Sales and profitability are on seemingly opposite ends of a spectrum. This spectrum may also look like a teeter-totter, as an increase in one, often leads to a decrease in the other.
An increase in sales requires an increase in inventory production, warehouse capabilities, marketing, ad spend and other expenditures. All of this is usually detrimental to profitability, at least in the short run.
Profitability, on the other hand, requires a “reigning in” of these expenditures. And, if done with the wrong timing, this reduction in spending can hurt sales. I drew a little diagram as an illustration of how sales and profitability can affect one another, and which factors contribute to each.
Finding the balance between sales growth and profitability requires a constant give-and-take. I refer to this as ratcheting, or advance-and-retreat. It’s like taking 3 steps forward and 1 or 2 steps, you are always moving forward, but you have to balance the demands of both sales growth and profitability as you go.
Let’s examine the factors that affect this delicate balance.
Factors That Contribute to Increased Sales Volume
- Search Impressions – If you can increase the number of times your product shows up in search results, you should see an increase in sales. This generally requires an increase in ad spend.
- Click Through Rates – Another way to increase sales is to increase the click-through-rates (CTR) on the impressions your product is getting.
- Impression Share – How much real estate does your brand occupy on a given search result page? A higher impression share means broader exposure and more sales for a given keyword.
- Search Rankings – How high on the page does your product appear for your target search terms? Positions 1-10 will perform a lot better than positions 10-20. Improving these rankings usually requires targeted ad spend in the right places.
Factors That Contribute to Increased Profitability
- Cost of Goods Sold – Obviously, if your product costs less to make (and you can sell it at the same, or higher price) you will make more money.
- Fulfillment Fees – This is one of the most overlooked factors to Amazon profitability. By reducing your packaging size, you could potentially increase your profitability. Amazon fulfillment fees (FBA) are fixed costs, so if you sell a lower priced item, FBA fees will eat up more of your profits as a percentage. By simply increasing your price by a few dollars, and/or decreasing the FBA fee, you can dramatically improve your profitability.
- Referral Fees – There is not much you can do about Amazon referral fees. Most categories are around 15%. Amazon does offer brand rebates to brand registered sellers for driving traffic from off of Amazon using attribution tags. So, if you are able to drive traffic to Amazon, this might be a way to save 60% on your Amazon fees (usually a 10% rebate off final sales price, so you pay 5% instead of 15%).
- Inventory Storage Fees – I always tell my clients that Amazon is not a warehouse. They are happy to store just enough inventory for a 30-60 day turn, but when your inventory starts to stick around longer than that, it can get expensive.
Factors That Balance BOTH Sales AND Profitability
- Advertising Spend – Ad spend is the single most volatile factor in this whole equation. More ad spend means more sales, but too much ad spend means smaller profits. Less ad spend means better profits, but is also usually tied to lower sales volumes. Finding the right balance is not easy, but is key to making it all work.
- Selling Price – I touched on this under fulfillment fees, but if you can increase your price, you will likely see an increase in profitability. The downside of this (and why this factor is in the middle), is that an increase in sales price, could lead to fewer sales. Ironically however, I have seen situations where an increase in sales price has actually increased sales volume as well as profitability. Never take your sales price for granted. Always test.
- Conversion Rate – Conversion Rate (CVR) is usually a direct reflection of your listing quality and relevance. If more buyers are seeing what they expect to see when they hit your page, CVR will go up, and an improved CVR will increase sales volume AND profitability.
I hope you found this analysis helpful. If you would like more information about improved profits and sales, check out these free reports:
3 Secrets to Improved Profitability
Happy Selling!