Key Performance Indicators (KPIs) for Measuring Success as an Amazon Seller
Introduction
As an Amazon seller, the road to success is paved with data. Knowing which numbers to focus on is paramount to crafting a winning strategy. Key Performance Indicators, or KPIs, are the metrics that matter most in assessing the health and growth of your business. This blog post will delve into the essential KPIs that every Amazon seller should monitor. From net profit margins to Total Advertising Cost of Sale (TACoS), we will explore how these metrics can make or break your Amazon venture.
Net Profit and Percentage Growth (Month-over-Month & Year-over-Year):
The number one metric we look for in a business is net profit: your true bottom line. Net profit is the amount you earn after all costs and expenses are deducted from your revenue. Many sellers may flaunt 7 or 8 figure seller, but the truth is many of them have margins and net profit less than mid 6 figure sellers.
It depends on the stage of business: growth or maturity, but most people would rather a simpler company doing 500k/ year at 40% margins = $200k versus the big 3M/ year seller with 2% margins = 60k / year.
However, knowing your net profit for just one month isn’t enough; you need to analyze the trends. Monitoring your net profit growth on a month-over-month (MOM) and year-over-year (YOY) basis is crucial. This helps you to understand if your business is growing, stagnant, or declining. By comparing net profit percentages over time, you can gauge the sustainability and scalability of your business, which in turn can inform future investment and marketing decisions.
Revenue Growth Percentage (Month-over-Month & Year-over-Year):
Revenue is the top line; it’s the total amount your business makes through sales before expenses. This is the sexy number that most people like to lead with as discussed before and it definitely is important; it shows how much total money you are bringing in and still is important.
Even more so is to monitor the growth month-over-month, year-over-year and seasonally; if you had a huge Q4 and January is a dip, a MOM analysis of Jan vs Dec is obviously going to be down but doesn’t mean it’s a bad thing. Understand what timeline to compare accurately, and determine how to improve it. Especially coupled with net profit, sometimes it makes sense to back off the growth if net profit is dropping too much and focus on efficiency
Advertising Cost of Sale (ACOS) & Total Advertising Cost of Sales (TACOS):
Advertising Cost of Sale, often abbreviated as ACOS, is a metric that directly connects your advertising spend to the revenue it generates. It’s calculated by dividing your total ad spend by your total advertising revenue. It shows you how effectively you are spending your advertising dollars.
Total Advertising Cost of Sale, TACOS, is a metric that directly connects your advertising spend to the total revenue of your company. It’s calculated by dividing your total ad spend by your total revenue and shows how reliant on advertising you are to generate revenue.
For example spending $5,000 in advertising and having $10,000 in PPC sales, and in that time period a total sales of $25,000: ACOS = 50%, TACOS = 20%.
ACOS can fluctate depending on product stage- if you are launching its not uncommon to have >100%, but ideally should be under 30% for maximum profit, so 50% is kind of high, but it depends how profitable your products are or if there are repeat customers. Sometimes a high ACOS can be used to aquire a customer once, but if they are repeat buyers, and require no more advertising the TACOS can be low which is what matters more: total profitability.
That TACOS of 20% is a bit high, with more companies aiming to be under 14%, but again it depends how profitable your account is.
This KPI is crucial because it gives you insight into how effectively your advertising dollars are contributing to your overall sales. A high TACOS might suggest that you’re spending too much on ads relative to the revenue your company generating. It also can show how well (or not) you are ranking and able to get organic traffic. Comparing the percent organic vs percent paid sales is another helpful metric.
Looking at the aggregate TACOS is helpful in determining overall profitability, but you should also check individual products as they may have different strategies. A newly launched product might have 30% or more on advertising, but a mature product under 10% would be ideal. Overall, shoot for a TACOS under 15%, and 10% ideal
Conversion Rate:
Last but definitely not least, your conversion rate is a KPI that can’t be ignored. The conversion rate is the percentage of visitors to your product listing that makes a purchase.
This metric is a direct reflection of the effectiveness of your product listings and pricing strategies. A high conversion rate could be indicative of compelling product listings and competitive pricing, while a low conversion rate might suggest that your listings are not persuasive enough or that your pricing is off. Keep a close eye on this KPI, as tweaking your product listings or adjusting pricing can significantly impact your bottom line.
Make sure to check trends in the total account level to ensure it is rising, and also by product to run experiments and test changes like new images, bullet points, a title and more.
If eCommerce was boiled to equation it would have 3 parts: you need eyeballs to see your product (impressions), you need people to be interested in it (clicks), and you need people to buy it (purchases). If you are trying to grow, it can be helpful to compare your percentages to benchmarks to determine if you have a conversion problem and should tweak the listing, or simply need more people to view it and then can focus on ranking higher or better advertising.
General guidelines vary by categories and competitiveness, but 3-8% is the range you should be targeting for efficient ad spend. If it’s at the low range or lower you should be optimizing your listings
Conclusion:
By keeping tabs on these four Key Performance Indicators – Net Profit and Percentage Growth (MOM and YOY), Revenue Growth Percentage (MOM and YOY), Total Advertising Cost of Sale (TACOS), and Conversion Rate, you arm yourself with the data needed to make informed decisions. Remember, what gets measured gets managed. Tracking these KPIs will provide you with a clear picture of where your Amazon business stands and what steps you need to take to scale new heights.