How to Calculate and Improve Your Ecommerce Product Profitability

How to Calculate and Improve Your Ecommerce Product Profitability

How do you calculate and improve your eCommerce profit margins?

It's no secret that selling on Amazon is one of the fastest ways to improve your eCommerce performance. According to Insider Intelligence, Amazon sales worldwide will reach $729.76 billion in 2022. Yet, it's one of the most complex and hard to manage and often carries a higher cost-to-serve than other channels.

Understanding how to calculate and improve the profitability of your eCommerce business is a significant part of your brand's ability to drive sustainable growth in the omnichannel world. Your Amazon profitability will depend on how you manage product sales mix, trade agreements, marketing and search costs, and your capabilities to analyze and execute.

ASIN-level profitability in 5 simple (not) steps

To calculate product-level profitability, you must gather and integrate the correct data. The calculation is simple: COGS – (Trade + Advertising + Manufacturing Costs) = Net Profit. Execution requires running SQL queries, downloading reports, finding data among cross-functional peers, and many other business or retailer areas. Combining the following five datasets allows you to interpret your product-level profitability to strategize your Amazon sales, including forecasting, advertising, and other relevant activities.

  1. Sales report
  2. NET PPM report
  3. Co-op invoices (invoice details) — all Amazon charges by ASIN (trade, subscribe and save, coupons, promotions, strategic account services, and other accruals)
  4. Advertising (Sponsored Products, Sponsored Brands, DSP)
  5. Chargebacks and shortages

Retailer profitability vs. brand profitability

In a perfect world, both retailer and brand profitability are directly correlated. In reality, retailer and brand profits fluctuate significantly on an item-to-item basis. With that said — you must maintain a healthy balance of your product profitability for your business and the retailer, in this case, Amazon.

Retailer profitability accounts for a long list of variables aiming to maximize profit margins while optimizing other expenses, such as transportation costs and taxes. The retailer must consider its costs and profit margins when setting prices.

Brand profitability is not directly impacted by the final price of goods sold to the consumer — although brands should be conscious of that as it will impact annual Joint Business Plans (JBP) margin negotiations with the retailer. This type of profitability includes all the promotions, advertising, coupons, and other marketing efforts you put into your product. Retailers want to see that you’re actively working towards making your product sell well in their stores and will purchase more of the goods that are profitable for them and not neglected by the brand.

What is Amazon CRaP, and why does it matter?

CRaP (Cannot Realize Any Profit) describes products structurally unprofitable for Amazon. Once Amazon marks an item as CRaP, they will no longer place orders for that product, and thus brands lose sales and rankings on the marketplace. The product also becomes ineligible for advertising if not whitelisted in the JBP agreement. Why it matters? It matters because you have to keep a close eye on the following list of attributes that directly impact Amazon's profitability:

  1. Price matching
  2. Product pricing
  3. Heavy and bulky items
  4. High customer returns
  5. High inventory
  6. Fines
  7. Trade Agreements

Ways of improving profitability and growing market share

Realistically there are only two paths to improving profitability while growing market share. Both involve heavy data analytics lift and are pretty time-consuming.

Number one is managing your product profitability across your product portfolio/mix to drive sales of premium-priced products to improve and accelerate sales of higher-margin products. Number two is optimizing marketing and advertising activities based on product margins, which implies close control of your profitability at the product level.

Alternatively, you can leverage a mix of both to improve your product Sales Mix. This approach consists of analyzing all the fixed and variable costs at the ASIN level – and prioritizing the ASINs that deliver the highest profitability. Areas of focus can be the mix of ASINs you promote in advertising, which ASINs you choose to include in promotions or coupons, and elevating profitable ASINs in all consumer-facing executions. 

Additionally, you can take control of your Buy Box to prevent revenue leakage via solutions that deliver ticketing automation. Reduce wasted and inefficient advertising spend with Buy Box intelligent ads that pause ASIN activity for products with poor content scores, low review performance, etc.

All of the above is complex and involves a lot of cross-functional teamwork. Still, if perfected, you will see performance improvements across the business, and most importantly, you will be able to control and grow your profitability, incremental revenue, and market share.

 Algorithmic management to maximize your eCommerce sales

Pacvue Commerce is the world's first end-to-end eCommerce platform for omnichannel teams to manage operations, supply chain, media, and the digital shelf. It will automatically pull an entire eCommerce business from inventory to sales, profitability, and ranking into one platform. Request a demo and we will calculate how much revenue your business can save with Pacvue Commerce today.

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by 
Matt Abbruzzese

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