By Martin Heubel, Amazon Strategy Consultant at Consulterce
Then you need to keep track of any profitability headwinds.
Here’s how to do it in 3 simple steps:
1. Understand Amazon’s P/L
There are three margin metrics you should know as an Amazon vendor:
- Pure Profit Margin (PPM),
- Net Pure Profit Margin (Net PPM),
- Contribution Margin (CM).
PPM measures the difference between your cost price and average selling price.
Net PPM measures your PPM, but also accounts for your trade terms and any given sales discount.
CM measures Net PPM, and includes Amazon’s variable profit and cost centres on your account.
2. Identify profitability headwinds
If your PPM declines, it’s because:
- Your Average Selling Price is down,
- Your cost price has increased,
- A combination of both, e.g., your ASP has not grown as much as your cost price.
If your Net PPM declines, it’s because:
- Your PPM has gone down,
- Lower back-end terms, or
- Missing trade terms
Note that Vendor Managers won’t typically share insights into Amazon’s Contribution Margin.
However, you can improve CM by optimising your packaging and supply chain with the online retailer.
3. Measure and track progress
There’s no point in only looking at your data dashboards when Amazon asks for margin support.
Instead, create a weekly reporting routine for your team.
For example, have your team report on your account’s margin performance every Monday.
That way, you create a process to identify margin headwinds before they manifest in your P/L.
Giving you a head start to prepare any countermeasures before your Vendor Manager requests them.
For further information and support, contact Martin Heubel here
