WHY PROFIT MARGIN CONFUSES AMAZON SELLERS
By Gaye Lisby
Table of Contents
When I Started Selling
When I started selling on Amazon, I never meant to be a retailer, much less an e-tailer, but here I am.
I had NO previous retail experience except that I learned as a 16-year-old working at Dunkin Donut the summer I spent in St. Louis. (In other words, NONE.)
Enter: my ecommerce days in 2014 after I sold a $2 cookbook for $89 on Amazon.
Enter: me as a retailer
Terms like profit margin, i.e., gross profit margin and operating profit margin were foreign to me.
Perhaps, they’ve been to you too. Can I help you with that?
Profit margin indicates the percentage of money received from the sale of products that is left over to the business as income.
Let’s break it down and distinguish between two common ways to view profit.
Gross profit margin is used to indicate the total amount of sales revenue you have left AFTER you deduct Cost of Goods Sold (COGS). My $89 sale of the cookbook minus the $2 I paid for it at the Jasper, Arkansas Museum of Junk.
Let me fast forward you to the present and let this become your story.
Over the past 30 days your business brought in revenue (Sales) of $216,417.27.
Be excited, but don’t run out and spend $216,417.27! We’ve got some subtracting to do.
Now let’s subtract the COGS – $107,448.42.
Gross Profit Margin
The result is your Gross Profit Margin. For the past 30 days, based on those numbers, your gross profit margin was $108,968.85/216,417.27 which is 50%. Congratulations! That’s awesome!
But it’s not all going to land in your pocket. We’ve got some more subtracting to do.
Enter another key profit margin term – Operating Profit Margin. This is going to be the percentage of everything that you’ll get to keep.
To calculate this, you will need to know your operating income which is the profit your business receives AFTER deducting COGS as well as other operating expenses such as employee wages, warehouse costs, utilities, fuel, shipping supplies, Amazon fees, etc.
That’s why having cool software like Inventory Lab is essential for Amazon sellers.
Inventory Lab easily syncs with your personal Amazon account and automatically deducts all Amazon fees. In addition, if you input them, it will deduct your operating costs.
When you go through Master Business Coach Garry Ray’s training, you will learn exactly how to do this and exactly how to interpret the numbers.
Remember, operating costs DO NOT include any payments you make to your estimated taxes, payments made to investment instruments like IRAs, donations, and etc.
Operating costs are only those costs directly related to operating your business.
One of Garry’s coaching students was confused because they felt their operating profit margin was much lower than other sellers they knew although their business was relatively the same size.
When Garry reviewed their Inventory Lab, he discovered they had entered as operating costs the money they were tithing to their local church. This donation does not belong in your Inventory Lab but does belong in the final information given to your accountant before taxes are calculated.
Operating costs include bills directly related to keeping the business running, such as staffing costs, prep and ship service, boxes, tape, labels, printers, tools, subscriptions, computers, water, electricity, smartphones for scanning, smartphone monthly bills, security alarms, cleaning services, and the one most often forgotten – debt service (i.e. % paid in interest on your credit card if you used your credit cards to make inventory purchases and did not fully pay the balance before card due date).
Operating costs are also those that Amazon takes out for fulfillment fees, storage fees, inbound shipping fees, etc. These are easily itemized for you by Inventory Lab.
In your case, you spent $82,302.50 because Amazon took their fees, and you paid your bills.
Once operating costs are entered, it’s easy to discover the OPERATING PROFIT.
Simply enter the Gross Profit (remember yours was $108,968.85) minus the operating costs (remember yours was $82,302.50)
There you go! $26,666.35 which is your operating profit.
Now let’s find your operating profit margin (sometimes referred to as net profit margin). Take 26,666.35/216,417.27. This calculates as a 12% operating profit margin.
Operating Profit Margin
This 12% Operating Profit Margin is now MONEY IN YOUR HANDS. What you choose to do with it will determine how you grow your life and your business.
But that discussion is for next time.
Challenge: before today ends, determine your operating profit margin. Write it down on a big piece of paper and challenge yourself to improve this number over the next 30 days.
Point of comparison: According to data analyzed January 2021 by NYU, online retail generally has a 5.75% pre-tax operating profit margin and general brick-and-mortar retail has 4.63% operating profit margin.
*Numbers included in this article are actual numbers taken from my personal Amazon selling business where I sell over $1 million annually, carry no long-term debt, pay 3 full time employees, 2 part-time employees and pay some prep and ship services to an outside prep and ship company. These numbers are actual figures from the past 30 days.
*Business principles discussed in this article were learned from Master Business Coach, Garry Ray.
Popular Amazon Seller Tribe Saying, “If you do what Garry does, you’ll get what Garry’s got!)
by Gaye Lisby
About Gaye Lisby
I mainly spend the day helping other sellers make money on Amazon while my sister takes care of the bank account credit cards. We buy our stuff on credit cards so we can get the points and we pay off that bill every month.
We never carry a balance over into the next month and never carry that interest fee over into the next month.
Sometimes, if a spare hand is needed in the warehouse, I’ll do that. This includes hauling boxes or picking up boxes almost anywhere. if we accidentally run out of boxes, I might also do the purchasing for that.
Everybody else does the rest and I like it that way because the whole process is almost an automatic stream of income. It’s an additional way for us to make money here in the later part of our careers since my sister and I are not young people anymore