When you start growing an online business, the profit margin can seem like the primary focus. Making money with popular products, consistent monthly sales, and the backing of Amazon FBA is exciting, especially as you watch that profit roll in.
But what exactly is a good profit margin for an Amazon FBA business?
There isn’t really a single answer to this. Profit depends on a number of variable factors, and a healthy ROI won’t look the same for every Amazon business.
And if you focus too heavily on profit, you might find you overlook other essential factors of the business.
The profit margin can indicate the sustainability and success of the business, but it isn’t the only factor. With this guide, we consider exactly what profit you should be making, what variable costs have an effect, and what you should focus on instead of big margins.
What Is A Good Profit Margin For An Amazon FBA Business?
An ideal profit margin for an Amazon FBA business is 100%. That would mean that if you spent $10 purchasing the product, you would then sell that same product for $20, and net a $10 ROI (return on investment).
However, this isn’t a realistic or long term way to run a business. There are just too many variables to consider, and no way of guaranteeing that 100% return each time.
Unless you plan a very short-lived Amazon FBA career, it’s better to plan for a smaller, but more consistent, profit margin.
There really is no overall profit margin that can be considered “good”. It depends instead on the sustainability of your business, what you’re selling, and the scalability of the product.
A profit margin of between 10% and 30% is generally considered to be decent for an Amazon FBA business.
The 3x Rule
When considering your profit margin for an Amazon FBA business, you’re going to hear a lot about the 3x rule. This is considered to be the gold standard for those starting out in Amazon FBA selling.
So, what is the 3x rule?
The 3x rule is a simple selling strategy, based on the idea of selling a product for 3 times what you paid to acquire it.
For example, if you bought an item for $10, you would then sell it for $30. One third of that would cover the initial cost, one third would cover any fees, and the final third would be 100% profit.
The 3x rule is a good starting place, but lacks sustainability. However, if you’re just establishing yourself on Amazon, then keep the 3x rule in mind.
Outgoings And Fees To Remember
When calculating your profit as an Amazon FBA seller, you have to consider the amount you’ll be spending. This is what determines the ROI, and how much must be plugged back into the business.
The initial spending will be the products you choose to sell. This is the heart of your business, and will determine the final selling price.
Fees also play a significant role. As an Amazon FBA seller, here are some of the fees that you will encounter:
- Seller Account Fee. Amazon charges a basic fee to have an account on Amazon. This is determined either by the amount of items sold, or the type of account. If your business is built on consistent sales of low-cost items, the seller account fee can really eat at profits.
- FBA Fee. Selling Amazon FBA is a good way to cut outgoings and ensure you can focus on your brand. But you will have to pay fees to use the Fulfilled By Amazon service. Again, this can be charged per unit sold, so must be factored into each individual item.
- Referral Fee. Amazon charges a referral fee on every item sold. This is a percentage of the total sales price, and is charged across categories. However, some categories take a smaller referral fee than others. If you want to cut costs, carefully consider which product categories you aim to sell in.
- Variable Closing Fee. Closing fees are a fixed fee charged by Amazon, taken from the final sale of an item.
There are a few other costs that you have to consider when determining your profit. Marketing is a necessary expense, and one that you must budget for if you intend to make any sales. To maximize sales and streamline the process, you may be paying for additional services such as bookkeeping software.
Calculating Profit Margins
To calculate your profit margins, you must consider all the costs that you will incur along the way. If you’re new to Amazon FBA selling, you may have some start up costs that will render your initial profit margin small.
When calculating your total profit, consider your fees, outgoings, and how much you make and how much you intend to put back into the business.
However, you should focus on growth, rather than getting caught up in calculating profit. As important as your profit margin is, it shouldn’t be the sole focus of your growing business.
Thinking Long Term
Of course, we all want as high a profit margin as possible on Amazon. However, this isn’t realistic for the long term.
Unless you want to sell one product for a single massive return and then move on, you’ll need to come up with a sustainable business plan.
What factors should you consider instead of ROI?
Sustainable products are those which will have future sales, and that you can continue to find a market for. These may not have the highest profit margin, but they will have a consistent profit margin.
An item with poor sustainability may initially return you a high profit, but you will quickly lose market share to bigger rivals with the lowest prices.
A hot new product with a profit margin of 70%, but no sustainability won’t return as consistent a profit as an item with a 30% profit margin and a better chance of future sales.
Choosing Products With Value Proposition
Value proposition refers to how unique an item is. If you’re selling a product that only you have access to, you can take a lower profit margin as you will dominate the market.
But if you sell a product with many competitors, you need a higher profit margin to make up for your smaller slice of the market.
For example, if you have exclusive distribution rights to a toy, you can afford to make a lower profit because you won’t have other competitors. You also have a greater sustainability.
You might be planning for a very short Amazon career, selling one product with a massive profit margin, and then taking your money and retiring. But the chances are, you want something long term.
Scalable products can help you grow the business, starting with a lower profit margin and gradually scaling upwards. Profit margins are less important, as you have a future secured.
As you can see, there’s more to profitability than just looking at profit margins. Consider what you’re doing, why you’re doing it, and how you can improve your business over time.
There is no single “good” profit margin. Depending on the business, a healthy profit margin can be anything from 100%, to 0.05%. Instead of focusing on a target profit margin, consider what profitable products you can use to grow your business.