Why Amazon Retailers Need to Care About Adjusted Gross Margin
- October 27, 2015 | Marcus DeHart
A few years ago my neighbor noticed standing water in his front yard next to his driveway. A few weeks later he received his water bill for more than twice what he normally paid. That’s when he realized that he had a busted pipe between his meter and the house and that was driving up the cost of his household water. The same can happen with your Amazon retail business if you don’t keep your eye on your adjusted gross margin.
Figuring Your Margin
When sourcing products, one of the many things you need to take into consideration is your margin on each sale. It’s a simple formula expressed as a percentage: Margin = (sale price - purchase price) ÷ sale price. So a widget you bought for $20 and sold for $30 would have a margin of 30 percent.
But from that $10 profit you need to pay a few people. That’s where adjusted gross margin comes in. The formula for adjusted gross margin isn’t quite so simple and could look a little different for each seller. In its rawest form, adjusted gross margin = (sale price - (purchase price + all other expenses)) ÷ sales price. That “all other expenses” can be a bugger to nail down, but the more precise you are with your calculations, the better equipped you’ll be to make good business decisions about the profitability of your merchandise.
FBA Can Help
In “Navigating Your Fulfillment by Amazon Payments Report” I shared how Amazon’s payments report can equip you with data that can help you fill in some of the details. Shipping, commission, and other fees, can be easily allocated to specific products you sell on Amazon. But the payments report doesn’t show you your overhead costs such as prepping, storing, or insuring products.
If you use Fulfillment by Amazon, you’ll be able to get a better picture of what some of these costs are. You can even pay Amazon to prep and label your products, which makes each fee attributable to a single unit.
But even FBA’s fees need some tweaking to reach your adjusted gross margin. For example, their inventory storage fee is a separate line item each month. Storage is assessed by how many cubic feet your inventory occupies during the month. Figuring out how much storage for each unit costs can be tricky because if a unit is in the fulfillment center for only a few days, the storage fee will be prorated.
So while a single book might cost $0.02 to store for 30 days, if it sells on the 15th day of the month, you’ll only be charged $0.01 for that book. Add to that the complexity of calculating the volume of each unit and whether it’s standard size or oversize to determine the rate for storage. Oh, and did I mention that the rates change during the holidays?
The Easy Approach
You could always approach take the easy approach to adjusted gross margin by just summing “all other expenses” and evenly distributing them among the number of products you have in stock during a given time period. That could work if all of your products are roughly the same size and weight. But if you're selling sporting goods, with baseballs right alongside bowling balls, your adjusted gross margin will be skewed because of the size and weight difference.
FBA Revenue Calculator
Amazon does offer tools to help you figure out your adjusted gross margin or at least get you looking in the right places to figure out your own expenses. With the Fulfillment by Amazon Revenue Calculator you can enter the name, UPC, or ASIN of a specific product, and the calculator walks you through figuring out how much you can make by selling and shipping it yourself versus using FBA.
You enter your price and shipping into then fill in your expenses, such as order handling, pick & pack, outbound shipping, and so on. These might be difficult to nail down to a specific cost per unit and might not easily align with your own fulfillment methods, but at the very least they point you in the direction of finding where your own “hidden” costs might be. The calculator then states how much you fees will be and provides a breakdown by fulfillment cost and your margin impact.
The calculator has another trick up its sleeve. Under the bar charts it creates on the right, you can enter how many units you expect to sell in a month so you can see your margin impact over time. You can also play around with sales lift if you expect demand for your products to increase over time.
Fine Tune Your Numbers
Now, unless you sell only a handful of products, using the FBA Revenue Calculator to figure out your adjusted gross margin isn’t a scalable solution. But at the very least, it helps you identify expenses that you should include in your own calculations.
From there you can develop your own calculator using a spreadsheet like Excel. You an integrate it with your data from the Amazon Payments Report and begin to fine tune your numbers to reach your adjust gross margin and fix any leaks before your expenses eat up all your profit.