Today, I’m going to give you the quickstep guide to understanding and calculating profitability so that you can start your Amazon FBA store off on the right foot.
What I’m about to show you is just a sampling of Just One Dime’s Amazon FBA Mastery Membership where—in 100+ video lessons—we take you through everything you need to know, step-by-step, about starting, running, and growing a thriving Amazon FBA business. If that sounds good go to JOD.com/freedom to get started today.
The first thing you should understand is that it might take some time before you are fully profitable (on Amazon or elsewhere). That’s OK; it’s both normal and expected.
You’re going to spend money to manufacture your products and ship them to Amazon long before you ever make a sale. You’re going to spend ad money to get views before you’ve actually made a single sale.
It’s not only possible, but rather likely, that you will not be profitable through your first batch of inventory. But if you’re on your third or fourth batch of inventory and you’re still not seeing a positive balance in your bank account, it might be time to adjust your strategy.
Profit vs revenue
Revenue is all the money you make from your products’ sales.
Profit is the money you’re left with once you’ve accounted for all of the costs, expenses, and fees I’m going to tell you about below.
While they both refer to making and accruing money, it’s important to understand that revenue is your sales whereas profit refers to the amount of money that you keep when all is said and done.
Gross profit vs net profit
We’ve established the difference between profit and revenue…so we’re done here, right?
Not so much.
You see, there are two predominant types of profit: net and gross.
Gross profit is your revenue minus the per unit cost to manufacture and ship your products to Amazon’s fulfillment centers where customers can buy them.
For example, let’s say you want to sell moka pots.
It costs you $5 per unit to manufacture your product, and $2 per unit to ship it from your manufacturer (typically in China) to an Amazon fulfillment center in your selected marketplace (country in which Amazon sells). If you sell one unit on Amazon for $40, your revenue is $40, but your gross profit is $40 - $5 - $2 = $33.
Net profit, on the other hand, is your revenue minus your per unit cost to manufacture and ship your products to an Amazon fulfillment center in addition to all other expenses (costs and fees) associated with running your business.
If profitability is the amount of revenue you bring in minus expenses, it stands to reason that you must understand your business’s expenses in order to fully understand profitability. Let’s start with the cost to make your product.
Cost of goods sold (COGS), are any expenses directly related to the production of your product. So the cost to manufacture your product is COGS. The fees you pay to a graphic designer to create your retail packaging is COGS.
You can get our full breakdown on COGS—what they are, why you need to know about them, and common examples—in this article that will also help you to better understand your business’s accounting. Win, win.
Landed cost is the total cost to “land” your product on Amazon fulfillment center shelves (or wherever eles your inventory will be stored), available for sale. It is the combined cost to manufacture (COGS) and ship your products, along with everything else those two processes entail, such as customs fees, taxes, insurance fees, customs brokerage fees, etc.
Whatever fees and expenses are required to get your product to a place where it can go on sale are part of your product’s landed costs.
Going off of our above example, if it costs us $5 to make each unit and $2 to ship each unit (and we assume that shipment includes customs fees, etc.), then each unit’s landed cost is $5 + $2 = $7.
And if you’ve been following along you’ve probably guessed by now that gross profit is actually your revenue minus landed cost.
Operating expenses are the cost to operate your business.
If you run a full-scale operation, your operating expenses include the rent for your business’s office space, that office’s utility bills, employee salaries and benefits, etc.
If you run a smaller operation, such as one item Amazon FBA store, your operating expenses might be much simpler: part of your rent or mortgage if you operate out of your home, your internet bill (also if you operate out of your home), your third party logistics provider if you sell high-volume FBM—fulfilled by merchant.
Operating expenses also include your Amazon fees.
Check out this article for a full breakdown of the most common Amazon fees you may encounter along your selling journey.
To understand profitability (and if a prospective product will in fact, be profitable), we can work with the following:
- FBA fulfillment fees
- Amazon referral fees
FBA fulfillment fees are the fees you pay to Amazon to sell your products FBA. They include the costs of fulfillment center employee wages along with transportation costs, outermost product packaging, and other materials required to fulfill orders.
