Whether you’re a marketplace seller or run your own online store, it’s great to see lots of sales coming in. But only focusing on sales revenue can be a recipe for disaster. It’s also essential to know how much of this overall income ends up in your back pocket.
Calculating Return on Sales can help you understand how much of your revenue contributes to profits and how much of it goes towards company costs.
Let’s take a closer look at this important eCommerce metric and why you should use it.
What is Return on Sales?
Return on sales – which is also known as ROS and operating profit margin – measures how efficiently your eCommerce store is performing.
It provides an indication of how much of your revenue becomes profit and this, in turn, says a lot about your company’s level of success.
This standardized metric is frequently used across all sorts of industries. For eCommerce merchants, it is a useful tool for understanding how sales truly impact profits. It tells you how much money ends up in your pockets after the likes of stock, shipping and staffing costs are accounted for.
If you have a high Return on Sales, you keep a lot of the revenue you take in as profit. If it is low, you keep little profit and most of this income is invested in covering your business costs.
How do you calculate Return on Sales?
Return on Sales is calculated by dividing your net profit into your net sales. That might sound complicated but we’ll take you through the process in three simple steps.
Step 1: Gather the information you need
Choose the time period you want to calculate your Return on Sales for. You may want to look at a specific month, quarter or year. This metric is usually tracked continuously over time, so choose whatever frequency makes sense for your business.
Then, for the window of time you’re focusing on, you’ll need your:
- Net revenue: The value of all sales coming through every eCommerce channel
- Operating expenses: The value of outgoing costs related to your business, such as staff wages, product costs and warehouse rental
When totting up these figures, don’t include non-operating costs like tax, interest or currency exchange.
The Return on Sales metric is all about measuring your store’s performance on an ongoing basis. For this reason, you don’t want to factor in the likes of tax, which can change from year to year and is outside of your control. These costs don’t reflect your eCommerce performance.
By excluding these expenses, your real profits will be a bit lower than the metric states. But this will also give you an accurate and stable indication of performance.
Step 2: Calculate your net profit
To get your net profit, simply subtract your expenses from your net sales revenue.
Net profit = Net revenue – Operating expenses
For example, let’s say an online store specializing in pet supplies attracts $100,000 in sales from across its eCommerce platforms. It also invests $40,000 in operational expenses. Here’s how the store would calculate its net profit:
Net profit = 100,000 – 40,000
Net profit = $60,000
Step 3: Use the Return on Sales formula
Now, you can calculate your Return on Sales using the following formula:
Return on Sales = Net profit ÷ Net revenue x 100
So looking at the online pet supply store again, its Return on Sales would be:
Return on Sales = 60,000 ÷ 100,000 x 100
Return on Sales = 60%
You multiply by 100 so the metric is represented as a percentage. This makes it easier to work with. It simply shows what percentage of your income becomes profit. So a Return on Sales of 60% means 60 cents of every dollar earned is retained as profit. The other 40 cents contributes to operational costs.
Why is Return on Sales important for online sellers?
Return on Sales helps sellers measure and assess their store’s performance over months and years. It’s a simple way to maintain oversight of your business.
It’s an important metric because it can be used in so many ways. From planning to analysis, here are just some of the metric’s beneficial uses:
- For new sellers: It can help you avoid the beginner’s pitfall of achieving high revenues without making a profit
- For stores chasing stability or growth: It will let you track your progress
- For planning: It highlights long-term trends and can be useful for planning investments
- For analysis: You can see how your costs and sales are interacting so it’s also great for monitoring how a significant business investment affects profits down the line
- For funding: A healthy and stable Return on Sales can be used to gain the confidence of creditors and investors. It demonstrates your ability to repay them
What’s a good Return on Sales to aim for?
In 2019, the median Return on Sales across industries was around 7.8%. More recently, in the first quarter of 2020, the average Return on Sales of the S&P 500 – which consists of large companies on the US stock exchange – was 9.86%.
If your store outdid these figures, you’re performing better than the overall market. But what’s considered a good Return on Sales varies hugely from industry to industry.
For online sellers, it completely depends on:
- Your eCommerce niche and the products you sell
- Your store’s business model
- How long your business has been established
If your business model relies on high volume sales and small margins, a lower Return On Sales is to be expected. Often, newly launched eCommerce businesses also have a low Return on Sales as they build their name and reinvest money in their business.
While you may find the average metric for your industry here, there is usually no clear figure to aim for. You can compare your performance with that of similar stores within your industry. Alternatively, you can simply focus on marginally increasing your ROS metric each month or quarter.
How can you increase your Return on Sales?
To increase Return on Sales, eCommerce merchants can either increase their revenue or decrease their outgoing expenses.
Taking steps to do both is a good move. But you shouldn’t sacrifice any expenses which can make your business more profitable in the long run.
