This is not something where I’m going to give you every single step blow by blow, because that is a bit complicated. But I can say that it sounds more complicated at the front because Amazon is a complicated business and it can be difficult to determine your Amazon profit.
On this instalment of Amazing FBA, 10k Collective member Ashley Pearce returns with part two of our interview. If you missed part one and you’re a seller new to Amazon, make sure you go back and take a listen to Episode 252. If you’re already caught up, today we’re going to be talking about scaling a business; specifically scaling a business up to $1 million in turnover per year.
I’m delighted today to welcome 10k Collective member Ashley Pearce. Ashley is one of the most active members of the 10k Collective mastermind, and he’s here to talk about selling on Amazon; specifically, the first 18 months. He’s not a billionaire Amazon seller or revolutionary startup software company CEO. Ashley is merely a guy who heard about the Fulfilment by Amazon program on the Entrepreneur on Fire Podcast, cobbled together about £8,000, and jumped into selling on Amazon.
Last time on Amazing FBA, we talked about startup businesses. Today, in part two of my discussion with Penny Lowe, owner of Wellington Consulting, we’re focusing on accounting for companies that would qualify for the 10k collective. In a nutshell, today we’re going to be talking about scaling from an accounting perspective.
It’s long overdue that we’ve had an accountant on Amazing FBA. Today I’ll be sitting down for part one of my interview with Penny Lowe, owner of Wellington Consulting. If I had to name one single item as the most significant pain point for most entrepreneurs, it’s accounting. So many people in all walks of business struggle with tax accounting, bookkeeping, and payroll. It’s impossible to cover everything accounting in just an hour’s worth of interviews, but today in part one of this two part series on accounting, we’ll be covering the basics for new sellers on Amazon.
The guest today is Coran Woodmass from The FBA Broker. Coran specialises in buying and selling FBA businesses. He has been involved in buying and selling online-based businesses for 4 years. Continue reading
It is important for any business to measure its profit and loss as this helps in determining the direction of the business. It helps in understanding if the business is headed in the right direction or if there are changes that need to be implemented. Continue reading
Just over 3 years ago, Coran and his wife left Australia and their corporate jobs and began traveling. They had online businesses at the time and soon began buying and selling websites to fund their traveling. He liked the process of building a company to sell it rather than building to for the income. He struggled to keep his attention on one thing.
For this interview Coran create a package of tools for Amazing FBA listeners at http://thefbabroker.com/amazing. So do check that out.
About a year ago he got into the brokerage side of things after people began asking him to review and vet websites that were for sale and help negotiate the sales. As of about a month ago he has been dealing exclusively with FBA businesses.
Most people do this backwards. They build up a business and it’s making money and then they decide they want to sell it. Maybe they want to focus on something else, maybe they want to cash out and pay off the investment. That’s a terrible time to sell. Odds are, you won’t be structured in a way that is attractive to sellers. The first thing you need to think about is who you are going to sell to and what they are looking for.
Let’s say you have a private label business that’s been operation for an year and half to two years. So you have a bit of history and you beginning to think about exiting. Reasons that Coran decided to sell his companies were that he might need the cash flow for something else or he was getting bored with the business.
Coran breaks Amazon businesses down into three types, retail arbitrage/wholesaling, private label, and unique or proprietary.
For retail arbitrage/wholesaling, unless you have exclusive rights to selling on Amazon, the chances of your income being taken away is very high. What an investor is looking for is a return on investment. They will pay a certain multiple for a business with the intention of getting that money back first. So with wholesaling, for almost all cases, your only asset is your inventory, so if you lose your means of selling it, you’re just stuck with a load of stock.
Private label is the most popular way to sell on Amazon. There is a barrier of entry so your products have a shelf life of 6-12 months. That means that if you have one product that you haven’t differentiated, you just stuck your label on a product and built the brand, it’s not super defensible. So it will sell at a lower multiple. You can definitely sell these companies, you just have to put a little work into it.
Unique or proprietary products are much more defensible. You may have taken negative comments on your products and tweaked them. So you might have a unique mold or something that makes your product unique, that will sell at a higher multiple. The more you can make a private label product better or unique, the better it will be when it comes time to sell.
