Profit Margin words and an arrow rising drawn on a dry erase board with red marker or pen to illustrate an increase in net earnings or money made by a business or company

Marginal Thinking

| 37 Comments

Remember struggling through story problems in high school math class? Well, we’ve got a doozy of a story problem for you in today’s blog post! If you’re not intimidated yet, read on…

My wife and I flew into Portland last night to spend six days exploring the city, the Columbia River, and Mount St. Helens. Our goal is always to pay for our trips by buying books along the way, so we need to figure out a game plan for how many books to buy during our adventure.  The total budget for this trip is right around $1,500, and that includes airfare (thanks, Southwest Companion Pass!), hotels, a rental car, and food.

Here’s where the story problem comes into play:  How many books do we need to purchase to earn a net profit of $1,500?  Obviously we will have to have a total list price on our books of over $1,500 to account for Amazon’s fees and for the books that will never sell.  But how much higher?  The key to finding the answer lies in the exploration of the topic of margins.

Margins are nothing more than a fancy business term that describes how much profit is left over after all fees are deducted from the purchase price.  If someone sells $100,000 of products on Amazon, but after Amazon’s fees and the cost of the merchandise (COGS), they are left with $10,000, they would have margins of 10%.  If another seller can sell the same $100k worth of product but winds up with $40k in profits, their margins would be a much more impressive 40%.  At the end of the day, it’s not about how much you sell.  It’s about how much you profit.  This is why we were taught in college that “good business people think at a margin“.

In order to solve our story problem, let’s first take a look at the various fees involved in selling books via Amazon FBA.

Amazon’s Fee Structure:  Here’s the cold, hard truth – Amazon takes a large portion of your FBA sales in the form of fees.  How large?  Well, it depends on the sales price of your products.  The higher your Average Sales Price (ASP), the higher your margins will be.  Here’s a quick breakdown of Amazon’s fees if you use FBA (and you should sell your books via FBA, as I explained in a previous post).  You can check my math for yourself by using the FBA Calculator.

  • Fixed fees:
    • $1.06 – Pick and pack fee
    • $0.85 – Outbound Shipping (for an average softcover book that weighs just under a pound – this fee will be higher for heavier books)
    • $1.35 – Selling fee per book
    • $0.99 – Additional selling fee per item (this fee is waived if you have a Professional Selling account and pay the $39.99 per month for that privilege)
  • Variable fees:
    • 15% of the sales price

Let’s lay these fees out into a handy dandy chart to visualize your margins (profits) at a range of sales prices:

Screen Shot 2016-06-17 at 10.43.35 PM

Moral of the story: A $10 book is not a $10 book.  It’s actually a $5.24 book after factoring in Amazon’s fees.  But wait – there’s more!  More fees, that is.  Let’s take a look at the other fees associated with selling books via FBA.

Screen Shot 2016-06-17 at 10.30.04 AM

The above chart represents my actual sales figures from August through October of 2015.  During that time period, my average sales price (ASP) was just a hair over $20.00.  As you can see, the inbound shipping costs only decreased my margins by 4%, and the inventory storage fees were a paltry 1%.  The orange and gray sections of the pie chart are the fixed and variable fees we discussed in the first chart.

The 60% Rule: For every $1,000 of books that I sell with an ASP of $20, Amazon deposits $600 into my bank account. If my ASP were to increase, my margins would go up as well.  If my ASP were to drop to $15, my margins would shrink to about 53%.  If I sold cheaper books, I would have to work harder to earn the same profits.  We’ll discuss this concept in more detail in next week’s post, but the concept of margins is why I work hard to source higher-priced books.

The 50% Rule: Unfortunately, you won’t sell every book you send into Amazon.  The prices may tank to the point where you’ll lose money if you sell it, or the book may go out of style and never sell another copy on Amazon again.  In my business, I expect to sell between 70-80% of the books I send to Amazon.  If my operating margins are 60%, as outlined above, and I sell 80% of my books, then my new adjusted margins are actually 48%.  This means that for every $1,000 of books that I send to Amazon, I can now expect to eventually have $480 deposited into my bank account.  This will help to keep things in proper perspective next time you source $1,000 worth of books.