Some ideas for boosting revenue
- Invest in SEO for your store, as well as your Amazon and eBay listings
- Try using PPC ads, email newsletters and other eCommerce marketing techniques
- Drive conversions by asking customers for positive reviews
- Consider selling high value items to offset the cost of logistics
Some ideas for reducing expenses
- Renegotiate shipping and logistics costs
- Use technology to make your business more efficient and save money
- Use your Return on Sales metrics and other data to pinpoint unnecessary expenses
The higher your Return on Sales, the better your business is equipped to deal with a drop in conversions. So consistently working and planning to increase it will make for a healthy bottom line and a stable business. But this will take time.
Did you know that over 60% of US online retail purchases were made through Amazon last year? Amazon’s hold over eCommerce is well established, with 9.1 million active Amazon sellers worldwide and an average of 66 thousand orders per day. Newer sellers may be wondering how they can get more sales on Amazon in such a competitive environment.
The truth is, they absolutely can because with Amazon’s booming market share come many opportunities. We’ve assembled this digestible list of 14 quick wins and strategic moves, to help you up your game and sell more on Amazon.
1. Do keyword research
Having the right keywords can be one of the most important tactics in reaching your target audiences. Using the keywords that are common to searches for your products is the objective, but search engine optimisation (SEO) is a constantly evolving game. That means that keywords used successfully in the past may not be as effective with updated search engine algorithms today.
The terms used by customers to find products change daily and are affected by seasonal, cultural, and economic factors. Hence, it’s important to stay on top of the latest SEO trends and make sure you cast a wide net when implementing keywords for each product listing.
Each product should be optimized with as many relevant keywords as possible – into the hundreds! This gives you the best possible chance of getting your products found by customers, helping you sell more on Amazon.
Amazon keyword research tools like Helium 10, SellerApp, Jungle Scout, and AMZ One can help by generating a list of related keywords with search volume, competition level, and other useful metrics, making it easier for you to choose the best keywords for your product listing
2. Use a repricing tool to get more sales on Amazon
When it comes to sealing the deal and making a sale, price is a main deciding factor for many customers. As an Amazon seller, you always want to make sure you’re pricing your products competitively, but equally, you don’t want to lose your margin!
This is something that using repricing software can help with. Repricing software automates the pricing process in real-time, ensuring your prices stay in line with those of competitors, and with market fluctuations, while you get more sales on Amazon.
Repricing software also has many customisable features that allow you to set prices at optimal levels to help drive sales, without compromising profit. It’s worth taking a trial to see how it can help lift your sales.
3. Get more Amazon reviews
Online reviews are important to spread confidence through word of month and for building credibility for your brand. It’s also a fact that 72% of shoppers won’t buy until they’ve read reviews of a product from people like themselves – people they trust.
Even a strong product with great marketing behind it still has to overcome the fear of the unknown if there’s no social proof. Plus, positive reviews are a significant factor in deciding which products win the Amazon Buy Box.
4. Provide great customer service
Customer service is absolutely essential in eCommerce. Offering top-quality customer service not only adds value, but helps retain customers. A big part of making a sale is assuring the customer that they can trust you to deliver, and that trust is hard earned but easily lost. Providing good eCommerce customer service is critical, and committing to providing great customer service is all the more so!
As an Amazon seller, you need to be on top of your customer service. Responsiveness, a friendly manner and quick and easy resolution processes are all ingredients that make for a winning approach to great customer service.
But it can be confusing trying to streamline it all. Thankfully, there are all sorts of tools available to make this job easier, like helpdesk software to keep all your customer interactions in one place. This helps you to respond quickly and accurately to customer inquiries when they come in, so that your customers always know you’ve got their back.
5. Leverage Amazon seller tools
The best part about being an Amazon seller is that you don’t have to go it alone. There are numerous tools available to help you maximize your business and get the most out of selling on Amazon, whether third-party or FBA.
From repricing tools, to help desk software, to review software and even shipping assistance, many tools exist on the market today that specifically help Amazon sellers optimize their listings, prices, feedback, shipping, customer service and even their taxes.
There are many different seller tools available, so it’s worth reading about options and making an informed decision about the right ones to choose for your business. With the right tools, you can grow your business more than you ever thought possible.
6. Get more sales on Amazon with ads
Running ads is almost guaranteed to help you get more sales on Amazon, but it’s easy to just throw money at them and hope for the best. You can do better! Pay attention to your advertising cost of sales (ACOS) metric, the figure for how much ad spend you need in order to make a sale.
By advertising more efficiently, you lower your ACOS and ensure you get more bang for your buck. Over time, you’ll learn what works and you can employ a strategy with regards to how you run your ads. Taking an insight-driven approach to Amazon ads results in a more profitable Amazon business!
7. Optimise your product pages
The old saying goes that 80% of readers never make it past the headline of any piece of content. That means once you’ve written your product title, you’ve effectively spent 80 cents of your dollar.
When writing product titles, stick to the formula of:
- Brand name
- Product name
- Features (size, colour, gender etc).
This lets you include the right keywords in the right order to immediately tell shoppers that this is the product for them.
