In last week’s episode of my podcast, I shared with you how much revenue I’d generated in my first two weeks of selling my private label products on Amazon.
This week, I decided that it was important to take a deep dive into the numbers to determine if my experiment was a success or a failure. You’d think that this would be easy to do via the Amazon Seller Central interface, but sadly, their reporting is pretty simplistic, so I had to spend a couple of hours creating a spreadsheet that would give me a clearer picture on how each of the five products I have listed so far are doing.
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A Deep Dive Into the Cash Flow
Cash flow is the heart of every business, and so I wanted to spend enough time to figure out where I’m at, now that I’ve reached just over $5,000 in sales.
To start, let’s have a look at my initial cash outlay, and what I got for it.
As you can see in cell G4 of the chart above, the total cost for my initial inventory was $1,293. For that sum, I received 900 units, split across 5 products.
In row six, you can see the quantity of remaining inventory. In row 7, is the estimated retail value of that inventory (using my average selling price for the units sold so far). And finally, in row 8 is the estimated profit potential of this remaining inventory, assuming I didn’t have to run any more promotions to sell it all. (I WILL have to run more promotions, because in the Jewelry category, I don’t have access to Amazon’s PPC program)
The main point of this first chart is to show you that to get started, I invested $1,293 in inventory.
Now that you’ve seen what I spent on inventory, let’s have a look at sales so far (21 days of selling from April 11th through to May 1st).
As you can see above, as of May 1st, gross revenue totaled $5,094.02. Not a home run by any stretch, but not horrible either.
In row 11 of columns B through F are the average selling price for each of the five products, and in row 12 is the gross units sold for each product. In row 13 is the total gross revenue for each product.
The product in column B is has been for sale a week longer than all the other products, plus, it is the product for which I ran the largest promotion.
Cost of Goods Sold
In traditional accounting, the next thing that we normally look at after revenue, is the Cost of Goods Sold (COGS). This line item is critical in understanding our gross profit margin.
As you can see below, the gross profit margins on my products are just over 90% (cell G19). What that means is that for every $1 of revenue, $.90 is my gross profit; out of which I will have various expenses that will be deducted before determining the net “owner profits” of my business.
Selecting products with as high a gross profit margin as possible is absolutely critical to your success, and there are a number of reasons for this.
Financing the Cost of Inventory
The most important of these reasons is that as your business grows (and sales increase), your need for more inventory is also going to increase and unless you have a pile of cash lying around, you are going to be using the profits from your sales to finance the cost of additional inventory (there are other methods for financing inventory, but I’m not going to get into that in this post).
Put simply, if you pick a product with a gross margin of just 30%, that means for every unit you sell, you are only going to be able to buy 1.3 units more inventory. Whereas, if you have a gross margin of 90%, you are going to be able to buy 1.9 units more inventory for every unit you sell.
Think about that for a few minutes.
If you want to grow fast, you must be able to finance your need for increasing inventory….OR…..you must figure out a way to turn your inventory faster.
For example, if you have just two inventory turns per year, instead of say, 4, you are going to need TWICE as much capital to finance the cost of that inventory.
This is one of the reasons why I’m so concerned about the speed of the delivery of my inventory. If I can get it faster, I can make more frequent (smaller) orders with my suppliers, and as a result, I won’t have to tie up as much cash in inventory that is sitting in the warehouse.
Be sure to factor this in when you are deciding whether to ship by sea (cheaper and slow) or by Air Express (more expensive and fast).
Financing the Cost of Promotions and Advertising
The other factor that is critical to your success is having a high enough gross margin to allow you sufficient capital to allocate to the cost of promotions and advertising.
In my case, as you will see below, I ran a large number of promotions (because PPC is not available to new sellers like me in Amazon’s jewelry category) to increase my BSR (best seller rank) so that my product listings would show up higher in the Amazon search results (SERPs).
As you can see below, shortly after I started running my promotions, my sales spiked way up for a few days, before settling back down.
I stopped running promotions on April 21st, and since then, organic sales have been relatively steady, as shown below. And, thanks to a very high gross margin, these organic sales are very profitable.
The big take away here is this: make sure you choose a product with a gross profit margin of at least 75%…especially if your product’s selling price is $20 to $50!
