Something we’ve noticed while working with Amazon sellers is a recurring difficulty with assessing the overall viability of their operation. Our experience managing catalogs for our various clients shows that some business owners focus solely on sales revenue and are missing a more important parameter that should not be overlooked: account profitability.
This blind spot usually stems not from a lack of knowledge, but from a lack of understanding of all the variables that contribute to Amazon Profit and Loss Statements and, often, a lack of time to dig deeper into its less obvious parameters.
We get it–there’s so much to do while running an E-commerce business, and the Profit and Loss (P&L) Statement may seem complex and even overwhelming. However, this fundamental report is based on a basic formula that factors in all your account’s income and expense variables. It includes both the expenses you can control and those you can’t.
The main goal of the P&L report is to allow you to identify the expenses that hurt profitability and address those you can control to maximize income.
In this article, we’ll explain why your Profit and Loss Statement is crucial to assessing the profitability of your Amazon store–and what you should include in yours. Most of the information we will analyze here can be found under Amazon Payment reports. We recommend running the report monthly, in addition to quarterly and yearly reports. Download the transactional date range report for the specific time frame you want to examine.
As an agency focused on maximizing the profitability of our clients’ stores, it’s a tool we constantly utilize, and we strongly recommend that others do the same.
What to include in the P&L statement?
To start out, create a separate P&L report for each marketplace, calculate the percentage of total income for each field, and combine the numbers for a global overview. This way, you can chart your numbers for each country and analyze which markets are profitable, which should be improved, and which are not worthwhile for your business.
Marketplace view (e.g. US):
Some of the fields may vary from country to country, but you can aggregate the essential clauses for an overall analysis.
Here are the main variables we recommend including in your monthly P&L report to better assess your Amazon profits:
- Total income
- Amazon fees
- Landed costs
- Related costs
- Gross profit
Let’s break these down one by one:
Income: All income, including sales, credits (e.g. shipping, gift wrap), liquidation, etc.
Refunds: Your expenses on returned items
Amazon fees: Includes various Amazon costs (such as selling fees, fulfillment fees, storage and removal fees, Shipping, etc.). Diving into these costs is essential to ensure you pinpoint any unusual expenses that might need your attention.
Marketing: Includes the cost of advertising, promotions, deals, promo rebates, etc.
Landed Costs: A comprehensive overview of your profits must include the manufacturing, handling, and shipping costs of sold items. Adding these numbers is vital to fully understand your Amazon profitability.
Sales-related costs: Factor in additional costs like software, accounting, campaign managers, virtual assistants (VAs), etc
Gross profit: The final profit calculation after accounting for l all parameters.
How to analyze your P&L report?
Now that you’ve put down the numbers, what’s next?
If you’ve filled out your P&L report and concluded that your account is profitable and meets your profitability goals, that’s great!
If it’s not, is there anything you can do about it? Absolutely! Go over the numbers line by line and check where you can minimize costs.
Here are a few examples of how you might be able to lower your business costs:
Refunds: If the percentage of refunds from all your sales is high, there may be a problem with one of your products. We recommend taking a deeper look at your customer returns report and examining which products are returned, why this happens, and how product quality affects them. It’s also a good idea to take a look at the Voice of the Customer (VoC) Dashboard and examine the percentage of negative customer experiences (NCX) for each product.
Amazon fees: There are many expenses you can try to cut back on here. If your storage costs are high, you can manage your inventory better, or you may need to redesign and optimize your e-commerce packaging.
Marketing costs: Carefully optimize your paid advertising and set advertising cost of sales (ACoS) and total advertising cost of sale (TACoS) goals that are suitable for your product’s life stage. There are no rules of thumb here; each business should adjust its ACoS to its goals and product margins. If you are running deals, make sure to choose the right products so that the deals are profitable and have good ROI.
Landed costs: Shipping costs have constantly been changing over the last few years, so this can be a great opportunity to examine what you spend and lower shipping expenses by working with another carrier with better prices.
Related Costs: Does your business need them all? Maybe you can save in this area.
We will not be covering product-based profitability in this article, but the next step would be to analyze your P&L report for each product. This can help you to determine whether some products are profitable while others are not, and understand how to cut losses on these particular items.
What can you learn from your P&L report?
Analyzing your P&L report will clarify whether you can meet your profitability goals and help you adjust your selling activities accordingly. Remember that even if your income seems high and you are selling loads of products, if your account is not profitable at the end of the day, the effort is not worth it.
Our final tip is to set clear and measurable goals. Your business results will improve if you’ll see the whole picture, analyzing and following the goals you’ve set.
For instance, establishing a TACoS goal will prevent unpleasant surprises due to excessive marketing expenses.
There are several tools available that track profitability, but to make it as easy as possible for you to crunch your numbers, we made a customizable P&L report template that you can use for your business. Input your email below to receive your copy of this template.
If you’re in search of an agency to help you grow your Amazon sales and profitability, you’re in the right place. Enter your details in the form below or shoot us an email, and let’s talk!