Is Amazon Advertising Profitable?
One of the most frequently voiced concerns from our e-commerce clients is the profitability of advertising on Amazon. Still a fairly underestimated/unfamiliar PPC platform, Amazon presents an entirely new set up of hurdles which advertisers don’t necessarily experience in AdWords, Bing and the like. Fully understanding margins and fees is essential to arriving at a profitable bottom line after expenses are taken into consideration. Before diving head-first into the Amazon PPC world, attempt to lay out all the potential costs which I outline below. Please keep in mind that this is not an all-encompassing overview of each and every fee/cost. This over-simplified explanation should be used as an initial practice to understand the potential to run a successful campaign in Seller Central – which is typically the starting point of most sellers.
Step 1: Understanding Selling Fees and Choosing a Subscription Plan
When choosing a selling plan, consider inventory levels and scalability in the marketplace. You’ll have two options to start – a “Professional” and an “Individual” account. A “Professional” Seller account is the frequently the preferred subscription model, as it allows room for growth. The fees for each subscription are outlined below:
The “Referral fees” mentioned above are costs paid directly to Amazon, for each item sold. Your referral fees are determined by Amazon, based upon the categorization of your products. For a handful of product categories, sellers will pay the greater of the referral fee or the per-item minimum referral fee. The list of product category referral fees can be found in its entirety in Amazon’s Help Center.
For the sake of all following calculations, we are going to operate under the theoretical assumption that we are selling products in the “Office Supplies” category. We will also imagine that we are starting with 1 product, which is priced at $50.00
For the “Office Products” category, Amazon charges a 15% referral fee OR $1.00 (whichever is greater).
- Listing Price: $50.00
- Amazon Referral Fee Percentage: 15%
- Amazon Referral Fee Cost: $7.50
- Per Sale Return: $42.50
Now that you’ve determined you need to pay $39.99/month to keep your subscription active, as well as pay 15% for each sale, you can move onto the next step.
Step 2: Understanding Internal Profit Margins
Being aware of your margins, seeking to achieve higher points, while still maintaining quality (essential for reviews) should be a never-ending process. In general, it’s difficult to achieve PPC profitability if margins are less than 25%. However, this should not deter sellers, as PPC helps to drive organic sales and rankings. Unlike Google, sales directly from Amazon PPC campaigns help your ASINs achieve higher search volume by moving them up in the Search Engine Result pages. So, do not be discouraged if you have razor-thin margins…PPC may be a short-term strategy to achieve long-term organic sales results.
In this scenario, our “Office Product” will have a theoretical margin of 40%.
- Listing Price: $50.00
- Internal Margin: 60%
- Per Sale Return: $30.00
- Amazon Referral Fee Cost: $7.50
- Per Sale Return: $27.50
Without considering shipping costs, we will Gross about $27.50 per sale on Amazon.
Step 3: Understanding Shipping Costs
Product orders can be shipped either by Amazon (known as FBA – fulfillment by Amazon) or by you – the seller. To achieve fulfillment by Amazon, you must complete the process which is outlined in this guide. For some sellers, this is definitely a preferable method, as it can assist in scaling. For others, FBA may dip into your margins too deeply, as you will accrue new fees and warehousing costs. There are plenty of articles and guides online to help you with this decision. For the sake of this article, let’s assume we are fulfilling our own Office Product orders.
Without getting into a discussion of which is the best carrier, let’s assume your per-item shipping costs average a flat $5.00.
- Per Sale Profit from Previous Steps: $27.50
- Shipping Costs: $5.00
- Gross Profit: $22.50
At this point, more than 50% of our listing price has been deducted for fees and hard costs. Just like the launch of any business, advertising costs will need to be determined to gain brand/product awareness. A typical restaurant owner would never launch his/her business without advertising locally. The same concept should be applied towards your Amazon presence…you need to make visitors aware of your product and begin to rank in searches. This is where PPC comes in.
Step 4: Understanding Amazon Advertising Costs
At this point in time, Amazon pay-per-click is still an extremely enticing platform to move inventory. Here are a few of our favorite features of PPC on Amazon:
- Much cheaper than Google AdWords (clicks generally range from $0.20 to $0.75)
- Users are ready to buy
- “Bottom of the funnel” searches
- Amazon is getting better at reporting features
With visitors having this “purchase-ready” mentality, a well-constructed advertising campaign will produce high conversion rates and low cost-per-sales. For this scenario, let’s use the following metrics to determine the profitability of a PPC campaign in this marketplace:
- Gross Profit of Each Sale: $22.50
- Average Cost per Click: $0.50
- Average Conversion Rate: 5.00%
- Marketing Budget (monthly spend): $1,000
- Average Number of Monthly Clicks: 2000
- Average Number of Monthly Sales: 100
- Average Cost per Sale: $10.00
- Average Return per Sale: $12.50
So yes – advertising on Amazon can absolutely be profitable. As long as you fully understand your costs, fees, and margins, the PPC campaign can be constructed around your operating costs to achieve profitability. Also, keep in mind that the key to “winning” on Amazon is sales volume, organic rankings, and reviews. In this scenario, PPC will facilitate better organic rankings (remember that PPC sales contribute towards better visibility on the organic side).