I apologize in advance to those who have a natural dislike of mathematics, but we cannot possibly run a business and understand the numbers without doing a little bit of math. Don’t worry though… I will keep it super simple.
Unfortunately, most people use terms like profit margin to mean different things, so I think it is best if we first understand and agree on the definitions, so we can all speak the same language.
Cost of Good Sold (COGS)
Cost of Good Sold is the amount it costs to sell one of your products.
In our case, this is calculated by determining what it costs us (per unit) to get our product to Amazon and sell it. This may include:
1. Per unit cost to source the product (note: quantity discounts will make this lower)
2. Per unit cost for packaging (if required)
3. Per unit cost to ship the product to Amazon
4. Per unit cost to sell the product (Amazon fees, etc)
5. Any other per unit fees you may incur to sell the product
You do not include costs such as label design fees in the Cost of Goods Sold calculation, because these are one-time costs and not per unit costs.
Let’s look at an example. I’m going to use round numbers to make the math simple.
I source a product that costs $9 per unit. In addition, I decide I want some fancy packaging, which will cost me another $0.50 per unit, and the supplier will do all of it for me.
My per unit cost to source (including packaging) = $9.50
I order 100 units of the product and it costs me $50 to ship it to Amazon.
My shipping cost per unit = $0.50.
I calculate the per unit shipping costs by dividing the $50 shipping cost by the number of units shipped (100).
Let’s say the total Amazon fees (selling fee, closing fee, FBA fees, etc) will add up to $5 (I am making up this number to make the math simple).
This means my total per unit Cost of Good Sold (COGS) = $15.
Gross profit is the total sales amount minus your total cost of goods sold.
For our purposes of evaluating and creating prices we will use Gross Profit “per unit.”
Using the figure we came up with in the example above, let’s say our Cost of Goods Sold is $15 per unit.
If we sell the product for $25, then our Gross Profit per unit = $10.
If we sell our product for $30, then our Gross Profit per unit = $15.
Very simple right? Let’s keep on moving…
Profit Margin is the term that gets used incorrectly most of the time. For example, some people will tell you their profit margin is over 100%. However, the very definition of profit margin makes it impossible to reach 100% unless your Cost of Goods Sold was $0 (you got the product for free and Amazon never charged you any fees to sell it).
Again for our purposes, when talking about Profit Margin, we are talking about Profit Margin “per unit.”
Profit Margin is calculated by taking the Gross Profit and dividing it by the sale price, then multiplying by 100 to arrive at percentage number.
Using our previous example, let’s say that our product sold for $30 and our Cost of Good Sold is $15. Then the math looks like this:
15 / 30 = 0.5
0.5 * 100 = 50
Therefore our Profit Margin is 50%.
Just for fun, let’s say we sold a product for $50 and it our Cost of Goods Sold is $10. Therefore our Gross Profit per unit is $40. Our Profit Margin is calculated as:
40 / 50 = 0.8
0.8 * 100 = 80
Therefore our Profit Margin is 80%
Markup Percentage (or Profit Percentage)
Markup percentage is what most people erroneously refer to as “profit margin.”
Markup percentage is the percentage you are going to charge above your Cost of Goods Sold. This is the number that can go well over 100%
Markup percentage can also be referred to as Profit Percentage and thought of as your return on investment. If you buy something for $10 and sell if for $20, your return on investment is $10 (your profit percentage is 100%). I will spare you more math examples. Hopefully this is pretty clear.
We usually don’t calculate this backwards, but rather we apply this to the Cost of Goods sold to calculate the price we will sell the item for, but we can also easily calculate it backwards. Sorry, I cannot resist just a little more math.
To calculate what our markup percentage is, we take the take the sale price and subtract the Cost of Good Sold. Then we take that number and divide by the Cost of Goods sold. Next, we multiple the result by 100 and that is our Markup Percentage.
Continuing to use our previous example, where our Cost of Goods Sold is $15 and we sell the item for $30, here is how the math looks:
30 – 15 = 15
15 / 15 = 1
1 * 100 = 100
Therefore our markup percentage = 100%
Just for fun, let’s say we sold the item for $45 instead of $30, then the math would look like this:
45 – 15 = 30
30 / 15 = 2
2 * 100 = 200
Therefore our markup percentage = 200%
As I mentioned earlier, we don’t usually calculate this backwards, but instead we decide the sales price by adding a markup percentage.
It goes more like this…
We decide we want 100% profit over our costs, so if our Cost of Goods Sold for the product is $15, we figure out what to sell the product for by taking the percentage of profit we want and adding it to 100. Then dividing the result 100, and finally multiplying the result by the Cost of Goods Sold.
In our example, if I want 100% profit over the Cost of Goods Sold, which is $15, then the math looks like this:
100 + 100 = 200
200 / 100 = 2
2 * 15 = 30
Therefore we need to sell it for $30 to reach our 100% profit target.
Let’s say we wanted a 50% profit instead on the same product which costs us $15, then the math looks like this:
50 + 100 = 150
150 / 100 = 1.5
1.5 * 15 = 22.5
Therefore we need to see the item for $22.50 to reach our 50% profit target.
Now that you understand the terminology, and the simple math to come up with your numbers, let’s discuss what it all really means and what your targets should be.
First, let’s appreciate the incredible potential of this business model.