Other fees:  There are other costs that we haven’t considered yet, including the cost of the book and Uncle Sam’s fair share.  And don’t forget to factor in your time involved in finding and processing the books.  If that $1,000 worth of books is only going to net you $480 in cash, remember to deduct the cost of the books (perhaps $100) to arrive at your true margin at the end of the day.

The answer to the original question:  Since this isn’t an actual math book, you didn’t have the option to turn to the back of the book to find the answer key.  So let’s walk through the original story problem together!

Goal: $1,500 of profit

Target list price per book: $17.50 (mine is usually closer to $20, but I’m going to err on the side of being conservative)

Margin per book: $11.61 (after all FBA fees are factored in)

Adjusted margin per book, planning for 80% of my books to actually sell: $9.29 ($11.61 times 80%)

Average cost per book: $1.50 (just a hunch)

Net margin per book: $7.79

Target number of books: 193 ($1,500 divided by $7.79)

If the numbers above pan out, we need to find just under 200 books to completely pay for our adventure.  Game on!  While I’ve been writing this post, my wife has been researching sourcing locations here in the city of Portland.  We’ll provide an update on our sourcing adventure in the next post.

Conclusion:  Hopefully this discussion about margins gives you a better idea of what you can realistically expect in the world of FBA book selling.  Did you learn something new?  Do you have any questions or comments you’d like to share?  Leave a note below to keep the conversation going.

A Look Ahead:  Next week, I’ll share the results of my Portland book scouting adventure and also discuss how to use the concept of margins to build a scouting philosophy that best fits your personality.  Stay tuned!

37 Comments

  1. This explained marginal thinking very well. I don’t think many book resellers understand this concept. If more people understood exactly how much they are making per hour of work they would think twice about the books they select and the price they charge per book. I bet many new sellers find this out the hard way and then drop out.

    • Precisely. The fees are just a part of business, but it’s important to understand them before jumping off the deep end. Many sellers mistakenly sell books at a loss, either from a lack of knowledge or from bad repricer settings. Good points overall.

  2. Wrote a heartfelt response praising your site and raising some questions and when I his post your site said it looked like spam.

    So Here is my second try.

  3. I do that as well for every sale or trip i take..I’ve always believed you make your profit when you buy..I have a minimum price i will list for..for example lets say $10..if i can’t buy a book to list at least $10, i let it there..so if i come home from a library sale with 45 books i know the least i’ll make is $250..45 x 10=$450 less 50% to Amazon and cost of book plus shipping..i usually try for $15..to go less there will not be much competition..figuring it all out at $10 is just simple math..love day trips where i make $300 plus…also, i’ve started doing rental houses for mini vacations so i can source the entire town where i’m staying and write it all off as a business expense.

  4. I know what your saying but I find it hard not to put that book in my cart that after fees I’ll make 5 or 6 so I thought till you subtract my time and taxes. I’ll just have to focus more on textbooks and those books that are required reading. I bought some fiction books that I new I wouldn’t make much at all but figured it would help my sales metrics. They all sold quick but even after I added them all up together it still sucked. I’m going to aim for twenty as well for books I buy at thrift stores. I’m going to start using Eflip more instead of driving so much. Thanks Caleb for all your help.

    • Good thoughts, Dan. Just to clarify – I do pick up several $10-12 books from thrift stores. I’ll even snag an $8 book or two if the sales rank is phenomenal and I’m fairly certain it’ll be a quick flip. My average book is $20, but there are plenty of $10 books (and $30-50 books) in that mix!

  5. This is great information. I HAVE A GARAGE FULL of text books but whenever I plug them into camel camel camel it’s just not worth it now the real transparency of The charges from fba will make book section smarter

    • I’m glad you enjoyed the read – textbooks can weigh as much as 5-8 pounds in some cases, and that added weight definitely needs to be considered before sending in an $8 textbook that weight 8 pounds.

  6. I think text books will shortly be a thing of the past – at least for general subjects. Amazon is partnering with the companies that are producing the books to sell them on the Kindle and they’re also starting to rent them out. Sometimes, I’m afraid people think text books are a panacea – the only way to make money on Amazon with books.

