Identifying Main Reasons for Lack of Profitability
There are different "levels" of profitiablity that sellers want to or should have an eye on. These levels will help you understand where your profitablity is hurting the most.
For example, you will be able to identify whether you should focus on optimizing your PPC costs, your product & content quality (to avoid returns) or whether your basic (gross) cost structure needs a fix, eg. with new retail prices or renegotiated COGS.
Gross Level - Unavoidable Order Related Costs
First up, on a gross level, the profit/margin/ROI calculation considers costs that apply for each order and which cannot be avoided, ie. taxes, your cost of goods, Amazon & FBA FBA fees.
= Net Sales - COGS & (inbound) Shipping Costs - Referral Fees - FBA Shipping Fees
Gross Margin (%)
= Gross Profit ÷ Net Sales * 100 %
Gross Margin ROI
= Gross Profit ÷ COGS & (inbound) Shipping Costs
The gross level can give you a good idea of how your profitability looks like if everything runs by itself (ie. without advertisement) and without issues (returns).
Contribution Level - Avoidable Order Related Costs
On this level, the calculation will also include all avoidable order related costs (or sales reductions) that will often occur: promotion costs, returns and PPC costs.
= Net Sales - all Variable Costs
= Net Sales - Avoidable & Unavoidable Order Related Costs
= Net Sales - COGS & (inbound) Shipping Costs - Referral Fees - FBA Shipping Fees - Ad Spend - Promotion Costs - Refund Commission Fees
Contribution Margin (%)
= (Net Sales - all Variable Costs) ÷ Net Sales * 100 %
Contribution Margin (CM) ROI
= Contribution Margin ÷ COGS & (inbound) Shipping Costs
The contribution margin will give you a more realistic picture of how profitable your products are, ie. including refunds & the necessary advertisement measures.
Account Level - Non-Order Related Market Costs
Finally, the Profit calculation will also include all other, non-order related costs that apply to the whole Seller account on a total market level (eg. North America), such as storage & FBA service fees, or the monthly Pro Seller account fee.
= Net Sales - all Variable Costs - all Fixed Costs
= Net Sales - COGS & (inbound) Shipping Costs - Referral Fees - FBA Shipping Fees - Ad Spend - Promotion Costs - Refund Commission Fees - SC Pro Account Fee - FBA Storage Fees - FBA Service Fees
Profit Margin (%)
= Operating Profit ÷ Net Sales * 100 %
= Operating Profit ÷ COGS & (inbound) Shipping Costs
These final numbers will give you the ultimate view of how profitable your Amazon business actually is.
This final level is only different to the Contribution level when looking at a market (ie. Europe or North America), as the Account level fees only exist for total markets.
Therefore, when viewing a single marketplace or product, the Contribution level's profitability is the same as the Account level's.