What is a good ROI (Return on Investment) on Amazon?
Ever wondered what a good ROI is on Amazon or what kind of profit margins your fellow Amazon sellers have?
To properly define ROI on Amazon, we need to bring a few factors into the picture, such as the cost to ship products to Amazon’s FBA fulfilment centres or other Amazon fees associated with, for example, the packaging of your products. All in all, to understand ‘What’s a good ROI?’ on Amazon, it pays to know what is considered a “realistic” UK ROI for Amazon sellers.
What’s ROI, anyway?
ROI refers to return on investment – say, you invest x amount of pounds into buying a product, and now you expect to have y amount of profit for selling that product. The difference between the price that product sells for vs. the price you originally paid to acquire it – that’s how we can define ROI.
What is a good ROI on Amazon?
Ah, yes – the million pound question!
You’ve likely heard of the ‘3x rule’ – i.e. whatever you paid to buy something (to be sold later), you should sell that for at least three times the original price so that you get a 100% UK ROI after you’ve paid all your Amazon fees.
Seems simple enough, right?
So you buy an item for £1 and sell it for £3 – the first pound covers the cost of the item, the second pound covers the fees owed to Amazon, and the third is your, voila, 100% ROI!
Now, let’s not get ahead of ourselves, because we’ve given a very basic and rather simplistic definition of ‘What’s a good ROI’ on Amazon. Things rarely work this way as there are so many products and categories on Amazon, so what we need to do is take a more nuanced approach.
Is there an amazon ROI calculator for this kind of thing?
Indeed! You can use the Amazon ROI calculator on Seller Central to get your return on investment figure, or you can do it yourself.
When we specifically talk about selling on Amazon, calculating your UK ROI is as simple as taking your net profit, dividing it by your COGS (cost of goods sold), and multiplying it by 100 to get the ROI percentage.
So, you can calculate your ROI like this:
3,000 divided by 1,500 multiplied by 100 equals 200% (Net profit / COGS * 100 = ROI)
An ROI of 100% means you have successfully doubled your investment while an ROI of 200% means that you have tripled it. So, the next time you wonder ‘What’s a good ROI on Amazon?’, aim for the 200% figure as that takes into account the cost to buy the goods and any Amazon fees you incur – remember the 3x rule?
How can I maximise my UK ROI?
Now that we have defined ROI, explained ‘What’s a good ROI’, and also pointed you to an Amazon ROI calculator as well a generic formula, let’s discuss how we can maximise our profits on Amazon.
Below, we’ve outlined two scenarios which demonstrate how we can increase our ROI. This is under the assumption that ‘John’ here can spend £5,000 on products that will get him at least a 100% ROI and he has £10,000 to spare on products that will get him a minimum of 50% ROI each month.
Scenario #1
John begins with a £10,000 sourcing budget and has decided NOT to buy any product that yields an ROI of less than 100%. However, he can consistently find £5,000 worth of 100% ROI products every month.
John continues to pass up every product which has an ROI of less than 100%. He also consistently finds products worth £10,000 of 50+ percent ROI that he will never buy. He ends up earning £5,000 each month. John’s sourcing budget for the next month is now £15,000.
Now, even though John’s sourcing budget has gone up, he is consistently earning £5,000 each month, with certain months being better and others, not so much – depending on how his sourcing turns out on a month-to-month basis – after all, there are only so many 100+ percent ROI products John can find.
Scenario #2
John begins with a £10,000 sourcing budget and is willing to buy products with a low 50% ROI. In fact, he buys every product with a 50% or greater ROI, irrespective of when he buys them during any given month.
So, during the first month, he spent £10,000 on his inventory; £6,700 on the 50% ROI inventory; and, £3,300 on the 100% ROI inventory. John ends up with £6,700 in earnings during the first month.
His sourcing budget for the second month is £16,700, where he is able to buy all £10,000 of the 50% ROI products and all £5,000 of the 100% ROI products. He has £1,700 which has not been spent. At month end, once John manages to sell off the products, his sourcing budget increased by £10,000 and is now £26,700.
John continues to source all of the 50+ percent ROI products he can find and continues to earn £10,000 each month.
The above two scenarios are not in practice but more in theory – it’s rather unlikely that you’ll be able to find the same inventory amount every single month and manage to sell it all too within the same month. Also, the numbers we used are purely arbitrary.
You can always change up the values for the sourcing budgets and, perhaps, apply them to your own personal selling strategy, but remember to redo all the math we worked on!
Even though these scenarios are theoretical, there is real value to be found in both of them as they can help choose your ROI target when sourcing products.
Our work isn’t quite finished on ‘What’s a good ROI’ as we need to make a few observations from the two examples:
First of all, if you reach a point where you’re comfortable with your earnings and sourcing budget, then there’s no need to lower your ROI target just to boost your income.
