If you’re an Amazon merchant, or plan to be, one of the most important things you need to learn is how to manage your inventory effectively. Why? Because your inventory is your biggest cost. Run out and you’ll lose sales. Buy too much and you’ll lose profit. Hold on to it too long and you’ll hurt your cash flow.

This was the topic of a conversation I had during a recent webinar hosted by Avalara with two very successful Amazon merchants: Adrienne Kosewicz, owner of Play It Safe World Toys and Valerie Milovic, owner of Better Than Coffee. We all agreed there are three key secrets to managing your Amazon inventory.

Secret 1:  Fully understand the Amazon landscape.­­­

Kosewicz and Milovic are both students of Amazon processes and understand how their products best fit into the Amazon landscape. Both merchants have embraced Fulfillment by Amazon (FBA) as the best way to maximize their relationship with the online giant. Yes, there are additional costs, they warn, but FBA is a critical and effective service for essentially outsourcing a merchant’s warehouse and inventory management. Not only does FBA simplify your business, it also provides more opportunities for free shipping and, better yet, Prime shipping — options that are now practically base expectations for customers.

If you’re an FBA seller, deciding between establishing yourself as a multichannel seller as compared to becoming an Amazon exclusive seller can also affect your inventory strategy. Being an “exclusive” Amazon partner has its benefits, including better customer service and access to free Lightning Deals. That said, the partnership also comes with the risk of relying on Amazon entirely for the success of a product line, and the decision to put all your eggs in one basket should not be taken lightly.

Whether or not you decide to engage with the FBA program, it’s critical to maximizing your inventory management that you learn about and consider this opportunity in the context of the Amazon landscape.

Secret 2: Let your customers drive your inventory.

Ultimately, your inventory decisions should be driven by customer demand. Your challenge is to understand that demand as best as possible so you can plan out your purchases and inventory levels. While there’s no silver bullet for calculating product lead time, both Kosewicz and Milovic urge you to carefully observe customer behavior as it relates to all things inventory. Here are their tips and tricks to getting it right:

  • Closely monitor sales. Products that were doing well last week may not be doing so well this week or vice versa. With such fickle rates of purchases, you don’t ever want to lose money just because you’re over- or under-stocked.
  • Use historical data to forecast. Though sales often fluctuate, sometimes general truths can apply. Look back at your sales from last year (and the years before that) to see if there are any general, seasonal trends you can take into account. Then, consider those findings when planning and buying inventory.
  • Utilize Amazon’s reports by product line. This is a great asset to help evaluate which product pages are garnering the most views. From there, you can compare that activity to past clicks to identify trends.
  • Watch your competition. How are your competitors promoting their products? What are their prices? Understanding the competitive terrain and adapting to it will give you a leg up.
  • Pay attention to customer reviews. Respond quickly to negative reviews and try to remove negative seller feedback about your company. Reviews can have a dramatic impact on demand, so be proactive about interacting with customers if they’re unhappy.

Every good Amazon merchant knows that customers drive their inventory levels. Great Amazon merchants know the right strategies to engage with to better predict that demand.

Secret 3:  Monitor your products closely.

Of course, customers drive your inventory. But how inventory is managed separates the super-successful merchants from the average ones.

Kosewicz and Milovic both highly advise spending time optimizing your products’ classification for keywords and search. This has a dramatic impact on how customers find your product as well as on any promotional campaigns you may run. Take the time to classify your products into categories that will best match keywords and eyeballs so that they’re picked up by Amazon’s search algorithms.

Kosewicz emphasizes the importance of automating sales tax compliance, particularly if a merchant is using FBA. All sellers are responsible for sales tax filing and remittance, even if Amazon is the one to decide where to store your products. Amazon puts FBA sellers’ products in warehouses based on delivery times and, more often than not, one SKU can be in several states at any given time. Manually managing these various processes can be risky, onerous, and time consuming.

Keep an eye on your products, their classifications, and their locations in order to maximize turnover and profits.

Amazon is an undeniably profitable platform for countless small business owners who otherwise wouldn’t have a place to sell products to a large audience. But, like anything in life, success requires hard work, particularly when it comes to managing your inventory.