The margin is the margin for a reason

[biophase]

I have wanted to make this post for a while. I see so many people write, "I found a product with great margins" or "I found a cheap product that I can sell for a good profit, but the shipping is expensive".

You guys don't see the big picture. There is a reason the wholesale AND the retail prices are where they are. You NEED to understand that SHIPPING and DUTIES and HANDLING and EASE OF SELLING are all calculated into the profit margin of a product.

This is why the prices are where they are.

Example #1

You find a product that is $5 from the factory and everyone is selling it for $100 on Amazon. Guess what? There is a reason for that. Do you think that everyone is just trying to milk the consumers and get maximum profit? Why isn't someone else undercutting them and selling for $50 only?

The reason is probably because the $5 product costs $25 each to ship by sea and there is a 100% tax on this product. So by the time it gets to the USA, it has cost $35. Now it costs the business another $10/unit to ship to FBA. Meanwhile, once it gets to FBA, Amazon takes $15 commission from the $100 price tag and charges $25 to ship. When all is said and done, the business makes a whopping $15 profit ($100 - $15 - $25 - $10 - $35).

So stop looking at the factory price and the Amazon selling price in a vacuum. Don't think that you've found this product that nobody else has ever searched for on alibaba. The prices are the prices for a reason.

Example #2

You find a product that is $2.50 from the factory and sells for $15 on Amazon. It's a small product that you can ship by sea for $.50/pc and taxes are 10%. Your total landed cost is $3.25. It costs you another $.50/pc to ship to FBA warehouse. You sell for $15 at Amazon and Amazon takes $5.50 commission and shipping. When all is said and done, your profit is a nice $
$5.75 ($15 - $5.50 - $3.25 - $.50).

39% margin, Not bad right? Why isn't everyone else selling this product? And if they are, why hasn't someone undercut the pricing to say $12 and make only $3.50?

Well you go head first into this product and then find out that it is very hard to organically rank for this product. You can't even get past page 4. So you run PPC and find out that the clicks are about $1 each. You convert at 20% so it's costing you $5 to get one sale. Now you are only making $.75/unit.

Worse yet, your competition decides to drop down to $13. They can do that because they are selling 50 units a day and ranked on page 1. On top of that, because they sell so many, they are getting the units for only $2 from China and shipping them over for $.20 a unit. So they could even go down to $11 if they wanted to.

You remain at $15, but now you only convert 17% so you actually lose $.25 per sale. You drop down to $13 and convert at 20% again, but now lose $.75 per sale.

So next time you see something with a nice healthy margin, stop and think about why the prices are where they are.

 

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[JAJT]

You find a product that is $2.50 from the factory and sells for $15 on Amazon. It's a small product that you can ship by sea for $.50/pc and taxes are 10%. Your total landed cost is $3.25. It costs you another $.50/pc to ship to FBA warehouse. You sell for $15 at Amazon and Amazon takes $5.50 commission and shipping. When all is said and done, your profit is a nice $
$5.75 ($15 - $5.50 - $3.25 - $.50).

39% margin, Not bad right? Why isn't everyone else selling this product? And if they are, why hasn't someone undercut the pricing to say $12 and make only $3.50?

Well you go head first into this product and then find out that it is very hard to organically rank for this product. You can't even get past page 4. So you run PPC and find out that the clicks are about $1 each. You convert at 20% so it's costing you $5 to get one sale. Now you are only making $.75/unit.

This has happened to me a few times. In fact it almost looks like you stole my numbers exactly from a few products I've had/have

Seriously, I've learned a lot about margin the hard way to this exact tune over my few years bringing in different products and trying to sell them on Amazon.

Glad you pointed this for others to read.

 

[Sully1994]

I have wanted to make this post for a while. I see so many people write, "I found a product with great margins" or "I found a cheap product that I can sell for a good profit, but the shipping is expensive".

You guys don't see the big picture. There is a reason the wholesale AND the retail prices are where they are. You NEED to understand that SHIPPING and DUTIES and HANDLING and EASE OF SELLING are all calculated into the profit margin of a product.

This is why the prices are where they are.

Example #1

You find a product that is $5 from the factory and everyone is selling it for $100 on Amazon. Guess what? There is a reason for that. Do you think that everyone is just trying to milk the consumers and get maximum profit? Why isn't someone else undercutting them and selling for $50 only?