Now that we’ve covered the Cost of Goods Sold and the importance of gross margin, it’s time to have a detailed look at my expenses and net profit.
In my Amazon business, the only expenses that I currently incur on a regular basis (aside from the value of my time) are:
- Amazon selling fees
- FBA fees
- Cost of promotions and advertising
As you can see in row 22 below, I sold 216 of my 900 units of inventory on promotions. On average, I discounted the price of each product by 85% in exchange for an honest product review. To facilitate this, I used software called ReviewKick as it made this really easy to do. Plus, it’s FREE.
In row 24, you can see that in total, the cost of my promotions reduced my gross revenue by $2,508, PLUS, I also had to pay Amazon selling fees and Amazon FBA fees on every single order that I received for a product that was offered on the promotion.
So, how did the cost of the promotions and Amazon fees affect my bottom line? Prior to today, I hadn’t taken the time to actually calculate it; hence the reason for this post. :)
Net Profit (Loss)
As you can see in cell G30 below, so far my net profit is a whopping $154.10! I’m rich!!
Ok…so maybe I’m not getting rich from Amazon FBA yet; however, before jumping to conclusions on whether or not this experiment was a success, there are some very important factors to consider.
Factor #1: It’s Only Been 3 Weeks
When I began this experiment, I had zero expectation of profits. In fact, I fully expected that the investment in marketing (promotions) needed to achieve organic ranking was going to produce a loss on my first batch of inventory.
Improvements in ranking don’t happen over night.
Factor #2: This Product Shows Strong Potential
How did I justify the loss I expected to take? Simple.
When I looked at the figures below, I could see that the average product for this search result was generating $8,143 in revenue per month (479 sales x $17.07 avg price). I then noticed a few other key things:
- The 3rd listing had just 80 reviews and was generating $7,794 a month in revenue
- The 5th listing had just 114 reviews and was doing $33,183 a month in revenue
- The 11th listing had just 60 reviews and was doing $9,096 a month in revenue
- The bulk of the sales were NOT being generated by ONLY the top 1 or 2 listings
- There were no major brands
- The gross margin on this product was very high
So….IF I could generate just the average of $8,143 per month after spending a few thousand dollars on promotions, would it have been worth it? Hell yes it would have.
The reality is that I am still expecting to “spend” more on promotions and will continue to do so until one of two things happen:
- I achieve a solid ranking and steady (profitable) sales
- I reach a point where I no longer believe I can “buy my way” to profitability
Factor #3: I Needed to Gain Hands On Experience
You can listen to all the podcasts, and read all the posts you want, but there is just no better way to learn how to do something than by actually doing it, and that is exactly how I looked at this adventure.
No matter what the financial outcome in the short term, I was going to learn something, and that is exactly what has happened.
Perhaps this first product will fail? Ok, I have 4 more in this category, and one of them, much to my surprise, has emerged as the best seller because it’s ranking #1 for its keyword. I had no idea that was going to happen so fast.
Perhaps all these products will fail? Ok, I will try more products in another category where I do have access to Amazon’s PPC. (I am doing exactly that, regardless of how these products fare.)
Factor #4: I Needed to Understand How Amazon Works
There is no owner’s manual for the algorithm that determines where a given product will end up in Amazon’s SERPs. The only way to attempt to figure it out is to try a bunch of things, and then take notes on what happens….and that is exactly what I’ve been doing day after day.
There is absolutely no question in my mind that I can build a $1M + business on Amazon over the next year or so. Will my investment of $1,293 for this first batch of 5 products play a role in the long term? I have no idea.
Honestly, I don’t expect that they’ll end up playing a big role; largely because of the big error that I made in choosing a product category where I don’t have access to PPC.
But so what! I don’t know about you, but I don’t know of too many other businesses that:
- Can scale as well as this
- Give me as much free time as this
- Require such a paltry investment to start as this
What’s Next For My Business?
As you might guess, I have ambitious plans for the future of my Amazon business. Here’s an overview of what is happening next:
- I’ve ordered more jewelry inventory (because I’m running out) so that I can continue this experiment
- I’m investing $700 in professional photographs of my current products (I did the first ones in-house)
- I’m about to launch another promotion for one of my products using super URLs (I have not used super URLs at all so far)
- I’m launching another new product in the pet supplies category (and I’ll have access to PPC in that category)
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