Last week for the first time we listed our products for sale on Amazon.com. I put up about half of the Tastefully Driven catalog because products must have a US UPC code to be on Amazon and some of our detailing products and supplements do not have UPC codes. The entire process was a complete pain in the ass (at least compared to Google Product Search and Yahoo Shopping) and the whole time I was saying to myself “this is a waste of time and money”. Amazon charges $39.99/month and 15% of the purchase price, which eats into profit quite a bit. On top of that, Amazon is a price-driven marketplace so you really need to have the lowest price if you want to get any sales. For that reason, let’s just say it’s $39.99/month and 20% of the purchase price.
Is it worth it? My first thought was hell no. George convinced me to try it for a month or two and then go from there. Before I even finished uploading all of the products, we had our first sale. Since then we’ve had steady sales via Amazon and have even run out of a few products due to volume from Amazon.
But what about our profits? Well, here’s the thing: you don’t have any marketing cost associated with putting your stuff on Amazon. The products literally sell themselves just because of the shear mass of people buying stuff everyday. There’s no sales process or customer service questions to deal with. The sale just comes through and we ship it with an Amazon invoice in it (and of course some coupons to entice them to shop on TD). I’d say our average product is $30 – 20% of which is $6, meaning we end up selling a $30 product for $24. Most of the time, I’d say we spend more than $6 of marketing expenses (including sales related customer service) on that same product when we sell it through the site. When I look at it that way, I feel a lot better about it.
The more intriguing question to ask – how important is profitability? Consider two online web businesses who both sell blue widgets…nah, blue widgets is played out, let’s say they sell the same high-demand DVD player, which is the only product they sell. Their cost on the DVD player is $50. Suggested retail price is $100. Company 1 sells it for $99, while Company 2 sells it for $80…becoming the low-cost leader for the product.
Assuming all else is equal, Company 1 will profit more (24% more) per unit. I know a lot of people who would rather be Company 1. They want to profit as much as they can per unit. But if the product is in high demand, it’s already being sought out thousands of times each day via product searches like on Amazon, Google, Yahoo, and a slew of other ones. Those searchers are likely solely buying based upon price – if your site doesn’t totally suck you’ll probably get the sale every time if you are Company 2.
Now – for funsies – let’s say that each company profits $100k for the year. Company 1 sells 2,041 units (x $49 profit/unit) and Company 2 sells 3,333 units (x $30 profit/unit). Again, I think that a lot of people would rather be Company 1.
I disagree. Here’s why: Company 1 has the advantage of less customer service and less work packing/shipping, but has the disadvantage of having to work a lot harder for each sale. In reality, a lot of that $19 difference goes away when you factor in the time/expense of marketing a product when selling it at the same price everyone else is. Company 2 spends more resources on packing/shipping and servicing customers, but minimal time marketing because the sales just come to them. Company 2 also gets purchasing discounts and shipping discounts because of their extra volume. In addition, they cycle through inventory faster…meaning they don’t tie up money/space with inventory that isn’t going to move fast. Over time the advantages of Company 2 are more valuable to me: it’s easy to find warehouse workers and customer service reps relative to how easy it is to generate sales. Generating sales is the hardest thing to do in the world of business. If I find a hands-off way to drive sales AND can turn over inventory faster by doing it, I’ll gladly sacrifice some profitability.
Think about it from the outside as a venture capitalist or someone trying to acquire your company. Taking the example to the extreme, would you rather have a company that ends the year with $100k in revenue, $10k in expenses, and profits $90k (a web design company could look like this) OR would you rather have a company with $10 mil in revenue, $9.91 mil in expenses, and also profits $90k? They both profit the same at the end of the year. But the second company has far more cash passing through their hands and because of that revenue they will be able to secure outside financing (bank loans, private investments, venture capital, etc) easier because their cash flow will allow them to manage their debt. The company is simply more valuable because they generate a lot more revenue.
I’m not sure if this is intuitive or counterintuitive to people or what. All I know is that it’s been on my mind a lot lately, and profitability is becoming less and less important to me.
*side note: salaries are being factored into our expenses whenever I discuss expenses, so breaking even is just fine with me for now. In addition, this does not mean that we aren’t constantly trying to improve our processes and systems so that we can maximize our profitability. I’m solely referring to pricing and how it impacts the bottom line…not all of the other factors that contribute to the bottom line of a business.