How To Read An Amazon P&L Like An Investor
Aug 8, 2023
In the highly competitive Amazon marketplace, it's essential for sellers to have a solid understanding of their financials to stay ahead. This blog post provides a comprehensive explanation of the importance of accurate P&L tracking and how 3fin can help you enhance profitability.
What is a P&L?
A Profit and Loss (P&L) statement is a financial document that outlines a company's revenues, costs, and expenses over a specific period. It offers a complete overview of a business's financial health, helping to identify areas for growth and improvement.
Why is it crucial to closely track your P&L and ensure accuracy?
In recent years, Amazon's fees have increased significantly, making accurate P&L tracking more important than ever. Monitoring your P&L at the SKU level helps maximize profitability across your entire product range. As Amazon now pockets more than 50% of sellers' revenue, effective profit management is vital for survival in this highly competitive environment.
A typical Amazon seller pays a 15% transaction fee (referral fee), 20-35% in Fulfillment by Amazon fees (including storage and other fees), and up to 15% for advertising and promotions on Amazon. Amazon has raised fulfillment fees every year, and advertising costs have become unavoidable due to competition. As a result, it's crucial for sellers to manage their profits effectively to thrive in an increasingly competitive market.
Comprehensive Guide to Reading a P&L
Understanding your P&L involves tracking several key aspects:
Discounts: Monitor the impact of discounts on your margin, as lowering prices can significantly change your profitability. Before placing discounts make sure you understand the underlying margin of each of the SKUs
Refunds: Keep track of refunds and identify the reasons for increases, such as product quality issues or misleading listings. Addressing these issues can help reduce refunds and improve your bottom line.
Contribution Margin 1 (Gross Profit): This metric reflects the impact of pricing, costs of goods sold, discounts, refunds, and product mix changes. A decrease in this percentage indicates various issues that need to be addressed. It's essential to track all these metrics to understand the driving forces behind changes in your gross profit.
Contribution Margin 2 (Profit after fixed platform fees): Track this metric to understand how platform fees, storage fees, and referral fees affect your profitability. To maintain or increase profitability:
Optimize product dimensions to reduce FBA fees
Adjust pricing to pass on cost increases to consumers
Monitor inventory levels to avoid excess stock and high storage fees
Run promotions to sell aged products at break-even.
Contribution Margin 3 (Profit after advertising spend): A crucial aspect of success on Amazon is an effective PPC strategy. Higher advertising spend can hurt your margins, so it's essential to optimize your advertising efforts by:
Targeting the right keywords
Using the appropriate strategies to maximize growth and margin
Monitoring ad spend and adjusting as needed.
How Can 3fin Help You?
3fin offers a range of solutions to help you optimize your Amazon business:
Real-time and accurate P&L: With 3fin, you can access a bulletproof, real-time P&L that tracks your performance by marketplace and ASIN/SKU. This data-driven approach enables you to make informed decisions to boost your business performance.
Cost savings opportunity: 3fin's Supply Chain Assistant includes a cost savings calculator based on aged inventory, helping you identify areas for improvement and potential savings.
Out of stock management: The 3fin Supply Chain Assistant also helps you understand the revenue and profit at risk if you don't replenish stock on time, allowing you to make proactive inventory decisions.
Ad Spend Optimization: 3fin's Brand Manager helps you assess the effectiveness of your advertising spend, allowing you to analyze the correlation between ad spend and sessions. This enables you to identify potential issues with pricing or conversion rates, helping you optimize your advertising strategy for maximum profitability.
In conclusion, managing your P&L effectively is vital for success as an Amazon seller. By using 3fin's suite of tools, you can ensure accurate tracking, identify opportunities for growth and improvement, and make data-driven decisions to maximize your profitability in this competitive marketplace.
