How to Reduce Costs and Increase Profitability on Amazon using a Sales Funnel

Do you want to increase your profit margin on Amazon? Do you want to have better success rates with advertising? Do you want to learn a simple but powerful way to analyze your costs and metrics and make changes? If so, read on!

 

If you are selling your own product or brand of products on Amazon, it can be challenging to scale your growth while maintaining a reasonable profit margin. Regardless of whether you have invented and manufactured your own patented product, or are simply a private label seller, a sales funnel analysis is a great way to examine your costs and note where improvements can be made.

 

What is a sales funnel, and why is it important?

A sales funnel is a way to view how customers find their way to your product and decide to purchase. The funnel starts wide at the top where you can attract many potential customers, then narrows down as the number of potential customers decrease and eventually turn into actual converting customers. This customer journey may seem obvious – something like search, click, buy – but taking the time to analyze this in terms of data and numbers is essential for optimizing your costs and making things like advertising as efficient as possible.

 

How does a sales funnel work on Amazon?

The sales funnel on Amazon is not extremely long if you start at the top with customers searching on Amazon. If you are using email marketing, social media promotions, advertising outside of Amazon, and/or Amazon landing pages (like storefront), the sales funnel will look longer and have some different strategies. However, most customers at Amazon start at Amazon, and we need to ensure that your sales funnel within Amazon is optimized before viewing outside traffic sources. The reason for this is that customers at Amazon are there for free. You don’t need to spend any time or money to get them there, so to grab your share of the Amazon market, let’s start the customer journey at the Amazon homepage.

 

Not yet convinced?

 

Top reasons for optimizing your sales funnel within Amazon

1. In early 2017, 52% of online shoppers said that they start their online purchasing process on Amazon. – Raymond James study, referenced at https://www.geekwire.com/2017/amazon-continues-grow-lead-google-starting-point-online-shoppers/
2. For the 2017 holiday season, 76% of online shoppers expected to do the majority of their holiday shopping on Amazon. – CNBC’s All-America Economic Survey, referenced at https://www.cnbc.com/2017/12/19/more-than-75-percent-of-us-online-consumers-shop-on-amazon-most-of-the-time.html
3. People shop on Amazon a LOT, especially Prime subscribers. There is currently an estimated 90 million Prime subscribers in the US, and 46% of them purchase something from Amazon at least once per week. – Various data reports, summarized at Forbes https://www.forbes.com/sites/louiscolumbus/2018/03/04/10-charts-that-will-change-your-perspective-of-amazon-primes-growth/#35b68fe53fee

 

The Top of the Funnel

The top of the Amazon sales funnel = eyes on your product. The metric for this is called impressions. These impressions mostly occur on the search results page after a customer types in the search term for what they want to purchase. Occasionally, impressions may occur elsewhere, such as on similar product listings, but the most important place that we want to achieve impressions is on the search results page. Your goal for this part of the funnel is to achieve page 1 ranking for search terms most related to your product. It can be a lengthy process to get to this point, especially for highly competitive items (such as health supplements, skin care products, clothing, etc). However, it’s important to keep track of where your listing and ads show up in search results, as well as the actual number of impressions of your ads.

 

• To improve impressions: It is essential to include relevant keywords in the title, bullet points, product description, and back-end (invisible) search terms of your listing. