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Profit Margin Analysis

In this post I discussed how to calculate how much money you can make selling online.  An important part of the equation is your profit margin.

There are many different versions of profit margin.  E.g., gross profit margin is simply (sales price of an item – what you paid the manufacturer of that item).  A useful measure to be sure, but for online sales there are other per-item costs that are so high they should be accounted for in your margin calculation, or you’ll make very poor decisions about what to sell, and how much you need to charge for an item to make carrying it worth your while.

The version of profit margin I use includes these per-item expenses:

– price paid to the manufacturer

– shipping cost from the manufacturer to me

– shipping cost from me to the fulfillment center

– cost of any boxes I have to use in shipping to the fulfillment center, in case shipments I receive from the manufacturer must be broken up

– processing fees charged by the fulfillment center whenever they receive a shipment (e.g., the Amazon FBA fee to apply stickers to inventory)

– the pick / pack / ship fees charged by the fulfillment center when an order comes in (including postage)

– average fulfillment center storage fees for this item (based on quantity and length of time at the fulfillment center on average)

– the marketplace selling fees (usually a percentage of the selling price)

Some of these numbers won’t be exact.  E.g., the postage depends on how many items are shipped.  If the postage for item A alone is $3, and the postage for item B alone is $3, the postage when someone buys both A and B is likely to be much less than $6.  You can use historical data to try to estimate this sort of thing, but I just use the worst-case, which is the postage of an item shipping by itself.

Once you have all of the per-item expenses, you can calculate a meaningful value of profit margin.  If you sell a lot of SKUs doing all of these calculations by hand will be impractical.  At a minimum you need to use a spreadsheet to calculate it.  Being familiar with a simple scripting language like Perl would be better, since you probably need the same data in several places for different purposes, and putting everything in one huge spreadsheet will become a nightmare.  But for a small number of SKUs a spreadsheet is fine.

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I’ve updated my list of potentially good products for you to sell on Amazon for June 2013.

 

 

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