The reason is probably because the $5 product costs $25 each to ship by sea and there is a 100% tax on this product. So by the time it gets to the USA, it has cost $35. Now it costs the business another $10/unit to ship to FBA. Meanwhile, once it gets to FBA, Amazon takes $15 commission from the $100 price tag and charges $25 to ship. When all is said and done, the business makes a whopping $15 profit ($100 - $15 - $25 - $10 - $35).

So stop looking at the factory price and the Amazon selling price in a vacuum. Don't think that you've found this product that nobody else has ever searched for on alibaba. The prices are the prices for a reason.

Example #2

You find a product that is $2.50 from the factory and sells for $15 on Amazon. It's a small product that you can ship by sea for $.50/pc and taxes are 10%. Your total landed cost is $3.25. It costs you another $.50/pc to ship to FBA warehouse. You sell for $15 at Amazon and Amazon takes $5.50 commission and shipping. When all is said and done, your profit is a nice $
$5.75 ($15 - $5.50 - $3.25 - $.50).

39% margin, Not bad right? Why isn't everyone else selling this product? And if they are, why hasn't someone undercut the pricing to say $12 and make only $3.50?

Well you go head first into this product and then find out that it is very hard to organically rank for this product. You can't even get past page 4. So you run PPC and find out that the clicks are about $1 each. You convert at 20% so it's costing you $5 to get one sale. Now you are only making $.75/unit.

Worse yet, your competition decides to drop down to $13. They can do that because they are selling 50 units a day and ranked on page 1. On top of that, because they sell so many, they are getting the units for only $2 from China and shipping them over for $.20 a unit. So they could even go down to $11 if they wanted to.

You remain at $15, but now you only convert 17% so you actually lose $.25 per sale. You drop down to $13 and convert at 20% again, but now lose $.75 per sale.

So next time you see something with a nice healthy margin, stop and think about why the prices are where they are.

Very smart post. Loved your price breakdown analysis.

Where things get especially fun is when you're competing with counterfeits that are so aesthetically perfect that consumers can't tell the difference. They have the luxury of undercutting and still making laughably amazing margins. Fortunately, Amazon has created quite a few barriers to entry for some of the categories infamously riddled with fraud- which discourages this type of behavior.

China doesn't give AF about intellectual property rights.

 

[luniac]

damn i always thought people set prices to see what they can get away with lol

 

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[MidwestLandlord]

damn i always thought people set prices to see what they can get away with lol

That is part of the whole "scripted" mindset in the country. The average consumer assumes there is much, much more margin than there really is.

A trade journal for my industry did a study a couple years back, asking consumers how much they think the business got to keep after all expenses (keep in mind your margin is post-COGS, but has to pay overhead as well)...the average answer was 50%

50%?!?!

I put a hair less than 2% to net income last year. I sell a commodity, so that is about right, in fact it's a little over the industry average according to this: Operating and Net Margins

Look at Retail Grocery for instance...1.89% net income. Keep that in mind the next time you think food is too expensive.

 

[luniac]

That is part of the whole "scripted" mindset in the country. The average consumer assumes there is much, much more margin than there really is.

A trade journal for my industry did a study a couple years back, asking consumers how much they think the business got to keep after all expenses (keep in mind your margin is post-COGS, but has to pay overhead as well)...the average answer was 50%

50%?!?!

I put a hair less than 2% to net income last year. I sell a commodity, so that is about right, in fact it's a little over the industry average according to this: Operating and Net Margins

Look at Retail Grocery for instance...1.89% net income. Keep that in mind the next time you think food is too expensive.

its not my fault, they didn't teach me this in school.

But to be fair, what are apple product margins?
they use brand loyalty to greatly overcharge, but at the same time noone forces the customer to be a stupid loyalist...
they make it more expensive for the rest of us damn it...

 

[CycleGuy]

How do you guys feel about MAP(minimum advertised price) policies? I feel like it helps the manufacturer maintain a control over their specific product. If you have any type of brand I think it's a must. If new iphones were sold for $99 or given away how many people would think they were getting a premium product? Online retailing and margins are so cut throat like biophase mentioned. We see some big players are willing to lose money on products to eliminate competition in the long term big picture.

 

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