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What Is A Good ROI For Amazon FBA?

What Is A Good ROI For Amazon FBA?

As an Amazon FBA seller, you may be struggling with questions about the Amazon FBA Return On Investment (ROI). If you are a beginner, you hear other Amazon FBA sellers warning you about selling items that give a minimum of 100% ROI for Amazon FBA to be profitable for you.

You may be hearing the term for the first time, have no clue what Amazon FBA ROI means, or why should you bother about generating a good ROI for your Amazon FBA business.

On the other hand, as an experienced seller, your challenge is more about achieving a correct Amazon FBA ROI percentage given your current stage of business.

Many FBA sellers do not bother going in-depth in understanding Amazon FBA as a business. That’s why they are clueless about how profitable Amazon FBA is, how much it costs to sell on Amazon, what is a good ROI for Amazon FBA business, and why should they achieve a particular ROI for their Amazon FBA business. This becomes one of the major reasons for their failure.

In this blog post, we will help you understand what Amazon ROI means, how to calculate ROI in Amazon, how is ROI different from profit margin, and what is a good ROI for Amazon FBA sellers. So let’s get started.

What Is Return On Investment (ROI)?

Return on Investment (ROI) is nothing but the return generated on every unit of dollar spent. Concerning your Amazon FBA business, Amazon FBA ROI is the net profit you earn from incurring the cost of buying a unit of an item you’re selling on Amazon. It is the amount of net profit you earn from your investment in items you are selling on Amazon.

Accordingly, the two components involved in calculating ROI are the net profit earned and the expense incurred on the inventory.

ROI is simply a profitability metric used to evaluate how well your investment has performed. It measures the amount of returns you get back on the cost you incurred on a particular investment.

Concerning your Amazon FBA business, you use ROI to:

  • ensure that your money or capital is invested properly
  • you are earning a profit after all your fixed costs have been accounted for

Many new Amazon FBA sellers aren’t aware of the costs involved in selling items via Amazon FBA. For instance, they consider the ‘Amazon FBA Selling Plan’ cost but fail to take into account other costs that Amazon charges over and above the selling plan. These costs may include fulfillment costs, inventory storage costs, returns processing fees, etc.

Read: Amazon FBA Fees: All An Amazon Seller Needs To Know

As a result, these FBA sellers come up with the wrong ROI percentage for the items sold on Amazon as an FBA seller.

ROI can be calculated by considering the total net profit earned from your total investment in the inventory or simply by calculating the net profit earned from the cost incurred on buying a single unit item sold on Amazon.

ROI is calculated in percentage, that is, the percentage of net profit earned on the cost incurred on purchasing the inventory sold.

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How Do You Calculate ROI On Amazon FBA?

The formula for calculating Amazon FBA ROI is as follows:

ROI = Net Profit/Cost of Goods Sold

Note here that we are taking the net profit and cost of items you sell on Amazon for calculating the ROI. Net profit is nothing but the returns you earn on the items you sell after all the costs including the taxes have been excluded from the total profit. Cost of goods sold is the total cost you incur or the amount you invest in the item you sell on Amazon as a FBA seller.

Read

The cost incurred on items you sell as an Amazon FBA seller is broken down as follows:

  1. Amazon Fees
    1. Referral Fee
    2. Fixed Closing Fee
    3. Variable Closing Fee
  2. Fulfillment Cost
    1. FBA Fulfillment Cost
    2. Service add ons
      1. Inventory Placement
      2. Opaque Bagging
      3. Tape
      4. Label
      5. Bagging
      6. Bubble Wrap
  3. Shipping to Amazon
  4. Storage Cost
  5. Other Costs
    1. Cost of Goods Sold
    2. Miscellaneous Cost

Read: How To Understand And Calculate COGS in Amazon FBA Store?

Amazon FBA ROI Example

Let’s take an example to understand how you calculate ROI an Amazon FBA. Let’s say you bought a Lego Icons Bonsai Tree Building set and want to sell it on Amazon. The following table gives the cost and the price of the per unit of the item.