For example, Greg Mercer at Jungle Scout ran a case study where he made his chop sticks a little longer. While not super defensible, it is unique, and if you build your brand around that it sets you up in a better position.
There is a debate among brokers as to what the minimum amount of time is. For Coran, a year is still young. You certainly want 12 months of history. There are a few reasons for this. One, you want to see if there is any seasonality involved. An investor wants to work out their return on the longest history possible. There is also something to be said for a product that takes time to gain traction. Seems a bit counter-intuitive but an investor will look at a product and think, “What’s to stop me from doing this myself?”, so a product that takes time to get established show the investor that this company is worth buying because it will take that much more time to get it going if he/she wanted to start from scratch.
Most importantly, when it come to age of a company, you want the company to be established. For online companies, that typically means 3 years. Compared to offline, like brick and mortar businesses, 10 years is a long time.
Even if you’re not thinking of selling your company soon, now is the time to start preparing for it. A year, year and a half out, you want to make sure your products are defensible and that you have products that will add value to your company when it comes time to sell.
Coran is working on two businesses, trying to get them ready to be listed. One business is completely private labeled, very little in the way of differentiation. It’s just brand. He has 20 products. That business is attractive because of the wide range of products. Out of the 20 products, most of the income comes from three products. It is all on Amazon and bringing in a million in sales a year.
The other company has only one product that is unique. It’s is their own formulation and their own brand. 70% of their income is coming from Amazon. They also sell on Amazon US and Amazon UK. 30% of their income is coming from their Shopify store. So they have several layers of defensibility.
The gold standard, according to Coran, is a third company he is working with. They have 10+ uniquely formulated products. Multiple sales channel. 70% through their e-commerce channel, 30% on Amazon.
The less reliant you are on one thing, the better. Multiple products, multiple sales channels, multiple traffic sources. So if you have a private label and don’t want to focus on unique products, focus on finding sales channels outside Amazon. That way, if one thing takes a hit you have hedged your bets.
You need to look at it from an investors perspective, they are looking for a return on investment (ROI). Their in for $1,000,000 and their making $200,000 a year on it, that’s the ROI. They way we value Amazon businesses is net profit. The best way to look at this is: what is your annual net profit. If your business has been around a year and making decent profit, that’s not as attractive to these kinds of buyers. The important thing to consider I: what is your profit right now? When working with clients, Coran finds that most people over-estimate their profits. Oftentimes it’s as much as half of what they thought it was once they put in their numbers. If you want to find out what your business is worth, use Coran’s tool for that.
The longer your business has been around, the better
The more profit you’re bringing in, the more attractive your business will be
Diversified traffic sources
The strong the competition, the more wary investors will be
Profit and Loss Template – Use this spreadsheet to help determine how much money your are actually making.
It starts with your total sales and revenue. From there it takes out the cost of sales. This is your Amazon fees, packaging, shipping, etc. All the costs associated with selling that item. Then it takes your operational costs out. The is refunds, ads, web hosting, salaries and other drawings, etc. All the costs that are associated with running your business. In the end you’re left with your net revenue.
In regards to salaries and other drawing from your business, when it comes to selling the business you can add that back into your profits. The reason is that your investor might not want to draw anything from the business. So you want to present them with the profits including what you are drawing from it. Then they can decide what they want from it. If they are looking for an income, they can look at the net revenue and determine how much they can draw. If they are looking for growth, they might want to leave everything in and use that to grow the company.
If you don’t add back your salary, it makes it much more difficult for them to find it. You want to make it as easy as possible for your buyer.
Today we are continuing with our giving-up list. What are you going to give up in 2017? Before you start doing something, you need to stop doing something else. You must free up your time, money, and mental focus. Today we will be discussing sponsored ads, or Amazon ads. Amazon calls them sponsored ads. Broadly speaking, they are one of a few ways you can that drive traffic that is moderately guaranteed to work.
If you have a product with terrible conversion rates and a decent amount of reviews and that’s not shifting over time, and you’re driving traffic with pay-per-click, then you have a problem with your product or listing. But if you have decent sales and the conversion rate isn’t terrible, not below 10%, then what is going to determine your profit will be the balance between the sales price and the cost of goods sold. A big percentage of that is your Amazon ads.
