How to Improve Your Margins on Amazon

Part 2 of 5 – This is the second part of a multi-step guide on creating a successful strategy on the Amazon platform. Are you looking to improve your margins on Amazon? In this section, I’ll walk you through how to enhance your margins on Amazon and increase your product profitability. This is crucial for long-term success on Amazon.

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The reason you and your company want to sell on Amazon is ultimately to make money, right? Despite this, many sellers focus more on sales (revenue) and less on the actual profit they’re making. In some industries and platforms, increased sales can lead to better margins. But this is rarely the case on Amazon. While selling more can boost absolute profit even with small margins, this is often a difficult and unsustainable way to increase profits. I suggest you focus on improving your margins instead.

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Why Prioritize Margins?

Margins are what actually make you money. If you sell a product for $100 and it costs you $50 to produce, ship, advertise, etc., you have a margin of $50 (50%). The more you sell, the more you earn, and there’s no commercial reason not to push as many products as possible. But if it costs you as much to produce and sell the product as you earn, selling more won’t help your bottom line. Unfortunately, it’s not uncommon for Amazon sellers to unknowingly sell at a negative margin, losing money with every sale. You don’t want to be one of them. Keeping a close eye on your margins is essential to making a profit.

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Priority: Expansion vs. Margins

There’s a notion that expanding is more important than improving margins. There’s some truth to this. By increasing sales, you capture more market share and can continue competing against rivals. There’s a fear (partially justified) that if you don’t expand, you’ll be outcompeted or at least find it harder to enter new markets in the future. But this thinking misses an essential part of the equation: the competitive and expansion advantages that better margins provide.

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With better margins, you can afford more advertising, hire more staff, invest more in product pages, collaborate with more influencers, and so on. Good margins will allow you to outpace the competition. This isn’t new; it has happened thousands of times, especially in recent years with the rise of social media. A company develops products with much better margins than competitors and can afford to invest more in branding, eventually outshining the competition.

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Does Increased Sales Also Improve Your Margins?

But does it work the other way around? Unfortunately, not much. While larger orders might reduce production and shipping costs to warehouses, Amazon's fees, including advertising, remain the same. And these fees are often more significant.

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Should everyone focus on improving margins on Amazon instead of expanding? Not necessarily. You must always consider your company’s situation. If you’re selling high-end products with large margins, it’s probably better to focus on expansion rather than margins. But the cheaper your products and the more of the sale price is eaten up by Amazon’s costs, the more you stand to gain by focusing on margins.

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Increase Profit Through Expansion

One of Amazon's great advantages is how easy it is to expand. Of course, there’s some work to be done in translating texts, adjusting SEO, setting up advertising, etc. But aside from optimization work, expanding globally is more or less a click away.

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As I’ve already mentioned, I recommend focusing on margins first and then expanding. But when it’s time to expand, it’s a potent tool for profit growth. And expansion doesn’t have to be geographical. You can also expand in existing markets by expanding your product portfolio.

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Get a Full Grip on Your Margins

An essential tool for working on Amazon is a spreadsheet containing all your product margin calculations. Production costs, shipping, various Amazon fees—everything must be included. Only when you have a full understanding of everything can you effectively work to increase profit margins. Margin files are also invaluable for future campaigns. They give you full control over how far you can lower prices or offer discounts. However, I recommend keeping Amazon advertising costs separate from this file, as ad costs are often easier to control. This makes it simpler to adjust ads based on margins rather than the other way around.

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A No-Brainer, Right?

This may sound obvious—"of course, you need to keep track of all costs and margins"—but the truth is that very few sellers actually do it. Historically, I and SellWave have not created these files for our clients because we assumed they were doing it themselves. However, this assumption has proven very wrong. Hardly anyone tracks this. Generally, smaller companies have less control, but even larger companies struggle.

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You don’t want to run a business or project like that! Keep track of your finances, and I promise you’ll have a much better chance of success and making Amazon a profitable platform.