By now, based on your research on Amazon product opportunities, suppliers, and sourcing costs, it should be pretty clear that you can easily source a product for under $10 and sell for $30 or more.
Your numbers might be a bit different, based on order quantities, but I hope that as a general rule you can agree that these numbers are very realistic, at least for future order quantities which will give you volume discounts.
Then, after you add the Amazon fees and calculate your profit per unit, you can realize a 100% return on investment per unit. How absolutely AWESOME is this? There are very few businesses in this world where you can realize this type of profitability in such a short period of time.
Now that you understand the terminology, you understand that this means if your Costs of Good Sold (product costs + shipping to Amazon + Amazon fees + any other costs) total $15, then you want to sell the product for about $30.
Tip: 50% profit margin is also equal 100% profit percentage (Markup Percentage). If this statement confused you, see the examples above and do the math.
What you need to understand is that this is a “guideline” and not an absolute rule.
The real metric you should use is your total profit. this is the money that actually ends up in your bank account after you pay for your costs. This is what really matters.
Let’s evaluate two different examples so I can illustrate a point:
1. Product A has a Cost of Goods Sold of $10 and I sell it for $50. That’s great, right? It’s a 400% markup. it has a profit margin of 80%. This is a killer product.
Let’s say we sell 10 units per day of this product. Since our profit is $40 per unit, the total profit on 10 units is $400. NICE.
2. Product B has a Cost of Good Sold of $10 and I sell it for $15. That does not sound so great, does it? It’s only a 50% markup… it has a profit margin of only 33.34%. This is below our guideline, but let’s keep looking at it.
Let’s say we sell 100 units per day of this product. Since our profit is $5 per unit, the total profit on 100 units is $500. WOW!
If everything else was equal, then I would much prefer to be selling Product B… wouldn’t you?
Of course, the examples I gave you were simply used to illustrate a point. When evaluating an opportunity as taught in ASM we do not know the actual number of units we are going to sell, so you cannot do the exact math. What I am trying to show you is that the while you have learned that you want to look for products where you can achieve a 50% profit margin, if you find a product that otherwise fits the criteria, you should not discount that product only because it failed the 50% profit margin target guideline.
When looking at the profit margin potential, you also need to take into account the future Cost of Goods Sold. In the Product B example, let’s say our Cost of Goods Sold was $10 based on a small order quantity to get us started. What would happen if after achieving success with the product, we were able to order larger quantities from our supplier? How much lower can the cost get?
What if we were able to get the cost down to $7.50 per unit by ordering larger quantities?
In this case, our profit margin would jump to 50%. Not only that, but if everything in the example stayed the same, our profit would jump from $500 per day to $750 per day.
See how this works?!
Some businesses go as far as losing money when launching a product. We DO NOT want you to do this while considering future profitability. There is no reason to lose money even from the start. You will invest some to get started, but outside of that, every sale you make should yield a per unit profit.
If you have been paying attention in the ASM Masters Facebook Group, you have probably seen countless stories about ASMers who were scared about raising their prices, because they thought they would lose sales. While this can be true, in many cases, their sales increased!
We will continue to hammer this point every chance we get. while some consumers are bargain shoppers, most are not. Most will make purchases based on perceived value instead of price. If they perceive your product has a higher value to them, they will pay you more than they would pay your competitor. Increasing perceived value is all about marketing, and this is what you will learn both in ASM and in the aSm Masters Facebook group.
Now, let’s consider a case where you end up selling less units per day because your prices increased. Is this a bad thing? Not necessarily. Let me prove this to you.
Let’s say I have a product where the Cost of Goods Sold is $15 and I currently sell it for $30. I am currently selling an average of 30 units per day. Therefore, if we do the math, we know that my profit per day is $450.
Now, let’s say I raised the price to $35 and my average number of units sold per day dropped to 25. Sounds bad right?
No, it is a good thing! Just do the math. If I am now profiting $20 per unit, and I am selling 25 units per day, my daily profit has jumped to $500 instead of $450.
When you do the math, is it very easy to see that even if I am selling less units per day, I am making more money by just adjusting my prices.
Now, let’s expand the example and say that when I increased my price to $35 my average sales dropped to 20 units per day instead. When I do the math, I can see that my total profits dropped down to $400 per day… which is this case is not good. I would then simply lower my price again.
See how simple it is? Never let your “emotions” or “fear” get in the way of you making more money. Do the math and try things out. Sometimes small tweaks are all it takes to increase your bottom line.
As you saw in the examples above, you can experiment with your prices to see how it affects your profitability.
It is very simple in Seller Central to change your price and once your product is making consistent sales, we recommend you do experiment and see what happens. A simple price adjustment may make a significant difference in your bottom line.
Just as a reminder, your business will have other costs. Although these do not apply in the calculations above for margin, etc, you will want to make sure you understand and account for these in your overall business and cash flow planning. Cash flow management is very important in this business and we will talk more about this in the future, and perhaps at the live event in Austin.
No matter what though, each profitable product you private label and sell on Amazon will add to your bottom line, and you can grow your business by lowering costs, increasing prices, or both
While math may not be your favorite subject, it is important for you to know how to perform the basic calculations explained in this report.
It is also very important that you learn and use the correct terminology when communicating with others, so you are “speaking the same language.”
Keep a copy of this guide handy so you can take a quick look and reference it as needed.Over time, both the terminology and the calculations will become second nature to you.