In today’s post I want to talk about Amazon return on investment (ROI). This is helps you determine the Amazon seller profit margin you are looking to achieve when sourcing products to sell. The most common strategy employed related to this, particularly for beginners selling on Amazon, is to look for items that you can sell for triple what you pay for them. This is often called the “3 times rule” or the “3X rule” and in general creates a 100% return on investment — a healthy Amazon FBA profit margin. The idea with this rule is that if you buy an item for $5, you should be able to sell it for $15. In this scenario, $5 is paid for the item, $5 is paid to amazon for shipping and fees, and the remaining $5 is your profit. $5 profit on a $5 purchase equals a 100% ROI, which is definitely an acceptable return on investment.
Now, the above strategy sounds good, but let’s dig a little deeper and see if lowering Amazon seller margins allows for an overall increase in income.
Let me start by saying that an Amazon profit margin of 100% is a good rule of thumb for those who are just getting started selling on Amazon. It provides significant room for error, and lowers risk to an acceptable level. I do think once a certain comfort level is gained with selling online that it makes sense to consider accepting a lower Amazon FBA return.
Now, if you are able to consistently spend your entire sourcing budget on items that provide a 100% ROI, then I would keep sourcing 100% ROI items, but if you are unable to spend your full sourcing budget on 100% ROI items, then I would consider lowering your acceptable ROI a bit if you are looking to expand your business.
Here’s a chart (click to enlarge) showing how much you end up with if you start with a $100 sourcing budget and are able to obtain your desired ROI each month and you reinvest all profits each month (a month is an arbitrary period of time, you could make this a shorter or longer period for your own purposes, but for this example we will use the time period of 1 month).
So here you can see what reinvesting all of your profits will get you to if you were able to spend your entire sourcing budget each month, and have all of the items sell again every month. Basically it assumes month 1 you buy $100 in inventory, it all sells before the end of month 1, month 2 you have $200 and spend it all on inventory, this entire amount then sells again, and you begin month 3 with $400, and these steps continue (this example was for the 100% ROI).
Now, I am guessing you are going to start running into problems continuing to spend your entire sourcing budget on 100% ROI by month 7, and run into very strong resistance around months 9 to 10 based on the chart above. There are multiple reasons for this, but being able to find enough items that make 100% return on investment will likely be one of the more significant issues.
So here’s an example of 2 scenarios to demonstrate what I am getting at with this post. A couple of overarching assumptions are that this individual is able to find $5,000 in cost of items that will yield a 100% ROI, and $10,000 in cost of items that will yield a 50% ROI every month.
- You begin with a $10K sourcing budget
- You WILL NOT buy anything with an ROI less than 100%.
- You can consistently find $5K in cost of 100% ROI items per month
- You consistently pass on every item that has an ROI less than 100%
- You consistently find $10K in cost of 50%+ ROI items that you never buy.
- You end up making $5K per month. Your sourcing budget for the subsequent month has now increased to $15K.
- Even though your sourcing budget has increased, you are consistently making $5K per month, with a few months being better and a few months being a bit less, depending on how your sourcing turns out month to month as there are only so many 100%+ ROI items that you can find.
- You begin with a $10,000 sourcing budget
- You are willing to buy items with an ROI as low as 50%
- You buy every item that has a 50% ROI or greater regardless of when you find it during the month.
- The first month you spend $10K on inventory, $6.7K on 50% ROI inventory, and $3.3K on 100% ROI inventory.
- You end up making $6.7K in profits the first month.
- Your sourcing budget for month 2 is $16.7K.
- In month 2 you are able to buy all $10K of the 50% ROI items, and all $5K of the 100% ROI items with $1.7K unspent. At the end of the month once these items sold, your sourcing budget increased by $10K up to $26.7K.
- You continue to source all of the 50% plus ROI items you can find and continue to make $10K per month.
Now, this is more of in theory versus in practice, as it’s highly unlikely that you will be able to find the exact same amount of inventory every month and have it all sell within the month. Also, the numbers used are arbitrary. You could change the sourcing budgets around as you see fit to make them work for your personal situation. Just make sure to redo the math. Even though this is somewhat theoretical, I believe there is real value in considering the above example when choosing your required ROI when sourcing products.
Now, a few notes on the above examples. If you get to a point where you are comfortable with the amount you are making, and the amount you are working, then by no means should you consider it necessary to lower your ROI to increase your income. But, if you consistently have part of your sourcing budget leftover at the end of each month, and you would like to make more money each month, I think it’s worth considering lowering your ROI a bit to do this.
In comparing the 2 examples, it’s worth noting that it would take the person in example #2 less time to source $5K in cost of products to resell than in example #1. The individual in each example would be scanning the same number of items, but in example #2 would be buying a significant number of items that would not meet the ROI requirements of example #1, and would simply be left behind in example #1. So, in reality lowering your ROI is unlikely to add too much time initially to your sourcing, and might even decrease it. Lowering your ROI will likely increase your prep/shipping time as you will have additional items to deal with, but the time savings from sourcing will help to cover this additional time.
There are some additional risks to lowering your required ROI, such as prices going down to a point where you are unable to profit, and returns cutting more significantly into profits, among others. So, be sure to account for these risks if you decide to accept a lower ROI.
Overall, I am not saying that it makes sense for everyone to lower the ROI that they require when sourcing. I simply want you to consider the possibilities of what would happen if you did. If you are hitting a wall and seeing little growth, lowering the minimum ROI a bit when sourcing could open some new opportunities.
Before I wrap this up, I wanted to post quick about 2 exclusive discounts that are available through my blog on 2 services that I am using.
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The second is for Appeagle. This is a repricing service that I have been using for about the past month. So far I am really liking the results of this, as it has helped me to sell through some older inventory, as well as sell through some of my newer inventory quicker and sometimes for higher prices than I initially listed the item for, it will save me a lot of time versus repricing manually going forward. You can sign up for a 14 day free trial through THIS LINK and if you use coupon code “RYAN_G” for 50% off your first month if you decide to continue using the service. Note: the coupon code is entered when entering your payment details if you decide this is a service you want to use, and not when signing up for the free trial (no credit card is required for the free trial).
That’s all I have for today. What ROI do you look for when sourcing? What other factors should be considered? Any questions for me? Let me know in the comments below!