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How Do You Improve Your Margins?

Okay, so you should focus on margins rather than expansion, and it’s crucial to keep track of your product margins. But how do you improve margins on Amazon? Keeping track of margins is good, but it requires more effort than that.

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There are many ways to improve margins on Amazon. I will focus on those specific to Amazon, but you can certainly do simple things like negotiating lower production prices, ordering larger quantities, etc. You can also raise prices if you have a product that can handle it, but that’s not as fun if it also leads to fewer sales. Ultimately, what’s most interesting is absolute profit; margins are just part of that equation. If you raise prices to increase margins but experience too much of a sales drop, the total profit may decrease. In the long run, it could also lead to a ranking drop, resulting in even more sales loss.

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How Can You Effectively Improve Margins on Amazon?

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Traffic Optimization

To effectively improve margins on Amazon, you can use traffic optimization. Anything that can get you more traffic at a lower cost or increase conversion rates will lower your average order cost and thereby increase your margins. How do you do that? It involves the various optimization activities I’ve already mentioned and will continue to discuss in this book. Copy, SEO, images, and perhaps most importantly, advertising. Copy and images increase conversion rates, SEO increases traffic, and ad optimization can directly lower costs, increase traffic, and boost exposure.

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Packaging Changes

Reviewing how you package your products can significantly improve your margins on Amazon. Amazon charges a fee for every order processed through their FBA program. This fee depends on the product’s weight and size, measured as the product is packaged when it arrives at Amazon. This means the way you package products can impact the cost charged for each order. Amazon’s system is based on size tiers, and if a product is 1 cm too large in one dimension, it will be placed in a larger tier, which comes with higher costs. If your product is packaged in a way that’s not optimal for Amazon’s system, you could lose substantial money long-term. You can find more information about these tiers and costs in a previous post.

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Multi-Pack Offers

By packaging products in multi-packs, you can dramatically lower Amazon’s costs per sold product. At the same time, you can increase the average order value by offering customers multi-packs at a lower price. Since Amazon uses the system it does, many products, when packaged together, don’t incur higher costs but offer greater value to the customer. Let’s say you sell a kitchen tray. These types of trays can easily be stacked, and three trays don’t take up much more space than one. As a result, Amazon is likely to charge the same fee for shipping a three-pack as for a single tray. However, the customer sees it as a three-pack and is probably willing to pay nearly three times as much.

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An example is a product one of SellWave’s clients is currently selling. The product, with all Amazon costs included, has a margin of 16%. That’s not great, but it’s a cheap product, and customers buy it in large quantities. We decided to also offer this product as a three-pack. The margin for this three-pack increased from 16% to a whopping 55%, and that’s while offering a 15% discount on the three-pack to ensure customers see greater value in choosing that option. That’s a significant margin increase!

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Let’s compare the margin in monetary terms instead of percentages. Let’s say a single pack costs the customer $100, and a three-pack costs $255. The margin for the single pack is then $16, while for the three-pack, it’s $140. That’s a fantastic increase! We still offer the single pack because some customers still only want one, and we don’t want to turn them away. But, of course, we try to push the three-pack as much as possible.

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Amazon Programs

Amazon offers various programs that can lower your costs and thereby increase margins. For example, they offer a program called Small and Light, which can significantly reduce costs for sellers of smaller products, such as jewelry, shoelaces, postcards, etc. In Europe, they also have a program called Pan-European. With this program, you can reduce your costs per order by €0.5 (about $0.55), which can be a significant amount if you sell many products. It can make a huge difference in your margins if your products are on the cheaper side. Amazon has several measures to reduce costs for products within specific groups or for sellers who meet specific requirements. Be sure to keep an eye out for these and stay alert to new opportunities that may arise in the future.

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After reading this, I hope you’ve picked up some tips and things to consider if you want to improve your margins on Amazon.