Once we have found a product which fits neatly with good demand, competition, competitor reviews and so forth. The next and crucial stage is to evaluate margin. The best way to do this is inputting your selling prices and costs on an excel sheet.
- Gross margin – (Net Selling Price – COGS) / Net Selling Price should be at a minimum 65%. This might sound high. But why this is important will make sense later on.
- Your Amazon referral fees or commissions will be 15% of gross revenue if you are VAT registered and 18% if not. These commissions are variable but the actual percentages Amazon take do not change.
- FBA fees i.e Amazon’s shipping fee will based upon the weights and dimensions of the product. Interestingly the increase in FBA costs selling a product which weighs for instance 1KG versus 200g is often negligible. Unlike the referral fees, the price of the item does not affect this fee.
Understanding this can lead to strategic decisions on product selection.. Let’s say we are selling a 200g product which costs £2.02 to ship with FBA then 20% of your revenue is shipping on top of VAT, the 15% commission and of course the cost of the product itself. This makes profitability very difficult as you will have to rely on volume and low or no advertising.
It might be wise to create multi packs of the same product or bundles with other products. You will find a lot of customers tend to order more than 1 unit of the same product each time. Everytime they do this the seller will get charged with an individual FBA fee. In this example if someone orders 3 units:
£2.02 x 3 Units = £6.06 to ship
However if you’re product is bundled and the 200g weight goes up to 600g, the cost will be £2.30 just 28 pence more. Let’s say we discount this product to £55 (it would be £60 @ 3 x £20) we are only paying 4.2% of our revenue in FBA fees. It can also lead to much higher sales as customers are incentivized to buy multi packs.
Sample Margin Analysis
|Net Selling Price
|Cost of Goods
||Gross margin / Net Selling Price
||15% of Gross Margin – Fixed
||Based on the weight of our product
||Net Margin / Net Selling Price
I have used an example of a product selling for £25 with typical FBA fees for a light product. The numbers used here would yield a margin of 42% after we account for other hidden costs such as refunds and shipping your goods into Amazon which is classified as ‘Other’.Having a net margin of at least 30% is very important as it does not factor in one more cost…
Amazon Sponsored Ads
The final cost to factor in is Amazon Sponsored Ads. This is an internal Advertising platform within Amazon which enables you to appear at the very top of the search results for certain customer searches by paying for the privilege. It is an extremely powerful tool as not only does it provide instant exposure for a product which might be languishing somewhere at the bottom of the search for what the customer is searching, it also increases your page positioning for organic positions. Organic positions are where you appear without advertising.
For instance, if we are selling Vitamin D when you first launch your product when a customer searches the product might appear number 500 in the search results down on page 30. Clearly nobody is going to see your product if it is buried that deeply. Using Amazon’s internal advertising platform will in turn create sales which will lead to higher page position so you do not have to rely on advertising as much as a means of getting exposure.
The goal we personally set is to spend between 10 and 15% of your net revenue on advertising. This number is a lot higher for brand new products as nearly all sales will be from advertising. But when the product is appearing on page 1 for the main search terms then we tend to aim to spend 10% or less. This is why having a margin before ads at no lower than 30% is so crucial as you will need to budget at the very least 10% for advertising.
If the margin is much lower than 30% then all profit will be obliterated should you choose to use Amazon’s advertising service and if you do not then you will not get the early exposure and rank boosts that are so vital for a new product launch.
Listing Content and Amazon SEO
When getting ready to list your private label product on Amazon there are a few important points to take into consideration. Amazon has a search feature that follows certain rules when deciding which products to show for any particular keyword search. These rules ultimately come down to keyword indexing and conversion. Keyword indexing simply put is whether or not Amazon will show your product in the results for a particular search. Conversion relates to the sales generated from that search. The more you are converting, the better your rank will be in the search results.
Great titles that work for you in the Amazon search algorithm should include some of your most important keywords, while telling the customer a little about your brand and what sets your product apart from other offerings. Try not to stuff too many keywords in your titles as Amazon frown on this. The goal is to write smooth, flowing titles that are easy to read, make sense, and encourage the customer to click.
2. Search Terms
The listing search terms are invisible to the customer and available to edit from your Seller Central inventory page. You can click on ‘Edit Product’ to find these options. The search terms are an opportunity for you to include additional keywords that aren’t already in your title. You don’t need to duplicate here so to make the most of your character limit, be sure to not add any keywords already in the title. You have 250 characters, and any keywords left over from your keyword research can be added here.
Keyword research is an important step in preparing to list your product. You can use Helium 10 tools, including Cerebro and Magnet as a starting point.