A Review of My First Year On Amazon and My Plans For the Future – Whiteboard Friday
The conclusion of May 2017 marks the completion of my first 12 full months of selling on Amazon and what a year it has been!
In today’s post, I’d like to share with you some of the key lessons that my team and I learned along the way, as well as give you some insight into some of the things we’re going to be testing in the year ahead.
If you’re the type of person that prefers watching to reading, in the video below, I cover everything that I’m about to write about.
As you can see below, in our first year on Amazon, our gross revenue was $738,047 with a gross margin of 16% for a total gross profit of $117,307.
What isn’t obvious from just looking at the chart below is that beginning in September of 2106, we shifted our focus from Private Label (PL) products to the wholesale business model.
To say this shift in focus produced positive results is an understatement. As you can see in the chart above, our gross profits increased significantly as a result of this shift. You can see our month by month increases here.
The reason for this big increase in profits is that in wholesale, you are buying products that are already selling well, whereas with PL, you are creating new products and the costs of launching these products is often astronomical.
The other significant difference between PL and wholesale is risk. With PL, if you make a bad product investment, you can lose 100% of your money; whereas with wholesale, I think the biggest “failure” we’ve had so far saw us able to recover about 75% of our investment.
I like a low risk business model and so should you!
As you might imagine, going from zero to a total of $695,000 in total sales in just 9 months (from Sept 1 to May 31), gave my team and I the opportunity to learn a LOT.
With that said, by far the most important area to get it right is in the area of product sourcing. The reason product sourcing is so critical to your growth is that you can’t sell what you don’t have.
If you want to grow revenue quickly, you’d better become a master of product sourcing because it is definitely a numbers game.
As you can see in the chart above, when we attempt to source new products, we fail just over 98% of the time! Despite this astronomical failure rate, we still managed to grow like crazy.
How did we manage to grow so quickly?
Systems – that’s how.
Without our product sourcing system (nicknamed the Chocolate Factory by one of my students), there is no way in hell we’d have grown as quickly as we have. To listen to a podcast that explains how to build your own chocolate factory, click here.
Build a Team
Once you have your Chocolate Factory built, you are doing to need to hire several virtual assistants to run it for you. You simply won’t be able to do it without them.
When it comes to virtual assistants, we generally expect to pay $1-2/hour.
To find the best ones, we post a job on Upwork and provide the exact documentation for the process we are going to hire them for. Then we hire 5 simultaneously to do the task one time. Once they are all done with the task, we simply pick the best 1 or 2 of the 5 and offer them a permanent position.
Purchase (& Re-Order) Systems
Not long after your Chocolate Factory is done, you’ll start purchasing your first products and this is an area that is pretty easy to make mistakes that will cost you money.
To help minimize our mistakes, we have checklists for product purchasing, new supplier onboarding, and adding the product to our product catalog.
As you might guess there are a LOT of steps in this process. It’s not complicated per sé; it just has a lot of little things that you need to do.
Initially, we created our SOPs in Google docs and for a time, that served us quite well. As we progressed, however; we realized that we wanted to increase automation as much as we could, so we ported our SOPs over to Process.st.
With Process.st, we can Zapier to easily connect multiple web apps (HubSpot, Trello, etc…) to our SOPs and when certain parts of checklists are marked as completed, Zapier will fire and cause related actions to trigger in the other applications we use.
Go After Exclusive Contracts
A huge part of our success – especially with respect to the significant increase in our profit margin – can be attributed to our exclusive (and co-exclusive contracts).
One of the biggest weaknesses of this business is that we are, essentially, just a middleman. As a result, to create a more sustainable business, we have focused on creating long-term assets, and exclusive contracts are one very good example.
The major benefit of an exclusive agreement is that it eliminates the “race to the bottom” that is so common on Amazon. Eliminating the race to the bottom solves the “dying product” problem and ensures that your margins are maintained. (It also helps the manufacturer to eliminate MAP violations)
For us, the key to winning exclusives has been to target smallish companies and ensure that we do an excellent job of conveying all the ways we are doing to help them solve their problems.
