Boy, do Amazon sellers get this wrong.
Most Amazon sellers think that their profit margin on Amazon can be the same as their profit margin on Shopify, and that simply isn’t the case.
Your profit margin is the difference between how much you buy your product for and how much you sell it for. If you buy for $5 and sell for $8, you have a profit margin of $3. (This is technically your gross profit margin which doesn’t account for your other expenses.)
On Amazon, profit is typically very low because Amazon is inherently competitive. With over 2.5 million active sellers — and price and reviews being the two main factors influencing purchase decisions — everyone drops their prices as low as possible.
Fortunately, Amazon sellers can afford to have a low profit margin. This is for two reasons:
1. Your Conversion Rate is Higher on Amazon
An Amazon product listing page converts between 10–25% while an ecommerce product page converts between 1–4%. Amazon is sending you prefiltered buyer traffic (people who have come to the platform with the intent to buy and who have their credit card details on file), and since you’re converting more buyers you can afford to profit less on each sale.
2. Your Marketing Costs Are Lower
Because Amazon is an all-in-one platform, sellers don’t have many expenses other than the cost of sourcing the product and the fees collected by Amazon. What people fail to realize is that, when they transition to Shopify, their marketing costs increase because they have to do more to acquire a customer. (This lowers their net profit margin, or how much they profit after subtracting all their expenses.)
THE BUY-FOR/SELL-FOR RATIO
So what should your profit margin be? Here’s a simple formula for calculating the right gross profit margin to sustain your Shopify store.
Just use the Buy-for/Sell-for Ratio: on Shopify, you should to at least buy for 1 and sell for 3. That’s a Buy-for/Sell-for Ratio of 3.
Boomsilk is one of my most popular products. This moisturizer costs me $9 to make and sells for $29 retail, leaving me with a Buy-for/Sell-for Ratio of 3.2:
If, on the other hand, I were to buy for $9 and sell for $18 (a BF/SF of 2), I’d only have $9 in profit. That wouldn’t be enough to run ads, provide customer support, and cover the other expenses associated with running an ecommerce store.
A BF/SF of 3 is a safe bet, but your profit margin should depend on the price of your product. The cheaper the product, the greater the ratio you need. However, if you have a product that you buy for $15 and sell for $37.50, then a 2.5x ratio is probably okay because you’re still getting $22.50 on the product, which is plenty of profit to work with.
The thing to remember is that the better the profit margin, the better the offer works because you can afford to market and support the product. This is something that Amazon brands consistently fail at.
DON’T BE AFRAID TO RAISE YOUR PRICES
So, what should you do if the profit margin on your Amazon product is too low to transition it to a Shopify store?
Raise your prices!
That’s what I did when I moved one of my skincare brands off Amazon. And it worked because by the time someone got to my website I’d already used a Facebook video ad to get them invested in my brand.
Plus, there was less competition: customers weren’t looking at 7 different products at the same time, so it was okay to be more expensive.
Sellers coming from Amazon are so afraid to raise their prices. They think if they charge more on their website, then people will go find it for cheaper on Amazon. But as it turns out that’s usually not what happens. The people who shop on Amazon and the people who shop on independent websites are often not the same people.