We believe that the Amazon FBA ecosystem is a profitable opportunity for everyone. But the success Alpha Rock Capital has experienced also lies on the arms of our operations team. The optimization, sometimes spectacular, of our businesses has taken us where we are right now. Today I will share with you the recipe behind our growth. Here’s how to optimize an Amazon business beyond using great listings.
While I won’t go into exact detail of our strategies in this article, these are some general concepts that can help to improve your Amazon business significantly. In future articles, I will elaborate on each of these topics.
ARC’s Amazon Business Optimization Pyramid
Below is our optimization pyramid. When we acquire a new FBA business, we move from the bottom to the top in order to implement the most impactful changes to current operations immediately, then focus on expansion.
Our Amazon Business Optimization Process, Step by Step
Step 1. Logistics
The core of any FBA business is logistics, but it is usually the most overlooked part. It’s not just a matter of getting products from Point A to Point B, but doing so in the most cost-effective and time-efficient manner.
When sellers first start, many will accept Door-to-Door (D2D) shipping from the suppliers of their products. This almost always has a mark-up and is almost never a good deal.
It’s much better to go to almost any freight forwarder instead of taking this quote.
When getting your own shipping quotes, air shipping is the most expensive shipping method and should be avoided unless your products are very small and lightweight and you are running out of stock. Even if they are small and lightweight, sea shipping is significantly more cost-effective assuming you have the cash flow to support an additional 20-30 days of shipping time.
When shipping by sea, you have two choices, either shipping Full Container Loads (FCL), that are 40-foot or 20-foot containers, or Less Than Container Load (LCL). Even if you are ordering products from different manufacturers, consolidating them to be able to ship a Full Container rather than LCL can save you anywhere from 40-75% on shipping costs.
Whether you are shipping FCL or LCL, it’s important to have a good network of shipping partners that you can go to for quotes. While we generally use 1 or 2 main freight forwarders, we always go through online shipping marketplaces in order to receive a variety of shipping quotes from many different carriers in order to compare them to our normal forwarder’s rates.
This is especially important during 2020 as container prices have more than doubled since the same time last year and some forwarders have skyrocketing prices due to availability.
Step 2. Suppliers
Choosing the right supplier is critical in having a profitable and long-lasting FBA business. If you can’t get good enough prices, your profit margin will suffer, and if you can’t get high enough quality, your product listings will suffer.
If you sourced your first product from Alibaba, there is a very high chance that you are working with a Trading Company rather than directly with a manufacturer.
The sourcing company is essentially a middle-man that can add anywhere from 5% to 50% or more to your Cost of Goods. While these middlemen can provide some value such as inspecting the goods or payment terms, they generally aren’t providing anything that you can’t get somewhere else for cheaper.
If product quality is your concern, it’s generally better to work directly with a manufacturer to get lower prices and then pay a third-party inspection company to inspect the goods, which can be done for as little as $100 for a basic inspection. These inspections have saved us huge amounts on goods that might have made it to Amazon otherwise and both cost us money in returns and hurt our reviews significantly.
Regarding payment terms/financing that these trading companies may supply, it’s usually something like 4% of the order value for 90 days of financing once the goods are handed to the freight forwarder. This effectively works out to around 17% per year, which is quite expensive and can be financed cheaper from other lenders.
Step 3. Inventory
This is the big one. Out of all of our acquisitions thus far, at least 75% didn’t have enough inventory at any given point and one even had too much. Having the right amount of inventory can make or break your business.
When an FBA business goes out of stock, it’s not only sales being lost but also ranking as others are selling their products and increasing their rank while you are selling zero, which the Amazon algorithm punishes heavily. As FBA businesses are valued and sold based on their trailing 12 months financials, we estimate that each month that a business is out of stock on a product equates to a 15% discount for us on that product.
On the other hand, having too much inventory, especially in Amazon, can be a huge margin killer for a business. For example, one of our acquisitions had around 12-18 months of inventory in Amazon, which resulted in $5,000 per month storage fees which effectively ate all the profit of that business. Once we reduced it to our standard 60 days of inventory in Amazon, the storage fee dropped to around $400, resulting in $4,600 of free profit for us.
