OK, I guess all this rain in Dallas is making me stir-crazy, but the theme song for “Rawhide” is stuck in my head…and now in yours. Enjoy. Our community talks a lot about acquiring inventory, fees and stuff like that, but we don’t talk as often about moving it out of the warehouse. In August, Amazon will assess long-term fees again: it seemed like a good time to talk about accelerating inventory turnover.
It can be a very confusing topic because on the one hand we (established sellers) talk about rank and how that indicates if something will sell quickly, and then we say that rank is a snapshot in time and doesn’t always indicate that something will sell. It makes you wonder if there is any way to tell how fast something will sell if you buy it. To help me this week, I asked Skip McGrath, Nathan Holmquist and Robert Prince to share their thoughts on increasing inventory turnover:
Skip McGrath is one of the top online sellers on eBay and Amazon. He has published many eBooks about selling online. His July 2013 newsletter provided a detailed analysis of how he decides whether or not to sell an item on eBay or Amazon.com. Turnover was an important part of that analysis. There is one product he has, for example, that he sells on Amazon instead of eBay not because he makes more money per unit (he doesn’t), but because he sells so many more units per week on Amazon than eBay. The difference in volume more than makes up for the difference in profit-per-item over the course of a week. Skip studies his inventory carefully and creates tests for himself to tweak his sales for maximum profits.
Q. When you are looking at a new item to possibly sell online, how do you know how fast something will sell? How do you set up a test for yourself?
Skip: For existing products the Amazon sales rank usually gives me a guideline. I figure out the profit margin for the product based on marketplace and then I list on both. I often use Amazon to fulfill my eBay orders so I have to take that shipping, etc., into account in my calculations. My recent newsletter breaks that out in more detail. I observe my sales. I am looking for how I can make the most profits per week rather than per item. If I’m selling one unit per week on eBay and 10 on Amazon, obviously Amazon is the better marketplace for that particular product.
Q. Do you ever list a product on both marketplaces?
Skip: Yes, if the sales and margins support it. eBay and Amazon.com tend to have different buyers with different motivations. This is why testing is so important.
Q. You add unique items to the Amazon catalog where there isn’t any rank, obviously. What do you do then?
Skip: There is no way to really forecast that – it is always a matter of experimenting. What I do is create and launch a lot of items and then watch them. It typically takes about two-to-three weeks to get the first sale of a brand new item that is not currently in the Amazon catalog. Once that waiting period passes, if an item keeps selling then I stick with it. If something isn’t selling, I start lowering the price until I get rid of it. Over time, I’ve ended up with a large number of great-selling items and those are the ones I reorder.
Nathan Holmquist was one of the early FBA sellers. When I read his eBook, it opened my eyes to how the program worked. It was a real “Aha!” moment. Fee changes at Amazon have cut into profits such that so-called “penny” books are no longer a source of quick profits, but the principles still stand and Nathan moves a huge volume of books. He recently conducted an experiment with 272 books that he bought at a book sale for $100 a bag and priced at $8 and up. You can read the details of his experiment and results HERE. Approximately 20% of his books sold in the first month which is typical for him.
Q. How do you increase your inventory turnover rate while maintaining profits?
Nathan: I have a three-step approach: 1) use a repricing program; 2) concentrate on volume and 3) track my results.
Q. How do you avoid the dreaded “race to the bottom” when you use a repricer?
Nathan: I set a “floor” or minimum price for my repricer. Right now I’m trying several experiments where my pricing floor is set at $7.95, $8.95 or $9.95. While there are often FBA sellers priced below me, I’ve learned that price is not always the factor when making the sale. Amazon buyers will buy based on condition, feedback and even store name. I had a person leave me feedback once where he told me the only reason he purchased my book was because he liked my store name (Book to the Future).
Q. When you talk about volume, you are still talking about “penny books” right?
Nathan: The term “penny books” came about because these were the books that merchant sellers were selling for a penny. With the $3.99 shipping cost, that made $4 the lowest priced book you could buy on Amazon. With fee changes and with FBA sellers now dipping below $4 to get the sale, I don’t sell penny books any more. Now my criteria are a merchant-fulfilled price of 2 cents or more with a rank below 2 million. I will usually buy if the cost of the book is below $1. If I set a minimum FBA price of $8.95 that leaves me with approximately $4.85 after fees. If I buy the book for $1 and spend another 25 cents to ship it in, that gives me a cost of $1.25 and a profit of $3.60. I normally buy 200-300 books at a library sale so this adds up.
Q. How does tracking your results help you improve your inventory turnover?
Nathan: I’m obsessed with documenting all the costs, sales, fees and turnover rate for all of my sourcing techniques. That way I can focus on my winners and strong performers and continuously improve the quality of my results. I share with my readers so they can improve their profits, too. My first book sale experiment took place in March of 2013. I bought 10 bags of books for $10 each. Here are some of my stats after the first two months:
Number of Books Purchased: 272
Number of Books Sold: 103
Percentage of Books Sold: 38%
Sales Revenue after all Fees: $529.72
Net Profit: $317.86
Per Unit Averages:
Cost Per Book: 77 cents
Gross Sales Price: $9.44
Amazon Fees: $4.30
Net Sales Price: $5.14
Return on Investment (ROI): 568%
As you can see, I sold nearly 40% of the books in the first two months. While I might end up with quite a few books that won’t sell for a while, the storage fees for an average book is only 1-3 cents per month. I will make periodic updates to this experiment on my blog: Book to the Future
Q. How long will you keep them up there if they don’t sell?
Nathan: At a rate of 2-3 cents per month storage costs, I’m willing to wait a couple of years to see if they sell. The majority of the books I send up sell in the first 3-4 months.
