When the couple first started with e-commerce, they were making money, but because they didn’t keep track of their finances, they ended up losing money, instead. It’s important to know your numbers, so you can be sure you’re actually making money. Do you know your profit and advertising margins? Are you making money?
There are three important things to keep in mind:
1. Know what your profit is. Profit is simple to determine; it’s the money you keep after all your expenses are paid.
2. Know your profit margin. Profit margin is different from profit, but both are important. Profit margin is the percentage you make in addition to what you spend.
3. Know your advertising margin. This one is important, because many people mess it up. Advertising margin is how much margin you have to profit from your product without losing money.
Let’s delve a bit deeper into what these three things really are.
If you’re selling a mug that costs $2 from the supplier and $2 to ship, you’re losing $4 per mug. This is called your landing cost, or how much you’re spending to get the product built and delivered.
Next, you’ll have to consider Amazon fees, which are around 33% of the selling price. (This depends on category, weight, and size, so you can use Amazon’s revenue calculator to determine the exact fee for your product.) If you decide to sell your mugs for $12 each, your Amazon fees will be about $4 per mug.
With your landing cost and Amazon fees, the total cost of your mug is $8. From here, calculating your profit is simple. Subtract your cost from your sales price. Each mug costs you $8, and you’re selling each mug for $12. 12 - 8 = 4. That’s $4 of profit for each mug.
Unlike profit, which is an amount of money, profit margin is a percentage. To find profit margin, divide your profit by your total costs. For your mugs, that’s $4 profit divided by $8 cost. 4 ÷ 8 = 0.5. To turn that number into a percentage, multiply it by 100. In this case, you’ll have a 50% profit margin.
You’ll probably refer to your profit margin more than any other number while building your business. As your business grows and you start selling more and more products, your profit margins will help you determine which products are making you the most money, and which are worth investing more time and energy in.
Advertising margin tells you how much you can spend on ads for a product without losing money. Like profit margin, advertising margin is a percentage, and again, it’s a simple equation. Divide your profit by your sales price, then multiply it by 100 to get a percentage. So, for your coffee mug, 4 ÷ 12 = 0.33, or 33%.
Now, you have to look at your Average Cost of Sale (ACOS) in the ad campaign manager. So, what is ACOS? If the ad campaign manager tells you your ACOS is 10% for your coffee mugs, that means that, on average, 10% of the money you made went into advertising every time you sold a coffee mug. So, if you sell 100 coffee mugs with an ACOS of 10%, you spent $10 on advertising to sell those 100 mugs.
So, if your advertising margin on your mugs is 33%, and the ACOS is 33%, you’re breaking even. If it’s less than 33%, you’re making money; if it’s more than 33%, you’re losing money.
Let’s say the ACOS for your mugs isn’t 10%, but 40%. Suddenly, you’re losing money with every sale, because your advertising costs are too high.
Here’s something important to keep in mind if you’re a new seller: in the beginning, your ACOS is going to be higher, and that’s okay. You’re still figuring out which keywords you need to use to attract sales. As you adjust your advertising campaigns to use stronger, more targeted keywords, your ACOS will improve. Once your ACOS drops below your advertising margin, you’ll start making money. You might lose a bit of money with a high ACOS at the start, but you’ll make that money back as the ACOS drops.
Remember, building a business is a process. You won’t make millions of dollars overnight – but the more you know, the more money you can make. Profit, profit margin, and advertising margin are three important numbers to know so you can stay on top of your finances and be sure you’re making money with every sale.