Pricing

# Marginal Thinking

Remember struggling through story problems in high school math class? Well, we’ve got a doozy of a story problem for you in today’s blog post! If you’re not intimidated yet, read on…

My wife and I flew into Portland last night to spend six days exploring the city, the Columbia River, and Mount St. Helens. Our goal is always to pay for our trips by buying books along the way, so we need to figure out a game plan for how many books to buy during our adventure.  The total budget for this trip is right around \$1,500, and that includes airfare (thanks, Southwest Companion Pass!), hotels, a rental car, and food.

Here’s where the story problem comes into play:  How many books do we need to purchase to earn a net profit of \$1,500?  Obviously we will have to have a total list price on our books of over \$1,500 to account for Amazon’s fees and for the books that will never sell.  But how much higher?  The key to finding the answer lies in the exploration of the topic of margins.

Margins are nothing more than a fancy business term that describes how much profit is left over after all fees are deducted from the purchase price.  If someone sells \$100,000 of products on Amazon, but after Amazon’s fees and the cost of the merchandise (COGS), they are left with \$10,000, they would have margins of 10%.  If another seller can sell the same \$100k worth of product but winds up with \$40k in profits, their margins would be a much more impressive 40%.  At the end of the day, it’s not about how much you sell.  It’s about how much you profit.  This is why we were taught in college that “good business people think at a margin“.

In order to solve our story problem, let’s first take a look at the various fees involved in selling books via Amazon FBA.

Amazon’s Fee Structure:  Here’s the cold, hard truth – Amazon takes a large portion of your FBA sales in the form of fees.  How large?  Well, it depends on the sales price of your products.  The higher your Average Sales Price (ASP), the higher your margins will be.  Here’s a quick breakdown of Amazon’s fees if you use FBA (and you should sell your books via FBA, as I explained in a previous post).  You can check my math for yourself by using the FBA Calculator.

• Fixed fees:
• \$1.06 – Pick and pack fee
• \$0.85 – Outbound Shipping (for an average softcover book that weighs just under a pound – this fee will be higher for heavier books)
• \$1.35 – Selling fee per book
• \$0.99 – Additional selling fee per item (this fee is waived if you have a Professional Selling account and pay the \$39.99 per month for that privilege)
• Variable fees:
• 15% of the sales price

Let’s lay these fees out into a handy dandy chart to visualize your margins (profits) at a range of sales prices:

Moral of the story: A \$10 book is not a \$10 book.  It’s actually a \$5.24 book after factoring in Amazon’s fees.  But wait – there’s more!  More fees, that is.  Let’s take a look at the other fees associated with selling books via FBA.

The above chart represents my actual sales figures from August through October of 2015.  During that time period, my average sales price (ASP) was just a hair over \$20.00.  As you can see, the inbound shipping costs only decreased my margins by 4%, and the inventory storage fees were a paltry 1%.  The orange and gray sections of the pie chart are the fixed and variable fees we discussed in the first chart.

The 60% Rule: For every \$1,000 of books that I sell with an ASP of \$20, Amazon deposits \$600 into my bank account. If my ASP were to increase, my margins would go up as well.  If my ASP were to drop to \$15, my margins would shrink to about 53%.  If I sold cheaper books, I would have to work harder to earn the same profits.  We’ll discuss this concept in more detail in next week’s post, but the concept of margins is why I work hard to source higher-priced books.

The 50% Rule: Unfortunately, you won’t sell every book you send into Amazon.  The prices may tank to the point where you’ll lose money if you sell it, or the book may go out of style and never sell another copy on Amazon again.  In my business, I expect to sell between 70-80% of the books I send to Amazon.  If my operating margins are 60%, as outlined above, and I sell 80% of my books, then my new adjusted margins are actually 48%.  This means that for every \$1,000 of books that I send to Amazon, I can now expect to eventually have \$480 deposited into my bank account.  This will help to keep things in proper perspective next time you source \$1,000 worth of books.

Other fees:  There are other costs that we haven’t considered yet, including the cost of the book and Uncle Sam’s fair share.  And don’t forget to factor in your time involved in finding and processing the books.  If that \$1,000 worth of books is only going to net you \$480 in cash, remember to deduct the cost of the books (perhaps \$100) to arrive at your true margin at the end of the day.

The answer to the original question:  Since this isn’t an actual math book, you didn’t have the option to turn to the back of the book to find the answer key.  So let’s walk through the original story problem together!

Goal: \$1,500 of profit

Target list price per book: \$17.50 (mine is usually closer to \$20, but I’m going to err on the side of being conservative)

Margin per book: \$11.61 (after all FBA fees are factored in)

Adjusted margin per book, planning for 80% of my books to actually sell: \$9.29 (\$11.61 times 80%)

Average cost per book: \$1.50 (just a hunch)

Net margin per book: \$7.79

Target number of books: 193 (\$1,500 divided by \$7.79)

If the numbers above pan out, we need to find just under 200 books to completely pay for our adventure.  Game on!  While I’ve been writing this post, my wife has been researching sourcing locations here in the city of Portland.  We’ll provide an update on our sourcing adventure in the next post.

Conclusion:  Hopefully this discussion about margins gives you a better idea of what you can realistically expect in the world of FBA book selling.  Did you learn something new?  Do you have any questions or comments you’d like to share?  Leave a note below to keep the conversation going.

A Look Ahead:  Next week, I’ll share the results of my Portland book scouting adventure and also discuss how to use the concept of margins to build a scouting philosophy that best fits your personality.  Stay tuned!