    I’ve come to the conclusion that for a sole person who sells books, they have to be buying and shipping almost every day to make a living at it, i.e., $40000+. It requires LOTS of hustle. Right now, I have 1000 books and send in about 160 a month. Last year, I had drove around the state every single day looking for books. Some days, I’d come up empty handed, but spent hours looking. Other days were clear winners. For me, it’s a good way to make money, but I definitely need to subsidize it with other types of income (i.e., Ebay, etc).

    • I agree to disagree with your textbooks comment. Many schools have attempted to switch completely over to digital books, and in some cases they have been successful. In other cases the students have bonded together and signed petitions to bring back physical textbooks. At least for the time being, textbooks aren’t going anywhere fast.

      Regarding your second point, you’re spot on. In order to make a full-time income with books, it requires a lot of work, hustle, a bit of knowledge, and some start-up capital to really get the ball rolling. It’s a great hobby to earn some side spending cash as well!

      • Hey, Caleb. I thought I would comment here, even though Judy’s post is five months old now. Her second paragraph comments hit home with me. Yesterday, I drove 100 miles to a new thrift store and found ONE decent book. I was so disgusted I didn’t even buy that one, and got in my car and drove the hundred miles home. I had planned on going full time on 12/10, but the thought of giving up a regular paycheck (even a minimum wage one) for something as costly as the book selling business is extremely nerve racking. With Amazon’s latest fee increases (again), the ever-increasing cost of thrift store & library store books, the huge (for me) gas expense involved, and all the other costs for supplies, shipping, etc, etc, etc, not to mention the monetary value of time and labor–with all that, I don’t see how any kind of full time living could be made selling anything less than about $75,000 gross per year, which means you’d probably need to list about a quarter of a million dollars worth per year. For individual books, it’s seeming to me that selling anything for less than about $20 makes the entire effort not worthwhile in terms of cost/time/effort involved. These numbers are definitely not analytically arrived at, but are just my reflections on how this business is a huge black hole of never-ending expenses & fees; very discouraging.

        • Hey Terry – we chatted online about this, but I wanted to provide a few additional comments here:
          — To gross $75,000 per year, you’d probably only have to list $125,000 – $150,000 in books, assuming you priced them accurately. I sell 80% of my books within 12 months, which means that if you did it right you could theoretically arrive at $75k with just under $100k listed.
          — The higher the ASP, the better profits you’ll have overall. My minimum target is $10, but I’ll drop to $8 on books with a rank under 100k that are selling often. I ignore MF prices when the rank is under 2 million.
          — Amazon actually loses money on shipping FBA orders each year. It wouldn’t surprise me if they keep raising prices and encourage sellers to look at Merchant Fulfilled Prime shipping within a year or two. But for now the fees still make sense to sell FBA. Many of the books I’m selling for $15-$20, have MF prices under $5, so it’s still more effective for me to pursue FBA and I still end up with more profits and less storage headache in my own house.

          Bottom line: there’s still tremendous opportunity here in this space. I’m sorry you’re having a tough go of it though.

          • Hey, Caleb. I just now saw this. Thanks for the additional input after our online chat. Tracy and I had worked out a listing goal equaling about $108K per year, producing gross sales of $36K. So that number isn’t too far away from what you’ve stated here. According to your numbers then, $108K in listing should result in much more than $36K gross if purchases and pricing are done correctly. That is motivating, which I need right now. I definitely want to succeed at FBA, but if that method ever becomes untenable because of Amazon’s changing policies and/or emphases, then I would have absolutely no interest whatever in storing books at home and doing things merchant style. Anyway, thanks again and I hope you and Mrs. Book Flipper have a very Happy Thanksgiving today (or I hope you had one if you see this afterward).

          • Much appreciated, Terry. I would agree that the $108k target is much more realistic (and attainable).

  7. Also, thanks for the post, Caleb. Very well done.

    One think to add. I noticed the COG (price of the book) was not included in the “FBA Fee breakdown”, which will bring the price down even more.

    • Thanks for reading, Judy. The chart was only intended to show the fees that Amazon deducts before sending money to your bank account (cashflow). The COGS, taxes, mileage, time, etc. will need to be further deducted from that operating margin to arrive at a true net profit.

  8. I always enjoy reading your posts that outline the true costs of sourcing and selling. Thank you for taking the time to break down the fee and profit structure in an easy to read and understand format.

