Why Total Dollars Net from a Sale are More Important Than ROI.

Budget

If you are a large high volume seller, then this is not for you. Really high volume sellers can make a lot of money even though they may make as little as one or two dollars per item. But if you are a small to medium-size seller, how much work do you want to do for one or two dollars’ profit?

Think about this for a minute. Let’s say you have about 300 SKUs on Amazon and you are averaging about 5 items sold per day. Your average selling price is $10, and your cost is only $1.50. But after Amazon fees your net is only $5.93 -that is a nice ROI (about 45%), but at that rate, your profit per item is $4.43, so even if you sell 5 units a day, your weekly profit is only $155.05

You have just done an awful lot of work for only $155.00.

Now let’s say you sell higher priced products with a lower ROI. I have one product I sell for $35.95 where my cost is 12.85. After Amazon fees I net about $24.03 – So my profit is about $11.18 (31% ROI). At 5 a day, my net is 55.90 so my weekly profit is $391.30. (Amazon works  7-days a week) Yes, my ROI per item is lower, but my weekly net is more than double the first example.

We have all heard the 3X-formula goal (You can’t always hit this but it’s a good cost/pricing goal). The way this works is when you buy a product, you want to sell it for 3X the amount you paid so the distribution is 1/3rd for Product cost, 1/3rd for Amazon and 1/3rd for you.

That is a great goal and I have several dozen products where I am doing that (and even more). But once you start buying wholesale products (as opposed to doing retail arbitrage or private label) that becomes harder to do because of competition.

In the real world, on most products I sell I am only getting 2X. But the answer to that is to source products that will sell for a higher average selling price (ASP). During the last holiday season, I came very close to my goal of $35 ASP – I came in at $34.72. My average profit per item was in the neighborhood of $12, but between November 1stand December 22nd we sold over 2800 items. That is a total profit of about (I am using some rounded numbers here) $33,000 – not bad for a 52-day period. The point I am trying to make here is not to intentionally look for lower ROI -you should always strive for the best ROI possible, but you can’t always do that but you can always aim for a higher ASP. Look for items that sell for a higher ASP and watch the larger dollars roll in. When I do the math on my hourly rate during that period it shows that I made about $110 per hour -yet I see sellers all the time on Amazon with great ROI on their products, but at the end of the week, they are averaging sometimes less than $15 to $20 an hour.

2 Comments

  1. ROI is calculated as:
    Profit / Cost
    In your examples, you calculated Margin which is
    Profit / Revenue

    1. Author

      Readers take note – I stand corrected – thank you.

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