Second, if you keep finding your sourcing budget to not get fully utilised at each month end, and want to earn more, then yes, you should probably lower your ROI to increase your income.
Also, in comparing the two scenarios, it would take John less time in scenario #2 to source £5,000 in order to cover the cost of goods and resell them, compared to scenario #1. John would, however, be scanning the same number of products; the only difference is, in the second scenario, he would purchase a significantly higher number of products that would otherwise be left behind in the first scenario.
So, realistically, lowering your ROI target will probably add too much time to your sourcing at first, and your budget might even decrease as a result. But then, lowering your ROI target also means increasing your prepping and shipping time as you’re going to be dealing with more products, although the time you save from sourcing will offset this.
Bear in mind that you may have to bear additional risks to lower your ROI target, including decreasing prices to the point where you are no longer profitable, and, any returned products cutting deeply into your profits, to name a few. So, account for these risks if you’ve set a lower ROI target.
“What is a good ROI?” – How to lay the foundation of one
Want to lay the foundation of a great UK ROI on Amazon from day one? For that, we’ll need to do a health check-up of your business. By focusing on these areas, you can identify missed opportunities and costly bottlenecks which may potentially deprive you of your hard-earned revenue.
Understand your FBA Amazon fees
Nearly every Amazon seller is using FBA (fulfilment by Amazon) to store, pack, and ship products to their customers. It’s a speedy, timely, reliable, and a very cost-effective solution, so no surprise there. However, you need to factor in FBA fees to keep your ROI in the black.
Amazon does a fairly good job of calculating the fees for you, but you need to do some record-checking yourself too as those calculations aren’t perfect.
This means ensuring that you are being charged correctly based on your item type, category, size, weight, selling plan, and storage duration at the warehouse.
Cross-check these amounts against Amazon’s official rate cards. If you believe there is an error somewhere, get in touch with Amazon to request a re-calculation. Your UK rate card can be found here.
Also, choose the right plan – the professional plan, for example, is much better for driving sales in your business.
Finally, you have to devise a solid inventory strategy – one that revolves around stock management, boosting sell-through rates, and cutting down on refunds/returns, all while complying with Amazon’s Performance Index threshold.
Leverage technology for driving better ROI
The right technology and tools can help you boost Amazon UK ROI.
There are many paid and free tools, for example, which you can use to deploy the best keywords in your niche, gather accurate data on your competitors, get more customer reviews, launch promotions in a timely manner, and more.
Just make sure the subscription is reasonable and makes proper use of your budget – you don’t want to end up with a plan where you’re not utilising everything to the max.
Optimise ads to drive down ACoS
Ads that don’t perform well cause your ACoS (advertising cost of sales) to soar, which means ‘bad stuff’ will happen to your ROI on Amazon.
So, you need to optimise your ad campaign by first searching and validating your target keyword, and then focusing on optimising sales to boost ad conversions.
If you’re not sure how to run profitable ads, fret not – Chris and his team would be more than happy to show you how an optimised ad campaign can help keep your ROI consistent.
Improve your products and listings
Amazon sells millions of products each day – yes, millions. This is why improving your listings is downright critical to standing out among all that competitive noise and snagging the attention of interested prospects.
Product listings are a great opportunity to show prospects what it’s like to own and interact with your product. So, use anything you can to give them a good feel for it – professionally photographed images and videos, benefit and value-loaded descriptions, infographics highlighting how your product stands out and your overall value proposition, etc. – you get the idea.
Also, improve your product from time to time – add new features, tweak existing ones, and do whatever possible to offer a superior one.
Negotiate better rates
Just when you think you got a great deal, another supplier or freight forward is going to pop up, offering a better one. No matter which suppliers and freight forwarders you choose, you can always negotiate better rates with them.
Just be fair when asking them to offer you better rates as you don’t want to hurt your relationship but at the same time, you also want to keep that ROI figure as high as possible. For instance, you might request them to freeze the shipping fee once you satisfy a specific weight.
Avoid international transaction fees
Sky-high exchange rates and international transaction fees will absolutely cut through your profits like knife through butter.
With the right tool, however, you can get a lower exchange rate than what Amazon charges you to convert the currency. Digital Wallet, aka. e-wallet, can help you save a lot of cash, for example.
Final thoughts
We’ve answered a lot of pressing questions in this article, including:
- What’s a good ROI
- Define ROI
- What your UK ROI should be
- Is there an Amazon ROI calculator
Setting an ROI target can depend on many things – the budget you’re working with, you sales target, and product sourcing, just to name a few.
Work with Chris and his expert Amazon marketing team to make the best of your budget and nail those ROI targets each month.