  9. Thank you Caleb! I love your profit-driven approach. I’m a numbers guy so I appreciate the calculations. 🙂

  10. I just have to comment on the general costs of books at thrift stores. I have never attended a real library sale where from my understanding, most of the real players in this market congregate. All I know is that yes, thrift stores are now selling books at 2 dollars or more on the average and it seems like most of them are scanning their own books. Even stores that sell new and used have discovered scanning for FBA. Also, anyone can now purchase books from Amazon Merchants by the hundreds if they have the capital for a quick flip due to new technology. You sure aren’t going to find a book for $1.50 though. Also now that everyone and their cousin is flipping, the price of text books are going though the roof. Now, this is my first year trying this and I could be wrong, blaming it on you guys with the software, maybe this happens every year a couple of months before school starts. I welcome your feedback

    • Hey Marillia,

      Thanks for your comments. It really depends on where in the country you live. In the Midwest, it’s not uncommon to find books at thrift stores for 50 cents and a dollar apiece. In Denver they are mostly $1 and $2.50. Here in Portland, the Goodwills are charging $3, $4, and even $6 for some of their books! There are still gems to be found, however, you just need to be a bit more selective in which ones you purchase. Goodwills are scanning their books in some cities, but in Denver they have abandoned selling online and are putting all of their Merchant Fulfilled inventory back into their retail stores to try to sell them that way. Selling online seems easy at first, but after building up a sizable inventory it becomes more tedious to keep track of everything. Will there be more competition over the next few years? No doubt. But that just means people will need to adapt and overcome. This continues to be a good way to earn a living, and I firmly believe it will continue for months and years to come.

  11. Very helpful! This confirms how I’ve been calculating my costs. What I didn’t realize is that the more expensive books actually decrease costs, in comparison. I’ve also noticed that the more books I send in per box, with a corresponding higher weight, the cheaper the shipping costs are. I recently sent in a box weighing 51#, and the shipping cost was $19. The next day, I sent in a box weighing 6# to the same place. Cost me almost $6. Crazy.

    • Yes, shipping heavier boxes is a great way to minimize your costs per book shipped. However, be sure to stay UNDER 50 pounds, as Amazon can refuse delivery of anything over 50 pounds.

  12. Caleb, when you say you will pick up some $10-12 books, are you referring to listed price or profit?

  13. So, I think I want to try selling on Amazon as a small side business to supplement my income. I thought I would start as an individual seller, selling books that I have around the house that I was planning on donating. I want to learn my way around before investing. They are mostly kids books that sell for about $5 new. After reading your marginal thinking blog, I think I may be better off just donating the books. It sounds like it would be difficult to even break even. Thoughts?

    • Hey Rivka – if you’re selling books FBA for under $5, you shouldn’t waste your time, unless you’re trying to learn the ropes, gain some positive feedback, etc. If you’re a megaseller with systems in place, you can earn a few pennies of profit per book and sell cheap books, but as a solopreneur, you should strive to hit a higher ASP to maximize your time. Good luck starting your side hustle!

  14. Caleb,

    I’m a recent purchaser of your tracking spreadsheet. I have also been reading your blogs and I appreciate the info shared.
    My question is do you mind sharing FBAScan triggers? I have been using Nathan Holmquists for some months now. I was wondering if you wouldn’t mind sharing what you use. You seem to have a fresh approach to the books you keep when scanned. I would really appreciate benefiting from your knowledge and experience.
    Thanks in advance!
    Jim

    • Hey Jim,

      I’d be happy to share my triggers, but I don’t use any. I prefer to glance at the data on every scan and make a decision based on the number of offers, current rank, MF used prices, and lowest new prices. That info can help you quickly decide “yes” or “no”, but there are still a handful of “maybes” where you’ll have to click through to see the Prime prices. Using triggers will speed up your sourcing, but you’ll buy too many duds or skip over some winners. There’s no perfect balance there. Nathan hires scouters and uses triggers so they can buy “blindly” – which is a great solution, but an imperfect one. A good trigger system will balance rank, number of offers, and competitive prices to select guaranteed winners.

  15. Wow! You are so informative. I would like to eventually jump into the amazon FBA business but for now I’m just studying it out. Thank for the breakdown!

  16. Great Info but is there a reason you did not include the referral fee in your calculations?

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