Making Amazon Worth It
The Business of Food
by Jennifer Barney
Making Amazon Worth It
2-min read
I talked about two common misconceptions about doing business with Amazon. The first, thinking of Amazon as a wholesaler, and the second, conflating operations and advertising management. Today I’m going to tackle the third misconception: that Amazon is too expensive to do business with.
Here’s the business model as compared to traditional retailer selling:
As you can see, Amazon is different but not more expensive. This is a super simplistic model, but let’s break it down anyway.
Fees vs Deductions
Retailer deductions comprise of sales terms and allowances plus all the trade marketing you will be doing with your distributors and retailers. These will come off of your invoice as deductions therefore what you invoiced and what you receive will be two different amounts. With Amazon you have fees tied to orders.
Net Sales
This is what you actually deposit in the bank. Your gross margin is calculated off of the net sales number (more on this in a future post).
Distribution is the cost of getting your products to the warehouse, stored, and fulfilled.
Amazon Ads & D2C Shipping vs Slotting and Other Marketing
These are simply the direct and indirect costs of getting your products sold and into consumer’s hands. Whereas you might exhibit at trade shows, conduct demos, pay for slotting, and run an Ibotta program to support your retail business, with Amazon your only lever is advertising on their platform. And once someone places it in their cart, you will pay for shipping. Remember, shipping is not free!
What should I expect to spend on ads?
The trick here is to anticipate what your sales are going to be and set a budget. You’ll hear that typical Advertising Cost of Sales (ACoS) can be 20 – 30% of gross sales (the retail price). It doesn’t have to be that high. My advice is consider investing in ads that will win you the keyword search – which means you know what someone is likely to type into the search bar when seeking an item like yours. Many agencies run an AI program to discover this for you.
All other Sales, General & Administrative (SG&A) is just what it sounds like, with the biggest portion being payroll. Agency fees to manage Amazon are expensed here.
What are typical agency fees?
When you are first starting out, an Amazon management company will charge you a retainer or retainer + % commission. One way or another the minimum outlay will be ~$2000 / month for their services. The retainer usually drops off once you reach a minimum monthly sales volume, usually once you’re doing over $25 - $30K per month.
As you can see, Amazon is not less profitable to do business with than retail business.
In final defense of Amazon as part of your channel mix: consumers and buyers alike are using Amazon reviews as a trusted judge of products. When presenting new products to a buyer, use your Amazon reviews and performance data as part of your sell-in story and to show market demand.
All my best,
Jennifer
News
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Boxed, the online delivery startup for bulk groceries, is going IPO via a SPAC, is not yet profitable, but is moving into digital advertising and a third-party marketplace to fuel growth - Wall Street Journal
There is such a thing as a plastic credit platform for your business
General Mills launches nut butter bars and almond crisps with no spike to blood sugar for the diabetic and prediabetic segment.
I'd love to hear from you - get in touch at jennifer@3rdandbroadway.com