I strongly encourage that you focus on pursuing exclusive contracts as soon as you have at least 20 non-exclusive products in your Amazon store.
Plans for the Future
Going forward, there are a number of things that we plan to tackle. Some will be fairly easy to achieve, while others may prove beyond our reach in the coming 12 months.
Obviously, we’ll continue to source more products as fast as we can; however, we’ll be more selective than we were in the first year; largely due to the fact that for products where we did not have an exclusive for Amazon, the margin evaporated 41% of the time. Ouch.
Ideally, cash flow will grow to the point where I can hire another full-time employee to focus on product sourcing. (we have me + one full-time person now)
More Exclusive Relationships
We have one large one now that has been incredibly profitable – and stable; things we like! We also have several smaller accounts with terrific gross margins.
Going forward, winning more exclusives will be a huge focus for us because it makes for a much more sustainable (and valuable) business.
Build a Customer List
Selling on Amazon allows us to get instant access to buyers, but what it doesn’t allow us (or our suppliers) to do is to build a customer list.
Building a customer list is a critical component of creating a sustainable company. It’s just one of those assets that you shouldn’t be without, and to solve this problem, we’re going to start running non-Amazon ad campaigns to drive qualified traffic to offer pages that will convert to revenue and a new customer. Hopefully, the cost of customer acquisition won’t be drastically higher than the profit from the first transaction.
Selling to the Government
As of this writing, we have registered ourselves to sell to Uncle Sam and are only about a week or two away from starting to bid on contracts. The last employee we hired had a small amount of experience with this and so I’m keen to see what comes of our effort.
While selling on Amazon is wonderful, you’d be wise to diversify your income stream, and this is one of our attempts at doing just that. Plus, when we talk to potential brands, the fact that we sell on Amazon, Walmart, eBay, Jet, and to the US Gov’t is yet another way we differentiate ourselves from our competitors.
Buy Our Suppliers
This is the biggie and will undoubtedly be the most challenging to accomplish.
As you might guess, thanks to our product sourcing system, we talk to a LOT of potential suppliers, and most of them are companies that have 50 to 100 employees. Due to their size, most of these companies are likely owned by a small group of individuals who are most likely closer to their retirement than I am.
As a result of my being 15-20 years younger than the current owners of most of the companies we target, plus our high level of expertise with eCommerce – which, in my opinion, is the future of retail – I believe that it’s not unreasonable to expect that we could find some very attractive opportunities.
The bigger challenge, I expect, will be to find the capital to take advantage of these opportunities. Hopefully, over the coming months, I’ll be able to engage is discussions with the kinds of people that are keen to invest in these types of companies. If you’re that type of person, let’s talk.
When it comes to potential acquisitions, I envision that the typical deal would see us buying around 50% of the company so that current leadership team stays in place. We’ll then work together towards a complete exit in 5-7 years; over which time, the goal would be to increase the value of our equity as much as possible.
To make a deal like this work, we’d offer the seller some cash up front, and then ask them to carry a note for the balance and/or take advantage of commercially available financing. This is the structure that a friend of mine just used to complete the acquisition of a retailer with 9 locations.
Given that I have zero experience in this type of acquisition, I have much to learn and partner selection will be key.
As it stands today, I do not offer paid training of any kind. The only coaching I do is for is provided one-on-one for 5 students who. As a way of increasing working capital for inventory, I have considered creating and offering a paid training program. As I’m particularly good at creating systems and documentation, my course, should it ever be created, would likely focus on this.
If you have been following my blog/podcast/videos for a while and would want to purchase a course like this, please send me a message on Facebook so that I can get a better gauge for demand. In the absense of strong demand, no paid training courses are planned.
Your Questions Answered
From the FB thread.