Say I decide to sell a $20 item on Amazon. I can purchase the item at a reasonable cost, say $8.50. I affirm that Amazon permits the solution and I create the entrance, to sell on the market. I put in a name, a description, and a few photos that match Amazon’s rules. I then list it.
I soon discover that other merchants are selling this item and are listing it on”my” entry. This pushes the price down to, say, $18, including shipping.
I list at this price to stay competitive, which generates a couple of sales.
I then do the math. From the U.K., the sales tax, known as VAT, is $3 — that comes from the $18. Amazon needs its 15 percent, which is $2.70. You need to pack the product and send it, which could cost another $2.50. Therefore, from the $18 sales price, I keep $9.80. However, the item costs $8.50, making my gross profit only $1.30.
I have been made to follow Amazon’s rules. I have been made to underprice to have sales. I’ve made the least money in this supply chain, which includes your organization, the taxation authorities, Amazon, the shipping company, and the provider. However, I have done all of the work and taken all of the risk.
So, whom do I actually work for?
It doesn’t stop there. An Amazon retailer of medium size will use inventory management and order processing applications. The merchant could also be utilizing repricing software. The cost of the third-party providers keeps increasing. By way of instance, one of my vendors, Linnworks, an order management software supplier, has shrunk its price.
You’re also at the mercy of those third-party suppliers, as retailers need to take any price increase in this pre-holiday period. It’s too late to sensibly alter key service providers so near Christmas. Linnworks knows I need to pay the thousands of extra dollars they need.
But third party vendors should be cautious. If retailers keep getting gouged, we’ll look to change our business plan. In doing this we’ll look to reduce costs whilst keeping or increasing profit margins.
This may include the counter-intuitive approach of drastically reducing the amount of items we sell.
If we stop selling the slow moving things, the low margin products, and the dead inventory, we might discover that focusing on the top 20 percent of inventory produces the maximum profit. Do some math. If we stopped selling the cheapest 80 percent and only concentrated on the top 20 percent, what changes could we make? What costs can we cut or even eliminate?
For me, cutting back 80 percent of the dead inventory means that I have far fewer things to maintain. I need repricing software. With so few inventory lines, stock management becomes much less of a problem. I could say goodbye to Linnworks and save a couple thousand dollars. If I no longer need the 80 percent, then I can invest more in the 20 percent. Buying in higher quantities could diminish the per-item cost. And I’d have space to store more of these, having removed the other 80 percent.
It is a scary idea. However, by cutting back my enterprise and decreasing my turnover by about 50 per cent I could wind up working less and earning more money.
So, do I scale up my company, hire temporary employees, buy plenty of Christmas inventory, and work countless hours per week so that these other companies can gain more than me?
Or, do I reduce my purchasing by focusing on the 20 percent high-profit linescut back on the workload, and take a better share of the gain, with perhaps a slightly smaller total gain?
It’s all a risk, but I work to live. It’s so easy to be blinded by scale and assume that growth is great.