How can you tell if a product is going to be profitable before you start sourcing it? Use a profit calculator to determine the profit margins on a product before you sell it!
One of the biggest questions sellers ask themselves before starting their Amazon FBA business is, “is it profitable to sell on Amazon?” The best answer will always be, it depends. Before you can estimate profit margins, extensive product analysis must take place for sellers to account for product costs, selling fees, and potential product margins.
The first step will be to identify profitable, “winning products” that will enable your Amazon wholesale or reseller business to thrive. A common method of identifying winning products is through product research tools such as Sellgo’s Product Tracker. FBA tools like the product tracker will scan the millions of products sold on Amazon and organize the data to identify products with the best profit potential. Sellers can then pick the products they want to sell, contact manufacturers for product sourcing, and obtain estimates for the product cost. For more information on how to use the Product Tracker tool and source winning products, check out our past blog post, A Beginner’s Guide to Selling Wholesale Products on Amazon: How to find “Winning Products”?
By conducting product research and utilizing various FBA tools, sellers can gain insight on various key performance indicators (KPIs) that will forecast the success of your Amazon business.
How to calculate profit margin?
Once the initial product research is complete, sellers should have an underlying idea of the cost of the product and can use that data to measure the first KPI, profit margin. The profit margin is the amount in which revenue of sales exceeds the cost of business. This may be simplified as the ratio of your profit divided by your sales which will be calculated as a percentage.
How to Calculate Gross Profit Margin?
There are two types of profit margins. The first is Gross Profit Margin which can be calculated using the gross margin formula:
Gross Profit Margin (%) = (net sales – cost of good sold) / net sales x 100%
The gross profit margin equation gives you a rough idea of how profitable an item is, which you can use to determine how profitable your business can be and your businesses’ overall health.
How to Calculate Net Profit Margin?
The second type of profit margin is Net Profit Margins. The net profit margin formula is:
Net Profit Margin (%) = (net sales – cost of good sold – all other costs) / net sales x 100%
By including other costs, the net profit margin equation will provide you a big picture estimate of how sustainable your business can be.
Gross Profit Margin vs. Net Profit Margin
While both gross profit margin and net profit margin are similar, the net profit margin is a bit more in-depth by taking into account all other costs that are not included in the gross profit margin. In Amazon FBA, the net profit margin will provide insight on the cost of inbound/outbound shipping, purchasing, and product costs, Amazon seller fees, and more. As a result, the net profit margin will be more helpful long-term because sellers can obtain a more accurate estimate of their total business costs that would be overlooked in the gross profit margin. Ideally, sellers should be using both the gross profit margin and net profit margin to optimize their profit forecasts.
How to calculate return on investment (ROI)?
Another KPI you should familiarize yourself with is Return on Investment (ROI). ROI is a profitability ratio that compares the return/profit to the cost of the investment you are making. The ROI formula:
ROI (%) = (net sales – direct cost) / direct cost x 100%
You can determine this by taking sales minus direct costs (which is your profit) divided by direct costs. Your direct costs would be things like the cost of goods, shipping costs (to you and Amazon), and processing costs. Return on investment analysis is a great indicator when it comes to determining what products you want to purchase to resell and how will the short-term costs impact profitability.
Putting it All Together: Key Performance Indicator Examples
Now that we have a general understanding of the KPIs, let’s try an example using real figures. For this example, we can assume keystone pricing, in which a product is sold for double (2x) the cost of the product.
Let’s say we have a product that we sell for $65 on Amazon. The total cost of goods sold would be $32.50, which is 50% of the Amazon selling price. Other costs include shipping and processing costs ($5) and your Amazon fee (we’ll say 15% of the Amazon selling price so that is $9.75).
First, we find the potential profit:
Profit ($) = (MSRP – COGS – $5 – $9.75) = $17.75
MSRP = manufacturer suggested retail price
COGS = cost of goods sold
Profit ($) = ($65 – $32.5 – $5 – $9.75) = $17.75
If you were to sell 50 units, you would make $887.50 in profit. Now, we can calculate the KPIs,
Gross Profit Margin (%) = ($65 – $32.50) / $65 * 100% = 50%
Net Profit Margin (%) = ($65 – $32.50 – $5 – $9.75) / $65 * 100% = 27.3%
As you can see, the gross profit margin has a higher yield (50%) than the net profit margin (27.3%) because it does not include all other costs. Therefore, the net profit margin will be more reliable when estimating total business expenses.
How to calculate ROI?
Our investment is the direct cost ($32.50) plus shipping and processing ($5), $37.50. Remember, Amazon fees are not part of your investment. They are incurred after the sale. Our ROI would be $17.75 divided by $37.50. The estimated ROI is 47% for this product.
ROI (%) = ($65 – $32.50 – $5) / 37.5 * 100% = 47%
Notes to Remember
1. Whether it be product sourcing or selling, Amazon selling is based on building relationships. As you build relationships with brand owners, manufacturers, and suppliers, you might be able to negotiate lower product costs, exclusive shipping costs, or various deals as you purchase more products.
2. Cost of goods and other costs can change constantly, so all sellers should take advantage of FBA tools to conduct product research consistently to stay knowledgeable on trends that may impact their business.
3. Amazon Reseller guidelines state your ideal product has a minimum of 30% ROI with a 15% profit margin. But sometimes you have to start with products that don’t perform that well. Make short-term and long-term goals for your Amazon business and keep track of the KPIs to ensure your business will thrive long-term.
Amazon Profit Calculator
Amazon has a handy Fulfillment by Amazon Revenue calculator located in Seller Central. You can search for your product by product name, UPC, EAN, ISBN, or ASIN. Once you locate your product, you can enter your item price and compare it to the shipping, storage, and other variable costs to calculate your KPIs (net profit margin, ROI, etc.). While this is mainly for estimate purposes, it can be extremely helpful in gaining a big picture analysis of potentially profitable products.
If you are not sure how to calculate your KPIs or not sure where to start looking for profitable products to sell, we recommend Sellgo’s Profit Finder and Chrome Extension. The profit finder sorts through all the products and tests Sales Equity Estimations to discover the products with the best average price, profit, margin, and even ROI. The Chrome Extension will provide an easy-to-use tool that can reduce the time used for extensive product research that you can then use to grow your business. Most importantly, not every product is a winning product. These tools will provide super filtering to prevent negative profit by tracking the most profitable online products to sell and disregarding underperforming products that may hurt your business.
Is online selling profitable?
Online selling can be profitable but requires a ton of work. Successful Amazon businesses rely on finding the right products, measuring the KPIs, and using that information to make knowledgeable data-driven decisions. The largest barrier is taking advantage of available resources and putting in the time and work. Various tools can help you calculate your profit before you purchase, avoid complicated manual calculations, and tons of spreadsheets. Instead of doing the manual calculation, try Sellgo’s Profit Finder for bulk automated calculation, and unlock your profits.
Bonus – FREE FBA Profitability calculator
Let me introduce you to our FREE FBA Opportunity Calculator. It’s probably the most elegant way for you to calculate product profitability with ease – and it’s totally free!