Many people start off selling on Amazon as a way to get rid of a few things around the house or to generate a bit of extra money. They see it more as a hobby than a business and then wonder why they are not doing as well as they hoped. In my book and blog, I encourage people to treat this as a business from day one. I talk about incorporating, sales tax certificates, business bank accounts…it can be a little overwhelming for someone who has never run their own business before.
As a business owner and entrepreneur for nearly 20 years, if I’ve learned one thing it is that I have to treat my business like it is IBM if I’m going to succeed. Running a business is a lot more than generating income (as exciting as that is!). It is a mindset for success. It is about applying strategy to your business and leaving as little to chance as possible. It is also about the “why” of the business. I mean, why the heck are we working so hard? It isn’t for money. It is for what we want the money to achieve for us. Each one of us has a very personal, very meaningful dream that is motivating us, right? If you missed the blog post on the “Zen of Selling,” check it out.
Years ago when I was running my first business, I was introduced to a small business expert named David Shepherd. David’s CV is extensive both as an entrepreneur, consultant, MBA and business school professor. Organizations have paid him millions of dollars to speak to their groups over the years about how to improve their businesses. In his workshop he took me and a roomful of other business owners through an eight-step process designed to help us think about why we were in business and what we needed from it. Most importantly, he helped us figure out how to get there. The plain fact is; most people don’t understand how to get their business to really work for them. It was called “Your Business or Your Life – 8 Steps for Getting All You Want out of BOTH.” Talk about stating it like it is!
Isn’t that what we all want? Money and a life to enjoy it with? The first time I took his workshop/worked through the 8-steps (yep, I’ve done it at least once for every business I’ve owned including this one), it blew my mind. He made me think about my business in a way I never had before. He helped me identify parts of my business that were consuming all my time and resources with the smallest return and focus on the parts that were generating the most margin with the least amount of effort. Then he helped me shift my time and activities to those that generated the most income. Seems obvious, right? Wrong! I was completely in the dark as to where my profits were really coming from and where I was wasting my time.
Clients I thought were profitable because they were big were actually very low margin and sucking the life out of me whereas other pieces of business that were smaller but low maintenance were cash cows for me and supporting the big losers.
His Writings, Classes And Podcasts Have Been Such A Huge Help For Me Over The Past 15 Years Or So, I Approached Him To Do A Free Webinar With Me On “Margins” For My Readers This Coming Wednesday Night (October 16) At 7:00 P.M. Central Time (8:00 Eastern, 6:00 Mountain And 5:00 Pacific). Click Here To Register Now.
I have a pop quiz for you on margins below, the topics which I will cover more in the webinar, plus David has a free podcast from one of his newsletters for you on “The High Imperative Margin.” Check it out!
In the FBA seller community we talk a lot about margins when we buy a product (will it be profitable?) and price a product, but not so much about our overall business. Sometimes people hire me to help them figure out why they are not making the money they hoped. Sometimes it is about their inventory – they are buying a lot of long-tail stuff, their pricing is off, etc. – but often it is about how they are running their business. They are not aware of their true expenses and how they are impacting the business. They don’t understand what margin they need to achieve in order to make money.
Pop Quiz: What Is Every Business’ Number One Expense?
Wait, what? Yep, taxes are just money down the drain. You never get a thing for it, not even a shiny star from the IRS for being such a responsible, honest citizen and owner. It is a complete suck of time, resources and money. So what can you do about it? Quite a lot. For the past 20 years my family’s effective federal tax rate has been below 15% – well below. Last year it was 8%. Even when we were making nearly $200,000 a year in the go-go days of the late 90s and early 2000s, we were around 12%. Other people in our tax bracket were paying up to 33% at the time. If you do the math, they were paying $42,000 MORE a year than us to Uncle Sam with the same income. Is it worth learning about taxes to keep thousands of extra dollars in your pocket at the end of the year? Is it worth paying your CPA a couple thousand a year to keep this kind of money legally in your pocket? It is to me. These aren’t secrets or shifty money moving strategies, these are the legitimate deductions in the tax code used by all the big companies that small guys like us don’t usually think about. This is why I encourage all serious sellers to incorporate their businesses. These deductions are not available to individuals, only corporations.
Pop Quiz: T/F Selling Product With A High Turnover At A Low Margin Is More Profitable Than Selling Fewer Products At A High Margin.
You know the answer is false and yet, how often do we see other sellers low-balling product? How often do we give up and join them because we are afraid our units will never sell at a decent margin? To my mind, even if I’m still in the black on a product, if I’m not getting my margin it’s a loser. Why is this? Partly because I have only so much time, energy and money with which to work. If I’m going to spend 10-20 hours a week on my business, every hour needs to work and every hour needs to produce. It takes time to prepare inventory to send to Amazon. It takes time to shop, plus money that I won’t see back for about a month at the very earliest. Given that, I can’t afford to buy, process or manage inventory that isn’t at least doubling my money. Also, I know that some of these will turn out to be losers. It’s a reality of our business. Amazon may undercut me, a new version will come out and no one will want the old. It happens. And because it happens, I need most of my inventory working really hard for me so that these losses don’t take me out of the game.
