This post is an excerpt from the book Primed: Your Guide To Building An Amazing Business On Amazon.
I want to share with you a fascinating study done in 1970 that put a group of 5-year-old kids into an observation room where each was presented with one marshmallow on a plate. The children were told that they could either eat the marshmallow now, or they could wait 20 minutes and they would receive a whole bag of marshmallows. Of those tested, only a few waited the 20 minutes.
The researchers then tracked those children for the next 40 years, studying their professional and financial progress. Using no other metric other than their ability to wait 20 minutes for a bag of marshmallows when they were 5 years old, those that had waited the 20 minutes became far more successful financially.
Fascinating!
For most everyday people who will be starting an Amazon business with modest financial means but a desire for time-free income, the same principle of delayed gratification will need to apply.
Why?
Because you make money on Amazon in only one way – selling products. The more products you have, the more money-making potential you have. The fewer products you have, the less money-making potential you have.
In simple terms, your income is directly tied to how much inventory you have, and how much inventory you have will be tied to how much capital you have.
Sadly, very few Amazon gurus make this point clearly. Instead, they keep you focused on how much money you can make with little mention of the underlying investment in inventory that is required.
Much like the game of monopoly, each product you have on Amazon is like a house. The more houses you have, the more income you make. Every now and then, you’ll launch a product that becomes a hotel. These are hit products people love and they are visited more often than your houses. These “hotel products” earn way more than your average “house product” on the Amazon monopoly board.
Make sense?
That being said, houses and hotels cost money to buy, so if you have limited cash to start with, then you’re going to have to be patient, follow Jeff Bezos’ strategy, and reinvest what you earn into your business. Over time, you’ll build a nice little portfolio of houses and hotels and you’ll be able to retire from your Amazon income.
So here’s my “Velocity Retailing” formula to help get your head around this.
Capital x Return x Rotations = Income
OK, let’s begin with the second variable, “Return”.
I have a saying that goes like this.
In business, turnover is irrelevant. It’s the left over I’m interested in.
For some strange reason, many experts are always talking about how much “revenue” they’re doing on Amazon, but revenue numbers can be very misleading. What’s the point of doing $1,000,000 in revenue if your costs are $1,000,001?
It’s somewhat important to know that second part right?
When I say, “return”, I am referring to the percentage return you make on the capital you invested. For example, if you invest $1 into a product that sells on Amazon and you get $1.30 back after paying for all the costs, then your return is 30%.
| Income | $1.30 |
| Capital invested | $1.00 |
| Profit | $0.30 |
$0.30 is 30% of $1 so your return is 30%.
The next piece of the formula is “Rotations”. Rotations relates to how many times a year you can sell that inventory and realize that return. For example, if you order 1,000 frying pans for $10,000, how quickly will you be able to get your money back and order them again? Can you rotate 1,000 frying pans once, twice or even three times a year?
As you’ll see in a moment, the answer to this question will have a profound impact on the amount of money you’ll make as an Amazon seller.
The last piece is “Income”. This is simply how much money you’ll actually make from your Amazon business – after ALL expenses.
So let me give you a practical example, and then we will dive deeper into some of the variables and how they can greatly impact your spendable income.
Jake is a stay-at-home dad raising three beautiful kids, while his wife Sally continues to run the graphic design business they started 5 years before having a family. They both have an eye for design and they spot a gap in the market for high-end kids’ dinner plates. In total, they want to invest $10,000 into starting an Amazon business.
They’ve done their research and found a supplier in China who will put their own designs onto the plates they want, at a price of $5 for a set of four plates.
In addition to the cost of the plates, they will spend a further $3/set on beautiful packaging to really make their product stand out. On top of that, Jake and Sally will be paying $1.30 per set to ship them to the US, and an additional $0.70c/set for import duties. So here’s what that looks like:
| Plates | $5.00 |
| Packaging | $3.00 |
| Freight | $1.30 |
| Duties | $0.70 |
| Total | $10.00/set |
We will refer to this $10 total as “The Cost Of Goods Sold”, or “COGS” for short. It represents the total cost of getting your complete product made and then shipped all the way to Amazon’s warehouse and ready for sale.