This is also where a third-party warehouse becomes very important. Since Amazon ships all our items for us, we don’t need to worry about 3rd party fulfillment, and can choose a warehouse based on pallet storage cost. Normal prices range from $15-$25 per pallet. Compare this to Amazon storage, where a pallet worth of storage costs roughly $70 Quarters 1-3 and $210 Quarter 4 of 2020, with prices going up every year. Therefore, it’s best to store in a third-party warehouse and drip inventory into Amazon in 30-60 days worth of inventory shipments.
Step 4. Pay Per Click
For most sellers that I have met, Pay per Click (PPC) is some kind of magic black box that they don’t seem to understand.
This is very unfortunate as PPC is the only way to advertise your product on Amazon, which is more effective than any other platform as when customers are on Amazon they already have some level of “intention to buy”, rather than just browsing their Facebook or Instagram social feeds. While PPC requires some understanding of search type matching, keyword research, and data analysis, it’s not nearly as complex as most people believe.
Determining the goal behind your PPC campaign
The first part of efficient PPC is determining your goal in relation to your profit margin. Do you want to increase your product rank? Then you should set your PPC Advertising Cost of Sales (ACOS) percentage around your profit margin. You won’t make any money on those sales, but you’ll increase your rank which leads to more organic sales.
If you just want to sell more and maintain rank, you should set it below your profit margin, but how much is up to how much money you want to make per sale. Not understanding what your goal is will render your PPC useless regardless of how much you optimize your keywords.
Keyword research and optimization
Next, you need to do keyword research to find your starting keywords based on your listing and competitor listings and which keywords you want to rank for. Add those keywords to Broad, Phrase, and Exact campaigns in order to help find long-tail keywords by checking your search term reports over time.
When you find keywords that convert, add them to the exact campaign which should have higher bids than the other two, then negative those keywords from the phrase and broad campaigns.
This strategy is used among the top sellers along with many other campaign types including product targeting, Sponsored Brands, and Sponsored Display, but it’s important to start with the basics.
Then, over time you will need to adjust bids for each keyword and the placement of your ads, like Top of Search, Rest of Search, and Product Listings. While all of this sounds like a lot of work, once you know the basics, you can automate finding long-tail keywords and bid adjustments with a variety of softwares.
Step 5. Product Variations
Once you have a successful product listing, an easy way to expand and make more money is by creating variations that show on the same listing. Whether it’s different colors, sizes, or quantities, if you add a variation to your listing that is already well ranked, chances are that you will start making more money immediately.
It’s important to do some research beforehand and check competitor listings to see which variations are selling well in order to know which to order, but overall this is one of the simplest ways to increase sales and profit.
Step 6. Amazon Listings Improvement
Once you have validated that your product is selling, chances are that you will want to improve your product listings over time.
Far and away, we find that improving the listing’s photos is the first thing to do here. As they say, a picture is worth 1,000 words. These are the types of Amazon product photos your listing should have:
- New Hero/White Background Amazon product photos. This will help your listing stand out on the search results page.
- Infographics that will help your customers better understand the product and its features.
- Lifestyle images that show your product in use to help your customers visualize themselves using said product.
You can also improve your Title, bullet points, listing description, and if you have a trademark, the Enhanced Brand Content/A+ Content that replaces the standard text description. The opportunities found when doing Amazon listing improvements are huge.
It’s important to do good keyword research to target keywords that your competitors rank for and that you want to rank for and to write convincing copy that makes a customer feel a need for that product. Testing these improvements to copy or images can be done through an A/B test or posting on voting websites.
Step 7. International Expansion
Once you have optimized in your starting marketplace and gotten the hang of selling and importing products, a great way to increase sales is by increasing your potential customer base and expanding internationally. Most sellers start in the US, which is the largest marketplace, and offer the Remote Fulfillment program to sell US inventory in Canada and Mexico, which are much smaller marketplaces.
This is a risk-free way to try international expansion as it doesn’t require shipping inventory to those countries.
Later on, you should consider expanding to Europe and the UK, the second-largest marketplace. In the past, we have seen sales increases of 30% just by expanding here. Of course, you’ll want to learn all tax and legal implications as the EU is generally much stricter than the US.
Plenty of Amazon FBA owners understand that optimizing their business is key. Unfortunately they get lost in small details or focus exclusively on Amazon listings. Listings are an essential part of our optimization pyramid to increase Amazon sales, but they are just one of seven steps.
Focusing on improving these seven areas, you will end up with a more successful, solid and ready for exit business. Your margins will be higher and your profit will increase significantly.
Are you there and looking to sell your business? Reach out to Alpha Rock Capital! We are buying!