A few years ago, a story came out about a husband and wife making 10 million dollars a month doing e-ecommerce. People were impressed, but it wasn’t long before someone curious decided to do a little digging and found out the husband and wife weren’t making any money at all. They had 10 million dollars coming in every month – but had 10.6 million dollars going out.
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
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.