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An Ultimate And Simple Guide On How To Calculate Estimated Profit Margin Of Your Product As New Amazon Seller

In this post, we’ll teach you how to check the profits of Amazon sellers and calculate your own profit margin for your own Amazon business.

Launching a product on Amazon is a daunting task. It is not as simple as it seems and it’s certainly not “passive”. 

There are a number of things that you need to keep in mind before launching a product on Amazon. Aside from the costs which are super important you also have to ensure that the product is interesting and has competitive pricing and advantage.

Below we explained how you can compute if your product pick is profitable and scalable.

You’re setting yourself up for failure if it won’t profit well. No amount of revenue is going to save a product with 5-10% margin. So nailing the profitability aspect is the first step.

To determine estimated profitability, you must consider all the costs involved. These costs include:

> Product manufacturing cost
> Shipping cost
> FBA fees (If you choose Fulfillment by Amazon),
> Referral fees
> storage fees
> Advertising
> Overhead
> Taxes
> Miscellaneous

1. Product Manufacturing Cost

Determine the cost consumed in the process of making your product. If you sourced your product through an online B2B marketplace such as Alibaba, it’s quite easy to determine the cost as usually, the suppliers would just give you a straightforward quote. 

Manufacturing cost includes product cost, customization cost (if applicable), packaging and logo cost. 

2. Shipping Cost

If you are using a third-party shipping forwarder, all you need is to provide a packing list that you can get from the supplier and ask for a quotation from the Freight Forwarder. Shipping rates change from time to time so you need to ask for the most competitive rates. 

Some Alibaba suppliers also offer shipping services but you need to compare it with other shipping services rates if you want to consider the lowest cost possible.

 3. FBA Fees

Amazon fulfillment is a service that allows you to ship your inventory to an Amazon Fulfillment Center, and Amazon will pick, pack, and ship your orders for you. They will also provide customer service related to order fulfillment.

FBA fees are usually 15% of your product price. You can check your direct competitor to determine FBA fees. You can also use the Helium10 tool to check on your competitor’s FBA fees by using helium  X-ray or Revenue Calculator to easily determine your estimated fees. See sample below:

4. Storage fees

Storage fees are costs incurred when you decide to store your products in Amazon’s fulfillment centers. 

These costs are calculated per cubic foot and depend on the size of the products being stored as well as the season they’re in. Depending on the type of products you’re selling, you will most likely want to plan for storage fees.

The fees start at $0.83 per unit but will vary depending on the size of your products and how much space they occupy in the fulfillment centers. You need to determine if your product falls to Dangerous Goods as well. 

To determine if your inventory is considered dangerous goods, review the Dangerous Goods Identification Guide.

Check the image below to determine the rate card that applies to your product:

Once you set up your listing on Amazon, you will easily determine your FBA fees and storage fees. Or you can directly check on competitors using Helium10 so you can have an estimate of how likely your storage fees are. 

Take a look at this image below for a sample of the Profit calculation of a Beard Straightener Product using Helium10:

5. Amazon Advertising Fees

The first step in creating an effective advertising campaign is setting a daily budget. If you’re just getting started on Amazon, we recommend setting your campaign budget at $30% of your selling price.  

Once you have established that your products are selling well and generating positive feedback, you can increase your campaign budget. 

Amazon has 3 different types of ads: Sponsored Product ads, Sponsored Brands and Sponsored display ads.

 Sponsored Product Ads

Sponsored Products is post-per-click advertising solution that enables you to promote the products you sell with keyword-targeted ads on Amazon. You can use Sponsored Products to promote individual products and drive traffic to your product detail pages.

Sponsored Brands Ads 

Sponsored Brands Ads is great for driving traffic to your site or Amazon store. They appear in search results below the search bar and above the first organic result.

Sponsored Display Ads 

Sponsored display ads are designed for sellers who want to promote their products to new customers in a cost-effective manner, without having to create their own text or image advertisements.

After you determine all the costs, you can start computing your estimated profitability, You can just create a spreadsheet, to sum up, all the COGS and subtract it from your ideal product price. You can set your ideal based on the average price of the top 10 best sellers. You can also set different price points to determine your profit margin and the best price to gain more profit.

To help you start the profitability calculation, here is a sample profit calculation of a beard straightener product from Aberlite.

The profit per unit to sell Beard Straightener is $4.63 which is an 11.59% profit margin based on the $39.99 selling price. 

Those are the basic costs you will spend on your product. When you start selling on Amazon, there will be more costs to consider. Such costs are:

Overhead cost

Every business must include a budget for its overhead costs, also referred to as indirect costs or operating expenses. Overhead costs can take many forms such as administrative costs, insurance, Rent for office space, employee perks & wages, or brand registration fees. 

Taxes

 All sellers making money on Amazon are required to pay Income Tax and Amazon Sales Tax to avoid financial risk.

Miscellaneous Cost

Miscellaneous costs are all costs that are related to your product but are not directly tied to your product’s manufacturing, packaging, or shipping costs. Common miscellaneous costs include the service fee for repacking your product when a customer returns it with damaged packaging; removal of products; or shipping to a third-party warehouse for repacking.

If you consider professional photography for your product, you can consider it a miscellaneous cost, as well. The same goes for any advertising you decide to do outside of Amazon—for example, Google and Facebook ads—to generate traffic and drive sales.

When it comes to being successful on Amazon, you need to remember that it is not only about selling products; they also need to be profitable. If you were to choose a product without calculating the profit margin, you would most likely be making less money than if you do your research on wholesale suppliers and product profitability.

We hope after reading this article, you will be able to calculate your profit margin with ease so that you can make the most of your selling business.  After all, you need money to make money, right?

We worked hard on this post so if you like our content we’d highly appreciate a comment or kindly share with those who might benefit. Thank you!

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