How to Cut Your Losses Selling on Amazon
Once you’ve been at the Amazon business for more than a year, you’ll probably have some duds sitting in the warehouse. Sometimes I buy junk. Sometimes popular products lose their popularity and you end up with leftover items. It’s ok. It’s part of the business model.
Maximize Profits and Minimize Expenses
Just like any business you need to maximize profits and minimize expenses. The key to making the most as an Amazon FBA seller is not only maximizing profits on your great purchases, but also on minimizing your losses on the junk.
Many times the products are (or were at one time) great products. Since we typically review sales rank at the purchase time, often these products just need a little discount in price to move them.
Expect It and Accept It
If you have trouble accepting the need to discount prices or even sell at a loss, you should change your frame of thought. Dealing with those duds is an expense in running the business, just like any other expenses. Focus on minimizing the expense and you’ll be a better businessperson in the long run.
If you’re diligent and work hard, you can find a way to dispose of those products that don’t sell so well taking the smallest loss possible.
Long Term Storage Fees
Each year on February 15 and August 15 Amazon charges long term storage fees for items in the Amazon warehouses 365 days or longer. The Long-Term Storage Fee is $22.50 per cubic foot (in addition to the regular storage fees). The fee applies to items that you have multiples of. One unit of each product won’t be charged.
Not only is the fee pretty steep, it’s being assessed on items which aren’t selling. Adding additional costs to items already dragging down your profitability is going to take you in the wrong direction.
Use the long term storage fees as a motivator to clean out your inventory!
How to Clean Up Your Inventory
Here’s how I handle purging my inventory of those loser products:
- Keep a reminder in your calendar before the long term storage fee dates. I set my reminder 60 days before to give me some time to work on selling the inventory.
- Pull the Inventory Health report that will identify which products are subject to long term storage fees and how much. You can also use the Recommended Removal report once you are a month away from the dates, but you can use the Inventory Health report anytime during the year.
- Review you break even prices and calculate rock bottom prices (I previously calculate break even prices).
- Begin to lower prices. I usually lower them incrementally every 2-3 weeks during this time.
- Promote the products. You can also offer promos instead of (or in conjunction with) your lower prices. I had some food products that were nearing the expiration date. Offering a buy one get one free promotion helped boost sales.
- If I can’t sell them at my rock bottom price, then I’ll consider donation and disposal options.
Lower Your Prices for Lower Profits
Some products will still turn a profit at a lower price and sell much faster to avoid long term storage fees. Just make sure you know your numbers to find out what price (with long term fees factored in) generates the most profit.
Here’s an example:
I originally purchased these Cloth Diapers for $5.23, which would have generated around $7 in profit at the current selling price of $18.83. However, they just weren’t selling fast enough; I had 10 that would be subject to a long term storage fee of $19.19. My break even price on each was $10.75. I quickly lowered my price to $12.99 and immediately sold out to avoid the dreaded long term storage fees. I reduced my profit to $2. As you can see, the long term storage fee would have reduced my profits to $5. Lesson learned: don’t lower the price too fast! Could I have avoided the fee but made more money? It’s hard to know, but that’s why it’s important to do your calculations before you start lowering prices. In addition, give yourself enough time to lower your prices slowly.
Selling at a Loss
If you can’t lower your prices and still turn a profit, you may need to sell at a loss. Now the focus shifts to minimizing your losses.
Don’t forget some items that you sell just slightly below or at your break even cost will still show a positive result in the profit column this month. That’s because you’ve already spent the money to ship it in and paid for storage. You can’t recover your sunk costs, but you can still put money in the bank and minimize your loss. If you have to slash your prices even further, focus on getting the most money back out of the product.
Here’s an example:
I bought these Dora toys for $5.80 and they generate an $11 profit when they sell for $25. However, I still had 12 subject to long term storage fees of $77.56! Yikes!!
My original break even was around $12. But I calculated that it would be worth it to go below that price to recover some of the investment in the product. At $9.99 they generate a $2 loss. However, since the storage and inbound shipping and overhead had already accounted for $1.34 of the cost (and are already on my books), I was only subject to a loss of $0.67 selling them at $9.99.
After fees paid at the sale, I recovered $5.13 each. While it isn’t much, it was $61.56 in sales versus paying $77 in fees!
If they wouldn’t have sold, I would have been willing to go to my rock bottom price just above $4. At that price Amazon still would have put a positive number in my account after fees, even though I would have taken a loss.
I took a total loss on them of $24. If I would have paid the fees and later sold them at the same lower price (to actually sell them) I would have had over a $100 loss. Sure, maybe I could have kept the prices higher, but maybe I couldn’t have. We will never know, since I took the $61 and reinvested it in other products.
By the way, it wasn’t a total loss on the product. I sold them for an average of $25 back when they were selling, and made almost $300 profit selling them. Even with the $24 loss, it was still a product that generated $273 in total profit.
Keep a Portfolio Mindset
It’s important to view the items as a portfolio. The dora toys appeared to be a loss in recent memory as I focused on selling them off, but looking at the calculation as a product showed that the item was a profitable investment! Keep a big picture outlook on selling and accept that you’ll have some winners and losers… just make sure to maximize the winners and minimize the losers!
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- How I Made $50,000 Selling on Amazon Last Year
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