Moreover, making sure to visually design your product pages so that they’re clean, simple and easy to read will also help win over shoppers. No one wants to read through a cluttered page. The more straightforward (yet informative) and the cleaner you make your design, the more likely you’ll be to win over those elusive eyeballs!
8. Win the Amazon Buy Box
The quickest way to get more sales on Amazon is by ensuring that your products show up consistently in the Amazon Buy Box (the area in the top right of a product page, where shoppers can ‘Add to Cart’ or ‘Buy Now’). This is because over 82% of sales happen through this highly sought after space.
Although the exact formula to win the Buy Box is unknown, there are a few things that we know are essential. These are mainly metrics that prove the seller is providing a good customer experience. Customer reviews play a big role here. The more positive reviews a seller can amass, the likelihood of winning the Buy Box increases.
In addition to reviews, something else that’s obviously very important to Amazon shoppers is price! By using repricing software, you can automatically set your prices at the optimal level to win the Buy Box and maximize profit, even if you’ve got an enormous inventory.
9. Amazon account health rating
The Amazon account health rating (AHR) is a new feature that helps you monitor your account health based on its adherence to Amazon seller policies.
It considers both negative factors (such as the number of unresolved policy violations on your account) as well as positive factors (how your account positively impacts the customer experience through its selling activities).
Each account will be given a rating, which is regularly reviewed as Amazon monitors the performance of its sellers. If your account is off-target, you will be notified so that you can improve your performance. Conversely, a good AHR rating will work in your favor, helping assure customers that they’re doing business with a compliant seller.
10. Maintain your Amazon SLA
A big part of being a seller is cultivating trust with your customers. That means showing them that you operate in an above-board manner and that you’ll make good on your promise of fulfillment to them. One way of doing that is by making sure your Amazon store has a Service Level Agreement (SLA). This is a promise to your customers that they’ll receive their orders on time. When it comes to fulfillment, the SLA is based on the capacity to fulfill open orders and on-time shipping and delivery.
SLAs help manage customer expectations by defining standards and outlining circumstances under which you as the seller won’t be liable for unfulfilled promises (e.g., natural disasters preventing shipping, etc).
eDesk’s customer service solution is designed to alert you when your SLA is expiring, so your business is never caught without one. Having a current SLA helps you maintain transparency with customers, thereby building trust which helps ensure customer loyalty.
11. Focus on products that already sell
Most ambitious business owners want to try new streams of revenue, but it’s important not to lose sight of the things that are making you money now.
By doubling down on the products that already provide your Amazon store with a reliable revenue stream, you not only deliver to market demand but ensure that you have the financial runway required to take risks on innovative new products, if need be.
Review your financial statements every quarter and look at the items that are performing best in your store. Think about how you can continue to market these with ads, SEO keywords and upgraded images to maximize their selling potential in your online store.
12. Sync your inventory
Inventory can be a delicate balancing act. Hold too much inventory for too long and you need to pay over the odds to store it. But hold too little inventory and you lose out on vital sales, or even customers, due to an inability to fulfill. Amazon can also penalize you if your inventory performance isn’t up to standard.
Stock control is something every seller needs to understand and have the capability to manage for optimal results. Smart inventory management is an under-appreciated way to increase your Amazon sales and profit margin. Fortunately, there are tools that can help. Investing in the right tools and software can help sellers take the stress out of balancing supply and demand.
13. Expand into new Amazon marketplaces
Amazon currently has 20 marketplaces around the world, which include the US, Canada, Mexico, UK, France, Germany, Italy, Spain, Japan, Singapore, Brazil, Australia and more.
You can scale your brand by moving into some of these marketplaces. This can involve doing market research to find out which products are popular in each market and then uplevelling your shipping operations in order to be able to ship globally.
But expanding into new markets also means you’ll need to take language into consideration and localize your listings so that they feature each marketplace’s local language and SEO keywords in the appropriate language. Multilingual customer service is also needed in order to be able to service customers across various marketplaces in their local language.
Sounds complicated? It doesn’t have to be. eDesk’s help desk solution is designed to support customer service and workflow in multiple languages, so you can expand your business without investing in the overhead of hiring a global team.
14. Spy on your competitors
Ok, maybe “spy” is a bit of an exaggeration, but profitable sellers are always on the lookout for what their competitors are doing. You want to make sure you’re offering the right inventory for your market at the right prices. Repricing software will monitor this for you, taking the guesswork out of pricing at the right levels.
Using data gleaned from helpdesk reporting can also help you gather valuable insights and feedback from your customers, which will help you to better understand what customers want and need. Acting on analytics-driven insights from easy-to-read reports means you’re always one step ahead of the competition.
The quest to increase your store’s Amazon sales doesn’t need to be an uphill struggle. There are many resources available to Amazon sellers today to help them optimize their store and develop a healthy sales pipeline.
By staying in touch with how the Amazon platform grows and using the right tech tools to drive your business, you can continue to do what you do best: building a great brand, winning customers, retaining existing customers and improving your bottom line.