, once all the other costs are added. This means that you pay VAT on both the shipping charges and also on the import duty, not just on the product cost.
Amazon FBA Profit Calculation
So let’s see how that all adds up with a fictional order of Gadget X. After speaking to suppliers, getting samples, and negotiating the MOQ (minimum order quantity) down from 1,000 units to 500, the product cost from your supplier is £3.50 per unit including OEM packaging.
Product cost = £3.50 x 500 = £1,750
For shipping courier is too expensive due to the order size, so you speak to a good freight forwarder (my personal recommendations are Woodland Global and Westbound Global) and decide on air freight shipping. You receive a quote which is broken down in to:
- Overseas Customs Entry – £45
- Air Freight – £303.76
- War Risk Insurance – £32.74
- Airline Handling – £39.50
- Customs Clearance Fee – £42.50
- UK Cartage – £35
That adds up to exactly £498.50 in total, which we’ll round to £500 for simplicity sake.
Last but not least we have the import tax. As I mentioned earlier this is split into import duty and then VAT.
And while VAT is set at 20% (apart from some very specific products that are 0 rated), import duty varies depending on the product and tariff code. To find out the tariff code for your product, simply go to this page: https://www.gov.uk/guidance/tariffs-on-goods-imported-into-the-uk and then use the trade tariff tool to look up your product type and find out the VAT and import duty.
For our fictional product the import duty is 4% and VAT the usual 20%.
Applying Import Duty & VAT
But as I warned before we can’t just call this 24% and then apply it to the order altogether. Instead we have to first apply the duty at 4% and then the VAT at 20%.
I know I know it barely makes a difference, but I just wanted to point it out nonetheless! So with £1,750 in product cost and £500 in shipping, that gives us import duty of 4% x £2,250, which is £90. Then lastly VAT at 20% x £2,340, which is £468. Import tax = £90 + £468 = £558
And that’s all the costs we need to take into account to get the product manufactured in China and delivered to my door in the UK.
In total this order cost:
Product cost – £1,750
Shipping cost – £500
Import tax – £558
=£2,808
Then I simply divide that by my total order size, which was 500 units, to get a landed cost per unit:
Final landed cost = £2,808 / 500 = £5.61
£5.61 is the all important figure which I’ll then use to set my pricing on Amazon, work out margins and ROI, etc!
Know each line item well to understand Amazon FBA profitablity
That’s why it’s so important to know your figures. What happens if shipping costs go up (and this isn’t even a what if but a real life example of something all Amazon FBA sellers have been dealing with for the last 12 months+ now: https://andrewminalto.com/amazon-fba-shipping-cost-from-china/)?
What happens if your supplier offers you a reduced product cost if you take 1,500 units?
You need to be able to quickly and easily work out how these changes will affect your margins and profitability.
But let’s take a step back and continue with our example, now that we’ve got our landed product cost figured out. The next step is to work backwards from your Amazon selling price, to see what you’re left with. For example, we sell our product via FBA for £16.99, which means we need to pay both an Amazon referral fee as well as the FBA fulfilment fee.
Include FBA Fees of course!
For 2021 the Amazon referral fee is pretty much always 15.3% whereas the FBA fulfilment fee depends on the product size and weight. In this example we’ll use £2.57, which means:
Amazon referral fee = 15.3% x £16.99 = £2.60
Fulfilment by Amazon fee = £2.57
VAT on Amazon fees = 20% x (£2.57 + £2.60) = £1.03
Total Amazon selling fees = £2.60 + £2.57 + £1.03 = £6.20
And that means that from your £16.99 sale, the payout from Amazon is £10.79 (£16.99 – £6.20).
Once we know our Amazon payout and landed costs, we can work out our profit!
Net profit = £10.79 – £5.61 = £5.18
£5.18 in real profit per item sold…
Amazon FBA net profit and ROI
And from this we can calculate two very important figures – our net profit margin and our return on investment (ROI).
Net profit margin is the percentage of the sale price that’s net profit. So £5.18 from a £16.99 sale price means 30.49% net margin.
This figure is extremely important as it also guides our PPC spending, as we know that 30.49% is our break even ACoS (Advertising Cost of Sale). Anything higher than that and we’re losing money on the sale!
Generally speaking, I always look for a minimum 30% net margin when analysing products to sell on Amazon, ideally 35%+. In some circumstances you can go to 25% but less than that and your margins are just too thin to build a sustainable business.
Next is the Return on Investment calculation. This has less of a practical effect on your business but is still a useful figure to know – ROI shows us, as the name suggests, your return on the money you invested. To work it out simply divide your net profit by your landed cost:
ROI = £5.18 / £5.61 x 100% = 92.34%
Now a number of Amazon “gurus” like to talk about ROI a lot but for me it’s actually nowhere near as important as it’s made out to be. For one thing your time to sell will have as big of an impact on your actual profit.
For example let’s look at two products.
Product A has an ROI of 200%, which means for every £100 invested you end up with £300 back once the product is sold.
Product B on the other hand has an ROI of only 100%, meaning you get back £200 for every £100 invested.
So of course I’m going to go for Product A right!? After all it’s double the return…
Not necessarily! Because the ROI doesn’t take into account how many I actually sell. Maybe Product B sells 35 units a day vs 15 for Product A.
For me that’s the only number that truly matters – your daily/monthly profit. That’s your actual income from your business and everything else is just noise.
And don’t even get me started on people who compare the ROI of an Amazon FBA business vs investing. It’s not even slightly comparable to a passive income!
In the beginning, especially the first 6 months to 1 year, running an Amazon business is a lot of work – anyone who says otherwise is lying.
Yes now that I’ve been running it for a number of years my FBA business is pretty self sufficient and it only takes a few hours a week to manage (mainly spent optimising PPC campaigns and planning inventory) but you can’t expect that straight away.
So long story short comparing it to investing is just stupid!
And on that note we’re pretty much at the end of today’s post. To any seasoned online sellers this is all basic simple stuff but I hope it helps some newbies with how to think about and calculate profit.
Of course I didn’t mention any software in this post, which was on purpose. I really think it helps to work it out yourself when just starting out so you can see the different costs and how it affects your profit.
But for ongoing calculations of course there’s plenty of calculators that can do it all for you. I personally am a huge fan of Shopkeeper.com since discovering it after looking for alternatives to Sellics.
Shopkeeper covers everything we talked about in today’s post and much more. Here’s an example of how detailed their P/L calculator is:
It really does cover everything you can think of. If that’s something you’re interested in, then take a look at my full Shopkeeper review here:
I’m also planning some further tests of their upcoming PPC software as well, so keep an eye out for that.
Until next time!
All the best,
Andrew