Part of this is a trick question because there is philosophy and strategy behind the volume argument. Grocery stores, for example, survive on 2.5% margins. But we are not running grocery stores. We are small businesses without the resources of a major business. Recently Chris Green and I discussed our revenues from Amazon on our book sales. He felt that I would make more money if I lowered my price because my volume would increase. I disagreed with him. When we discussed last month’s royalties, he paused. Then he said, “You need to write another book and then another book and then another one after that.” Chris is selling a LOT more books than me and that is a good strategy for him. Why? Because he has something else to sell. His book is his “loss leader” to use a grocery term (even though he is still making money on it). Many of his readers sign up for ScanPower when they start their FBA business, which brings him steady monthly revenue. In my case, my book is a source of (mostly) passive income. David would call it “outside cash.” My margins matter a lot to me because I don’t have an add-on product to sell. It has to stand on its own. Lowering price and raising volume will not increase my profits…just the opposite. I have fixed monthly costs for the system that takes people’s money, runs my database and my emails. My blog, my credit card processor, PayPal…they all have fixed and variable fees that need to be completely supported by the sales of the book. I pay affiliate commissions on my eBook. Amazon takes its commissions on the softcover. My business model is different from Chris’ on the book front, but the same on the Amazon front. Without good margins, our businesses are dead in the water. I see too many people leaving the Amazon business not because they weren’t selling stuff, but because they were not keeping their margins up. I’ll talk more about this in the webinar.
Pop Quiz: T/F Raising My Prices By 5% Will Increase My Profits By 5%.
A 5% raise in your prices could conceivably increase your profits by 25%, 50%, 100% or more. What?!? In our business there are set expenses and variable expenses for every item we sell. Amazon fees are set, for example, commissions are variable. What most people overlook, however, are all the costs of keeping the lights on in our business. Everything from our banking fees (if any) to equipment and supplies, to taxes, cost of inventory, electricity, and more. These set expenses have to be covered every month. Any increase in income without increasing these fixed costs go directly to your bottom line which is why a 5% increase in income can have a much bigger impact on your pocketbook than 5%.
Pop Quiz: T/F The More Inventory I Have At Amazon, The More Money I’ll Make
…and True. It is kind of a trick question. You do have to have stuff to sell in order to make money. What matters most is that it is high margin inventory with a decent turnover. One seller I know takes home (net profit) over $100K a year with only a couple hundred SKUs. Another seller has thousands of SKUs but is only taking home about $18K. Both of them have solid business models. One seller has the ability to buy large lots of inventory at a time. The other is very limited on inventory dollars and is starting small. The fact is, it is not the number of SKUs or even the number of units at Amazon that measures success. It is margin and turnover. The person with fewer SKUs has a larger number of units of good-selling items in grocery, beauty and other consumables. The other person has a lot of books in addition to toys, grocery, household goods, etc. They have fewer units of more goods. As long as the margin is there and there is decent turnover, then both sellers will do well. The smaller seller can build themselves up to the point where they can buy larger lots and take advantage of deals like that.
In my case, I started with books because of their margin. I can buy books for 10 cents to $2 that I routinely sell for $7-$15 and more. Books are not fussy and don’t require bagging or special packing skills. I can spend 2 hours at a book sale and walk out with 100 books worth selling. The downside is I have to process each one. With grocery or multiples of toys, etc., it is much faster to process inventory and get it up to Amazon. If you want to get the most bang for your buck and dollar return for your hour spent, then the answer is margin so you can make more money with less out-of-pocket dollars spent. You must have a fair amount of inventory that is turning quickly or your cash flow will suffer. It is OK to have high-value, high-margin “long-tail” sales in your inventory, but it has to be 20% or less of your overall inventory. You need the majority of your inventory to be selling at your desired margin. If you have inventory that you can replenish rather than having to constantly seek new items to sell, that is a more efficient use of your time and money. Skip McGrath shared in a recent blog post how he tests his products and once he has a winner, he sells it for as long as he can. He has fewer SKUs but each one is a performer and he has the ability to get more of that inventory when he needs it.
Pop Quiz: T/F In Order To Get A Handle On Your Margins, You Need To Track Everything Religiously.
One more thing high margins give you is what David calls “sloppy business” that doesn’t require as many spreadsheets or brutal efficiency. What?!? Identifying and wringing out every penny of cost takes a lot of time and measurement. I don’t know about you, but I hate spreadsheets and tracking every minute aspect of my business. I try to off-load that kind of pain to someone else when I can. When you are running a business with 5% net profit margins, you have to watch everything. When you have a 30% net profit margin, you can focus more on the activities that make you money rather than save you money.
When you are small like us, sloppy makes sense. Measurement and tracking are important, of course – but how much do you need to do? Luckily, Amazon keeps incredible records for us. From the minute your stuff gets the warehouse, Amazon has you covered. Thank God! You still need a bookkeeping program to help you track everything on your side of the UPS delivery (cost of inventory, cost of supplies, taxes, etc.,) but it doesn’t have to be quite as intensive as you may fear. David’s free podcast “The High Margin Imperative” talks more about this concept. During the webinar, I will show you some of Amazon’s reports that can help you see inside your business.
In Wednesday’s webinar, we will also talk about two margin-related business concepts and how they apply to our Amazon business specifically. David will talk about the concepts and how they work. I’ll focus on where to find the information we need either in our Seller Central or elsewhere. The first is “Excess Cash” and how we can reduce expenses to maximize cash flow in our business. The second is “Outside Cash” and how we can leverage multiple streams of income to increase revenue passively. In this portion of the webinar, David will talk about affiliate programs (including his) and I’ll talk briefly about other pathways Amazon gives us to generate income. There will also be a Q&A session at the end.
Frankly, it is very easy to let your business consume your life and forget about the living and enjoying part. If you feel you’ve become a slave to your business, there’s a problem. Now, to be accurate, we all feel like slaves around the Holidays. It is our busiest time of the year. But overall, it shouldn’t be like that most of the year. Please come join me on Wednesday!
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Register for Wednesday’s free webinar with me and David.
Check out David’s free podcast on The High Margin Imperative.