If you increase your price you could negatively affect your sales, however, if you reduce your cost, by reducing money spent on Amazon ads, then you will increase your profit while maintaining your sales. Which is obviously a big win for you.
It is very important to use negative keywords if you’re using auto-campaign. I always suggest using auto-campaign to start with because you can gather a lot of data and tune the algorithm to your listing. But after a while (say 1-2 weeks usually) you shouldn’t be spending a large bid-per-click on that.
Go through your search term report, and anything you’re spending a lot of money on, that doesn’t bring you sales, is something you want to put in negative keywords fairly soon.
How soon? Well, if you are really serious about your products, you have signs of good success on your hands, and deep pockets, you might want to run a loss on that campaign for a rather long time in order to gather data.
If you have 50 clicks on a keyword and no sales, that pretty certain that it’s not working. You’ll want to make sure that’s a negative match keyword. However, to get 50 clicks, you likely spent a lot of money and you might want to have a cutoff at 5, 10, or 20 clicks.
The next thing you want to look at is the keywords that are making sales. These are probably going to be a small percentage of all the keywords you’re using. Over time, you’ll start gathering your long-tail keywords, but starting out, it’ll likely be around 10-15. That all depends on how much you’re willing to spend before you make sales.
Unless you want to be really harsh, after two to three weeks you’ll have your 10-15 keywords that are making you sales. You’ll want to look at those and reduce the bids on those which are costing you too high of advertising cost of sales.
One caveat, don’t allow advertising costs of sales to be your main guiding point. When you launching products, you’ll be raising your prices over time. For example, if you’re spending $10 on advertising on a product you’re selling for $10. That’s 100% ACoS (Advertising Cost of Sales). Over time, you might raise the price to $15 which change that ACoS dramatically. So I wouldn’t recommend using that as a metric. It can be misleading until you land at a stable price.
What I would recommend looking at is the overall spend on advertising divided by the overall sales. A very simple, robust metric that you should monitor weekly at least.
This isn’t something Amazon will give you because they want you to spend money on advertising.
It’s very simple to calculate. Get the same time period for both; you can get your advertising costs from the seller central “Advertising” tab, and you add up how much you spent. Then you go back to your business reports, and add up the sales you made in the same exact period period. Then just take your advertising costs and divide them by your sales.
The main thing is that it’s not about the advertising cost of sales, it about profit. If my profit margin on an item, before advertising, is $3, then I can spend $3 on advertising before it becomes a loss.
Another thing to consider, is that, if you have a decent selling product, you may be willing to run at 100% ACoS. That is, you’re running a loss on those sales from ads. You will still rank organically because of the ads, and you can make your money from organic sales.
I wouldn’t recommend it if you’re not being aggressive and really looking to grow your sales volume. I prefer to keep my ACoS where it is break-even. Let’s say I am selling a widget for $10, and my total cost before Amazon ads, including Amazon fees and fulfillment costs etc, is $7. That means, before ads, my profit margin is $3. I would not want to spend more than $3 per sale averaged over all my ads. That means that all sales gained via Amazon Ads are at breakeven or better, and that all organic sales represent profit.
I know this is complicated and it’s not really meant to be an instruction guide for pay-per-click ads. If it’s the sort of thing you need help with and you want to get in touch with me, I do offer a one-off call with you through Clarity FM. It’s $2/minute so it’s an expensive way of working with me. You’d be better off joining my mentorship program if you want ongoing help. Although I’m pretty strict about who I work with, I do have room for one or two more people. If you’re interested, still apply, and don’t assume I won’t work with you. Just read the guidelines and FAQs first though.
Another, inexpensive, way to work with me, as well of several others, is to become a part of the mastermind group. The London mastermind is in full swing and we’ve had meetups with about 6-10 people, which is perfect. We have dates set from January to June if you’re interested in working with me and up to 10 other people.
One last word on pay-per-click, I am trying out some software called PPC Entourage which they claim will help you manage your pay-per-click very quickly and easily. I haven’t had a chance to really dive into it but I will give it a test run and report back to you. If you want to try it, you can get a copy at http://ppcentourage.com/.
Need more personalised input on issues like this? Live in the UK in or near the South-East? You might want to consider joining us for monthly meetings where we can thrash out all the issues like this one for YOUR business. Check it out here.