In this post, we’re going to look at profit margins for Amazon sellers, including what constitutes a good ROI for products sold on Amazon and what is a realistic profit margin to aim for as a seller on Amazon.
When thinking about your Amazon ROI, it’s very important to factor in Amazon fees and the cost to ship your products to Amazon FBA warehouses. These expenses make a huge difference to the Amazon seller profit margin you are going to enjoy.
In other words, ROI is more than just the difference between the price an item sells for on Amazon and the price you can obtain it for.
This may seem obvious to some of you, but many beginners don’t realize this and invest in inventory that has no hope of turning a profit. If you are brand new to selling on Amazon, I recommend reading this beginner’s guide to selling on Amazon as a starting point or checking out our Launch Accelerator which will help you get your first $150 in expected profit.
What is a good ROI for FBA?
When you are first getting started on Amazon, all the fees and numbers can get overwhelming when you are trying to figure out how much money you are making and what you should be doing to make more.
Understanding your ROI and profit margin will help you with this.
ROI is your profit per item divided by how much it cost to buy the item. So if you bought an item for $10 and earned $10 profit, that would be a 100% ROI. If you only earned $2 profit, that would be a 20% ROI.
Whether or not your ROI is “good” depends on a lot of factors.
The biggest mistake that many beginners make is not factoring in Amazon fees.
For example, beginners will look at an item they can buy for $15 and sell for $25 via FBA and assume that means they are making $10 profit with ~67% ROI – this is not the case! By the time all the FBA selling and shipping fees are factored in, the actual profit will be less than $5 with an ROI that is likely less than 30%.
The 3x Rule
The most common strategy employed by beginning sellers looking for a healthy ROI on Amazon is to look for items that 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. This is a safe and healthy Amazon FBA profit margin because it allows new sellers to skip over specific fee calculations while still turning a profit.
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.
Why The 3X Rule Will Limit Your Total Amazon Profit
An Amazon profit margin of 100% is a good rule of thumb for those who are just getting started selling on Amazon, but eventually, you’ll need to adopt a more advanced strategy if you want to maximize your Amazon profits.
If you were able to consistently spend your entire sourcing budget on items that provide a 100% ROI, then you should definitely keep sourcing 100% ROI items as long as possible.
At some point, though, you will be unable to spend your full sourcing budget on 100% ROI items. Your budget will grow to the point that there just aren’t enough items to buy that provide that level of ROI on Amazon. That’s when you’ll need to lower your acceptable ROI if you want to expand your business as much as possible.
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:
So here you can see what reinvesting all of your profits will get you if you were able to spend your entire sourcing budget each month and have all of the items sell again every month.
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.
How To Maximize Profits On Amazon
Below you’ll find 2 scenarios that demonstrate what I am getting at with this post.
A couple of overarching assumptions are that this individual is able to spend $5,000 on items that will yield a 100% ROI and $10,000 on 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 worth of 100% ROI items per month.
- You consistently pass on every item that has an ROI less than 100%
- You consistently find $10K worth 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.
First, 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, 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 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. Be sure to account for these risks if you decide to accept a lower ROI.
In my own business, we base our purchasing decisions on a combination of ROI and the sales rank of the individual item. In other words, I’ll accept a lower ROI on items that will sell faster and look for a much higher ROI for items that will take longer to sell.
Need Help With All These Numbers?
If you are new to selling on Amazon and looking to get your first sales, I recommend checking out our Launch Accelerator. This is a guided 4-week program where you will work directly with my team and I to get your Amazon business up and running with guaranteed results. This usually sells out very quickly, but you can check availability or get on the waitlist here.
A Couple Discounts That May Help You
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.
The first is for Shoeboxed, which is a service that I am using to manage my receipts. I simply send my receipts to Shoeboxed in the mail, and they scan them into an online portal where they are stored and easy to access. If you sign up through THIS LINK you can get a 30 day free trial, and if you decide to pay for the service you will receive a 20% discount for your first 6 months.
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!