Particulars  Cost/Price per Unit in $
Price of the Set $40
Amazon fees $7
FBA Fulfillment Cost  $7
Storage Cost $1

Total Cost per unit = Amazon Fees + FBA Fulfillment Cost + Storage Cost
= $7 + $7 +$1
= $15

Price per Unit = $40
Net Profit = $40 – $15 = $25

Thus, ROI = Net Profit/Cost of the Item = [$25/$15] x 100 = 166.66%

Thus, selling a Lego Icons Bonsai Tree Building set as an Amazon FBA seller generates an ROI of 166.67%. You are not only able to cover your fixed costs here but earn profits on selling this item as an FBA seller.

Amazon Revenue Calculator

Amazon Revenue Calculator is a tool that helps you see real-time comparisons between various fulfillment methods, that is Amazon FBA and Fulfillment by Merchant (FBM). It gives you an estimate of the cost you’ll incur per unit item and the net profit margin you’ll earn on such an item under FBA and FBM fulfillment methods.

All you need to do is provide the details of the product you want to sell from the Amazon catalog and it will serve you with a detailed cost and net profit margin comparison between FBA and FBM methods. To get the cost and net profit margin estimate for FBM, you will have to fill in the cost of fulfillment, storage, etc. manually.

Amazon Revenue Calculator makes it super easy for you to get a rough estimate of the cost you will incur on the item and the net profit margin you will earn by selling the selected item. You can also use the Amazon Revenue Calculator to estimate your ROI on selected items and see if selling such items is profitable.

Below is the screenshot of a comparison of per unit cost and net profit margin for selling LEGO Icons Bonsai Tree Building Set between FBA and FBM methods.

What is a Good ROI For Amazon FBA?

As you can see in the above screenshot, it costs $15.04 to sell one unit of LEGO Icons Bonsai Tree Building Set. The total cost per unit of an item includes Amazon fees of $6.99, Fulfillment Cost of $7.83, and Storage Cost of $0.22. With the per unit item price of $39.99, selling a unit of LEGO Icons Bonsai Tree Set generates a net profit margin of 62.39% ([Net Profit/Sale Price] x 100 = {[$39.99 – $15.04]/$39.99} x 100).

Likewise, the ROI on LEGO Icons Bonsai Tree Building Set is [($39.99 – $15.04)/$15.04] x 100 = 165.89%.

Read: Is Amazon FBA Worth It Doing Full-Time?

Amazon FBA ROI Vs Amazon FBA Net Profit Margin

Many Amazon FBA sellers confuse Amazon FBA ROI with Net Profit Margin. They consider ROI to be the same as the net profit margin. However, ROI is different from net profit margin and are two important metrics to track to run a successful Amazon FBA business.

Let’s look at the following table to understand the difference between ROI and net profit margin.

S.No. Return On Investment  Net Profit Margin 
ROI is the return earned back on the capital invested in a particular product.  Net profit margin is the profit earned in reaction to the sale price of the product.
ROI = [Net Profit/Cost of Goods Sold] x 100 Net Profit Margin = [Net Profit/Sale Price of the Product] x 100
Example

In the LEGO example above, ROI = [Net Profit/Cost of the Item] x 100

= [($39.99 – $15.04)/$15.04] x 100 

= 165.89%

Example

In the LEGO example above, Net Profit Margin = ([Net Profit/Sale Price] x 100 

= {[$39.99 – $15.04]/$39.99} x 100)

= 62.39%

ROI can be more than 100% as we are taking net profit on the cost of goods.  Net profit margin can never be more than 100% as we are taking net profit about the sales price. 

What Is A Good ROI For Amazon FBA?

One of the critical questions every Amazon FBA seller faces is about the ROI percentage he should aim for his Amazon FBA business. Well, the ROI on the item a seller chooses to sell on Amazon should not only cover his fixed costs but also be the one that makes him enough profits after taking into account such fixed costs.

There’s no point in selling items that make you incur losses in your Amazon FBA business. Also, a good ROI for Amazon FBA business depends upon several factors including the stage of business you are at or the environment in which you are undertaking your Amazon FBA business. Considering these two factors, let’s have a look at the Amazon FBA ROI you should aim for as an Amazon FBA seller.

