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In order to maximize the growth opportunities for your Amazon business, you need a clear understanding of each variable that impacts your profitability. Examples of these variables include storage and fulfillment fees, shipping costs, cost of goods sold (COGS), operating expenses, advertising spend, costs associated with returns, and more.
Pure profit margin (PPM), also known as net profit margin, represents how much net income or profit is generated as a percentage of revenue and, in the case of your Amazon business, is the ratio of net profits to revenue. It is the percentage of profit generated from revenue after you have accounted for all of your expenses, costs, and open cash flow items. The formula for calculating net profit margin is total revenue minus COGS, divided by total revenue.
PPM is used to calculate how much of each dollar of a company’s revenue ladders down to actual profit. It can also be used to assess if a company is gaining enough profit from its sales and whether operating costs and overhead costs are being maintained.
PPM is especially important to your Amazon business because it helps you quantify your Amazon business’s overall financial health. In order to maintain a sound PPM, you need to effectively track your business’s overall profit and losses, as well as monitor all of your costs on an ongoing basis. Doing so will help you adjust appropriately when expenses go up by either proactively finding ways to increase revenue or drive costs down. Here are a few strategies you can employ to keep your costs low and your PPM high:
Attaining a high pure profit margin or high net profit margin on Amazon means that you are successfully controlling your business’s costs and selling your products at prices that outweigh their upfront costs. By effectively managing these business figures, you will be able to keep operational costs low and precisely pinpoint where you need to take action, such as generating sales for a specific ASIN, in order to maintain profitability.