More people buy on Amazon than ever before, so why is it hard for many sellers to profit? The answer: rising seller costs, from cost-of-goods (including import shipping) to cost-per-click (CPC) prices, are driving many historically profitable sellers into the red. This post will highlight why it’s so hard to make a profit on Amazon and how sellers can use strategic marketing investment to get back into the black this holiday season and beyond.
What is Margin-Based Optimization?
Margin-based optimization is Quartile’s new feature that balances the costs of your Amazon account with sales revenue, adjusting the levers of your Amazon advertising campaigns to maintain and ultimately improve profit margin.
Why is Margin-Based Optimization Important?
With the costs of running an Amazon business rising over the years, many sellers have difficulty keeping track of the various expenditures and how they impact profit. Margin-based optimization allows sellers to input business costs into the Quartile platform, everything from cost-of-goods and general administration (GA), and then optimizes your account and advertising campaigns using our advanced machine learning algorithms. For example, many sellers who rely on products sourced from Asia saw shipping costs explode by almost 500% or more this year. These new costs hit sellers hard, impacting their ability to maintain inventory and ultimately their profitability.
How to Calculate Margin-Based Optimization and Profitability
There are four main buckets of costs associated with running an Amazon seller account:
- Direct correlations: costs increase as you sell more products, like cost-of-goods and shipping
- Inverse correlations: costs decrease as you sell more products, like warehousing and storage
- Independent: costs such as general administration
- Variable correlations: costs that are loosely correlated to your sales and overall business but also dependent upon tactics and strategy, like advertising
In practice, sellers should be calculating costs for each ASIN and forecasting the sales you expect to determine the budgets leftover for ad spending. Below are two hypothetical ASINs at the same price but with varying costs of goods. Each has set referral and FBA fees directly correlated with sales and delivered to Quartile via the Amazon API (these are examples and not exact).
In example two, the product moves faster and has a lower sourcing cost, leading to a higher potential margin despite fewer sales overall. Quartile’s system works backward from the other fees to establish a baseline of ad spend to reach the number of sales and estimated margin based on the forecast sales.
While advertisers can adjust their margin in the system, Quartile recommends starting with the existing margin and working on a step-basis toward your desired margin. In the above example, on ASIN 1, you would start with a 15% margin, allow the system to maintain it for you, and then start to step it up by a single or a half percentage point. Once achieved, adjust it up again. As with any A.I.-based optimization, the higher the spend, the more data the system has to optimize and the quicker the results, so if spending on your account or any particular ASIN remains low, be patient for your results.
Checklist: What Quartile Needs from Advertisers to Use Margin-Based Optimization
Quartile automatically receives the referral and FBA fees from the Amazon API, but our system requires a few extra data points to optimize. Below, you will find a checklist of data that we need to start using Margin-Based Optimization for your account.
- If Sellers are using Fulfilled by Merchant (FBM), you must input the overall cost as a percentage of sales manually or share it with your account manager
- Total Cost-of-Goods or how much you’re paying in combined shipping and materials/inventory
- Other Fees: non-FBA costs like storage, taxes, VAT, etc.
- Desired margin: Quartile recommends that you start with your existing margin and move it up as you begin
- Clients can set their margin at the overall account or individual ASIN level. To speed up the ASIN level optimization, send an excel document with your desired margins to your account manager to speed up the process
For more information, including an in-depth walkthrough of how the Quartile engineers built this new feature over the last two years, watch our CEO Daniel Knijnik explain it in an exclusive webinar on-demand. Ready to start optimizing your margin and earning higher profits on your existing inventory? Reach out to your Quartile account manager today. Not a current client, but think Margin-Optimization could improve your Amazon profits?
Set up a demo with one of our sales reps today!