FBA fees are based on your product’s size (in its retail packaging) and outbound shipping weight.
Outbound shipping weight is either your product’s unit weight (your product’s scale value in its retail packaging) or its dimensional weight, whichever is greater.
Dimensional weight accounts for your product’s volume and is typically used with lighter products that take up a lot of space, such as giant boxes of pool noodles. We fully cover dimensional weight in our Amazon FBA Mastery membership.
Amazon referral fees are your fees to sell on Amazon’s platform to its hundreds of millions (no joke) of customers. Amazon has incredible reach…and that reach is not free.
Because Amazon makes it so easy (and relatively low cost compared to building your own site and paying for Google ads) to sell your products to so many shoppers worldwide, they take a small cut of each of your sales. Amazon brings you each sale, not the other way around, and for that, they take a small fee, much like a local store would if you were to ask to sell your products in their brick and mortar location.
The good news is that Amazon is nothing if not reciprocal: if you ever launch your own site (particularly with Shopify) to promote your products, Amazon will pay you a small referral fee to drive customers to buy your products on Amazon.
Referral fees vary by product category, however they are most commonly 15% of your product’s sell price. With our $40 moka pots, for example, the referral fee would be $40 x 0.15 = $6.
Once you understand what amounts you (prospectively) have coming in along with what costs are going out of your business, you can better discern if a product idea will make you profitable.
Calculate Your Potential Profit Margin.
When determining if a product idea has profit potential on Amazon, it’s best to work backwards: start with your goal sell price. You can get an idea of this based on how much existing, comparable products currently sell for on Amazon.
For example, if your potential competitors sell their moka pots for $40, your goal sell price might be $40 or even $45, provided that your product is differentiated—different from, and often better than, existing models. For example purposes, we’ll stick to $40.
From there, it’s a game of subtraction.
Consider every other per unit expense necessary to get your product from design to for-sale on Amazon. Simply add those numbers together, subtract that total from your goal sell price and Ta-Da!
Ok maybe it’s not quite so simple.
Start with the cost to manufacture your product. We know that it costs $5 to manufacture each moka pot.
Next consider shipping. We’ve estimated $2 to ship each unit to an Amazon fulfillment center. You can find estimates for total shipping costs via freightos.com.
Next is your FBA fulfillment fee. To estimate this cost, choose a comparable product on Amazon.
Grab its Amazon Standard Identification Number (ASIN) from its listing URL. The ASIN always comes after “/dp/” and begins with “B0”.
Copy that number and paste it into the ASIN field in Amazon’s Revenue Calculator.
You can also, instead, enter your prospective product’s size, weight, estimated ship to Amazon cost, sell price, and product category if you’d rather.
You can now grab that product’s exact FBA fees from the Fulfillment cost line. In this case, they’re $5.40 per item.
Next you’ll need your product’s referral fee. You can calculate it on your own, as we did above ($6), or you can grab the exact number from Amazon’s revenue calculator from the section Amazon fees. In this case, Amazon adds a fixed closing fee of $0.99, so the total associated with Amazon referral fees is $6.99.
Now we will add all of our expenses and fees together:
$5 to manufacture our product + $2 to ship it to Amazon + $5.40 in FBA fees + $6.99 in referral fees = $19.39.
Next, we deduct that number from our goal sell price: $40 - $19.39 = $20.61.
Now we divide that number by our goal sell price: $20.61 / $40 = 0.52.
Finally, to get our percentage, multiply that number by 100: 0.52 x 100 = 52%.
I always, always, always recommend you aim to find products with at least a 40% profit margin, therefore—based on profitability alone—a moka pot might very well be a strong product to launch your Amazon FBA store with. Of course, we haven’t accounted for demand, competition, or any of the other factors we should consider when determining if a product will make money. Grab our full profitability breakdown here.
And if you’re dead serious about changing your life, about becoming your own boss, about working your own schedule and on your own terms, visit JOD.com/freedom. There, you can apply to speak with a member of our team who will understand your goals and help you decide if we are the right fit to help you on your journey, so that you can build margin to do the things you love with the people you love.
What surprised you the most about profitability? Let me know in the comments.