1. Amazon FBA Beginner ROI

Typically, the new Amazon FBA sellers aim for a higher ROI. They generally follow the 4x rule in which they select an item whose selling price is 4X the cost of the item.

If an item costs $10, the selling price must be $10 + 4x$10 = $50 as per the 4x rule. Following the 4x rule, the Amazon FBA beginner seller can generate close to 100% or more ROI on the items sold.

Thus, if you are a beginner selling via Amazon FBA, you must aim for a higher ROI. An ROI of a minimum of 35% to 40% is good to start selling via Amazon FBA to cover all your fixed costs and make you a decent profit from your Amazon FBA sales.

Why Should Amazon FBA Beginner Sellers Aim For A Higher ROI?

Amazon sellers new to FBA typically have less capital to invest in stock. Since they can’t invest much in inventory, they need products that give back higher returns on the cost incurred. That is why, they invest in products that generate a higher ROI, covering not only the fixed costs but also making considerable profits on sales.

Let’s take an example here to understand why a high ROI is good for the new Amazon FBA sellers. Say a new FBA seller has $1002 to invest in inventory. Since the available cash is a small amount, he can buy less number of items to sell on Amazon via FBA.

To earn profits by selling a small number of items, he needs such products that generate a higher ROI for him. That is, even by selling less number of items, he’s able to cover fixed costs and make enough profits.

Read: Amazon FBA

Scenario 1 Scenario 2 Scenario 3
Item Price = $20

Amazon Fee = $7

Fulfillment Cost = $6

Storage Cost = $1

Total Cost = $7 +$6 + $1 = $14

Net Profit = $20-$14 = $6

ROI = ($6/$14) X 100 = 42.85%

Item Price = $16

Amazon Fee = $6

Fulfillment Cost = $6

Storage Cost = $1

Total Cost = $6 +$6 + $1 = $13

Net Profit = $16-$13 = $3

ROI = ($3/$13) X 100 = 23.07%

Item Price = $14

Amazon Fee = $7

Fulfillment Cost = $7

Storage Cost = $1

Total Cost = $7 +$7 + $1 = $15

Net Profit = $14-$15 = – $1

ROI = (-$1/$15) X 100 = -6.67%

Let’s say the FBA seller invests in 40 items under scenario 1 and 34 items under scenario 2 with a total investment amounting to $100. If he sells these items at their respective prices as mentioned above, his average ROI on each item reduces to 34%. This is a good ROI for a beginner. But, if he chooses to invest $1010 by investing in 40 items under scenario 1 and 30 items under scenario 3, his average ROI per item reduces to 20.79%. Thus, with low ROI items, he is left with thin profits since the major portion of the revenue is used to cover fixed costs. Also, since the beginner FBA sellers have less capital for investment and thereby buy fewer items, they can easily locate products with higher ROIs (of say 40%.)

A higher ROI gives new sellers enough bandwidth to commit errors. Initially, there are chances of new sellers not sourcing items from the right sources or committing errors while setting the prices. A higher ROI items gives new sellers room to reduce prices if they need to or bear higher item costs from the vendor.

2. Advanced Amazon FBA Seller

Advanced FBA sellers can aim for lower ROIs of 20-25%.

Why Should Advanced Amazon FBA Sellers Aim For A Lower ROI?

Since they are experienced sellers who know how to price the goods and where to source them from, there are fewer chances of committing errors. Because they have a large amount of capital for investment, it becomes difficult to find and invest the whole of the capital in items with higher ROI.

Finding 100 items with ROI as high as 40% may be possible to invest the complete $1000. However, if $100,000 needs to be invested in stock of say 1000 items, the seller may run out of items with ROI as high as 40%. Thus, he needs to aim for lower ROI items to invest the complete $100,000 as it will open opportunities for him to invest. Thus, he can deploy his capital in items with 20-25% ROI and play on volumes to earn higher profits.

However, if he chooses to aim for only higher ROI items, he will not be able to invest the complete $100,000, which will make him earn a $0 return on the uninvested amount. This will reduce his average ROI per item sold via Amazon FBA.

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