💰Why Product ROI Matters More than Margin in Amazon FBA

💰Why Product ROI Matters More than Margin in Amazon FBA

👑Cash ROI is king

Today, I will discuss the main product KPI we use at Inversal to succeed at Amazon FBA.

Most aggregators have focused on profit margin after PPC but before OPEX when acquiring businesses in the last 3 years. I will explain why the margin is less important than cash ROI.

Product is key to this. This is why the product team has to lead growth in any e-commerce business once we achieve product market fit. Not the marketing team.

Margin is a Vanity Metric

We all want a 25% net margin business. Most are happy with 15% nowadays, but this doesn’t reflect the reality of the cash we need to grow the business. E-commerce is a long game; you only get rewarded once you sell the business. Unless, of course, you have one of those unicorn brands.

ROI is King

The number one factor of success in Amazon FBA is access to capital, enabling more inventory turns. On average, a business that sources from China can do 3 turns a year:

  1. We order with a small down payment while the goods are being produced
  2. We pay the full balance, and then it takes, on average, 30 to 45 days to get to Amazon
  3. We order 3 months of inventory and will not receive full cash investment until month 4. But, we need to reorder more 60 days into this 120-day cycle if we are growing.

This means we must go from 1,000 units on the first order to 3,000 on the second order until we achieve best-seller status. Only then can we convert the product to cash cow mode.

Inversal aims to have a minimum of 100% ROI in our products after PPC. If we had access to cheaper capital, we could go lower, but that is not the case. External costs are usually not accounted for in the calculation, which gives us enough margin of error.

Now let’s see how offering the right product is vital to an e-commerce business’ success.

Discontinued Product Example

This product has made us over $200,000 in profit over the last 5 years. But, we have decided to discontinue it in January until we can lower the COGS. We have better uses of our cash than reordering.

In April 2022, the margin was 19% and the ROI was 57%. This was sourced from the USA. We had credit terms with the supplier and could hold 60 days of inventory instead of 90 days.

Discontinued Product Example

By April 2023, the main competitor decided to drop prices, and there was a new competitor. The manufacturer increased our COGS, and the numbers looked much worse.

We can’t invest $25,000 to make just $6,000 over 3 months. If something else happens, we might go into a negative margin.

The listing has over 3,000 reviews with a 4.5 average rating, but we cannot compete with a brand with $250MM+ revenue and can keep the cost low as they have more scale.

Perfect Product Example

I designed this product for one of our brands back in April. It has more quantity than its competitors, and its main image is better than its Chinese competitors.

I knew we could rank it, but we would require many units. We had 30,000 produced immediately after month 3. We are achieving full scale after hitting 100 reviews this second week of January.

This product is our north star: 30%+ margin, 300%+ ROI after one month. We can now reorder enough for the next 4 months and reinvest in new variations that increase the average order value.

Competitors on this product have 10,000+ reviews. This shows that a better product with more perceived value at the same price will always win.

BONUS: Low Margin, High ROI Product

This one is a special case of one of our turnaround brands. The product has low COGS but the Amazon fees are very high. Once we stabilize the ad cost to 10%, it will be a 200% ROI product with just a 15% margin.

Conclusion: Cost of Capital is the MAIN FACTOR of SUCCESS

We need to keep growing to get access to cheaper capital. Having loans at 6% interest will allow us to keep products under 100% ROI or buy those brands from others who do not have access to that capital at $1 for the goodwill; otherwise, they would be shut down.

This is where we believe e-commerce is going by the end of this decade. You will not be able to compete with rollups and bigger companies who have the scale to achieve $50MM+ credit lines to purchase and scale.

This is a major part of my job at Inversal: finding us the products we can scale at 100%+ ROI while looking for cheaper capital as we grow the company.

On another Sunday, I will explain more about Shopify product economics, why they are so different from Amazon FBA, and how product lines are incompatible if a brand wants to succeed in both.

Here are some links to stay connected:

Marc Roca
Founder & CEO of Inversal

Marc Roca Founder & CEO of Inversal - Face

close