Robert Prince was my first consulting client about 18 months ago. During that time he has grown his business from zero to over $20,000 in revenues a month (on a normal month – the holidays are much more than that). One of the reasons for his success besides a lot of hard work is his thoughtful, analytical approach to the business side of selling on Amazon. He is constantly learning and has a strong commitment to quality of his inventory. His 100% approval rating with 1000+ feedback is a testament to his success. Lately he has been focused on increasing his inventory turnover down to three months or less. Robert is an avid user of his repricer to keep turnover going, but he avoids the “race to the bottom” that is so common among less experienced repricer users.
Q. First, can you explain how repricers can contribute to the “race to the bottom” so new sellers understand the danger?
Robert: Typically, when two sellers are competing and they both have their repricers set to beat the other guy, even if it is only a penny, eventually the price will be driven down until it reaches the minimum that one or the other has set. That’s why you’ll often see prices so low that the seller is losing money every sale they make. That’s a good way for nobody to make a living.
Q. OK, what if they set their repricer to match the other seller’s lowest price. Doesn’t that fix the problem?
Robert: No. If one of your competitors has their repricer set to beat all other prices, even by a penny, you will end up with the same result, even if you only set to match the low price. It will just take a little longer. So don’t think you are NOT causing races-to-bottom just because you set to match, you may be.
Q. So what’s the answer?
Robert: All you need to do is set your re-pricer so that it follows a set of rules I call, “Why Can’t We All Just Get Along?” (If you were born after 1980 or so, you probably don’t get the reference). The rules incorporate the following assumptions:
- You want the Buy Box as often as possible. Even if there’s another seller offering the identical item for a lower price just another click away in the “More Buying Choices” box, the Buy Box wins the majority of the time.
- You want to be within 2%-3% of the lowest price. You do not need to be the lowest price to rotate through the Buy Box, but you have to be close. If the low guy is 30.00, you can be 30.40 or 30.50 and still have time in the buy box and make regular sales. If the low guy is Non-FBA, you can exceed them by about 3%, (sell for 30.90). These numbers are not exact to the penny and there are other factors that Amazon uses to determine how much time you spend in the buy box, such as your feedback score, your inventory level, your metrics, and your astrological sign.
Just kidding about the last one. But no one outside of Amazon knows exactly how its complex algorithms determine things such as sales rank or how much Buy Box time a seller gets.
Q. How do you get the Buy Box without racing to the bottom?
Robert: Set your repricer so you are beat by 1.9% by FBA Sellers, and 2.9% by non-FBA Sellers. Here’s what will happen: Because you are not the lowest, the seller that is lowest will not see you as a threat, and will not lower prices and start a price war. But because you are close enough (within 2% or 3%), you WILL find yourself in the buy box, and you will get sales. Furthermore, you will be earning an extra 2% or 3% profit margin on every sale above what Mr. or Ms. Lowball is getting. And then, in best case scenarios, the low guys catch on that you are getting as many sales as they are because of the Buy Box situation, and they let their price creep up so they can increase profits. And then what happens to you? That’s right, you continue to stay 2-3% higher, still get the Buy Box, still make more profit.
Q. Obviously, this approach works best for items where you have multiple units. Can you give us a recent example of how it works?
Robert: A product I buy for 3.99 was selling at an okay profit at $10-11 when I noticed one hadn’t sold for a while. I investigated and discovered a price war had dragged the price down to 8.50, barely break-even. I applied the “Why Can’t We All Just Get Along” pricing approach to the item, and before long, as others noticed (I assume), the price started to climb until six FBA sellers were taking turns in the Buy Box at prices ranging among $14.70 and $14.99.
It is a lot more fun than fighting like hell to make a few cents!
Q. You are working to sell your inventory in three months or less. What do you do if a product has been sitting on the shelf for more than three months?
Robert: I’ve got enough margin in my products that I can afford to drop prices if I need to. I date my MSKUs so it is easy to pull up those that are at or past the three-month mark without a sale. At that point, I will usually be more aggressive in cutting prices. Since my goal is three-month turnaround, I’m not sending in as many – if any – long-tail sales. These items should have sold and I examine them more closely to find out why they aren’t. I can set my repricer to drop all of the laggards by a dollar (or whatever I choose) and/or I can reprice them manually.
By the way, all three sellers agree that they have a floor that they won’t go below. If there are a few crazy people selling product at a loss, they will wait them out in most cases or will at least handle the decision manually rather than automatically. Hopefully these pointers will help you accelerate inventory turnover and, thus, make more money! Unlike other industries where I have worked, the FBA community is extraordinarily generous to its competitors. Like Skip, Nathan & Robert, many successful sellers are willing to share what they’ve learned. When I first started, I spent a lot of time at the FBA Forum and listening to Scan Power and Kat Simpson’s online shows. I read eBooks and asked questions. Be sure to check out my “helpful blogs and websites” page where I list some of my teachers. Do you have an approach you take to accelerating sales in your inventory? Please share in the comments below!