This post is by Jae Jun, a seven-figure Amazon seller and founder of Gorilla ROI.
In this article, I’ll take you through the steps to analyze your profit margins and find benchmarks to make sure your business is running at optimal levels.
Using the methods I outline below, I was able to take our business from a low 30% gross profit range to 35-45% margins for many of our products.
This helped us break out from a sales plateau of $250k in revenue to over $2M in a few short years. Our sales continue to grow quickly today.
Business is a competition.
You are competing against hundreds, if not thousands of similar products and sellers.
If you watch any cycling, racing, golf or sporting event, there are always leader packs that separate themselves from the rest of the competition.
The point of benchmarking is to keep up with the leader pack and not drop down the ranks.
But here’s the good news. Before I started implementing this mindset and process, our business was near the bottom, but in a few short years, our business became leaner, faster, focused, more competitive and more profitable.
This is all despite the fact that:
- My products are priced below $15
- My products are in competitive categories
- I’ve been copied with prices racing to the bottom
Step #1: Clearly define your business model and objective
A big mistake I see with most small businesses is how they stumble around in the dark hoping to get from point A to point B. There is no clear direction. They have no identity. No goal or objective about pricing and margins.
This is one of the worst positions to be in. You are just another “me too” seller hearing about the glories of selling on Amazon FBA and wanting to get a piece of the action.
I know because I did the exact same thing. Random products, pricing all over the place, forgetting to include important costs into the pricing like refunds, warranties and taxes.
The first big step is to clearly identify the type of Amazon business you are trying to run.
I categorize Amazon business models into four groups.
- Group 1: the supermarket store model that resells other brands at razor thin margins (Target, Walmart store strategy)
- Group 2: the specialty store model that focuses on a specific category (Best Buy, Willams Sonoma)
- Group 3: the OEM branded store model (Etekcity, Anker strategy)
- Group 4: the Alibaba product store model (slap a different name on the same Alibaba products strategy)
Each model can be broken down further. For example, the supermarket model could be selling all items related to health supplements, or an FBA branded store could focus on just swimwear or barbecue related products.
Business models and sourcing strategies
Most often, Amazon sellers are grouped into either:
- OEM
- Private label
- Wholesaling
- Online arbitrage
- Retail arbitrage
This is why there’s a lot of bad advice out there. Because depending on the strategy, a lot of things change and the way you source, operate and make money changes.
We operate on the Group 3 (OEM) model above, where we design and manufacture everything from scratch.
An eight-figure seller that focuses on selling wholesale products has a different perspective and strategy for operating their FBA business. And because they don’t have experience with OEM, their advice is not always suited to how we operate.
On the flip side, if an FBA seller is a 60-year old woman who just wants to make some extra money on the side in her spare time at home, the objective is very different. The goal isn’t to hire people and scale up. In this case, margins can be lower for the same profit because there is no insurance, payroll and warehouses to worry about.
This is why it is very important you first clearly identify your business model and objective so you know who your benchmarks are and which direction you need to head in.
Homework
Write down your business model. Write down your objective.
Done? Let’s move to step 2.
Step #2: Know the difference between gross, operating and net profit
To do business, you need to speak the language of business.
That language is accounting.
Another big reason why small businesses can’t scale and get stuck in the losing pack of the race is due to misusing these terms.
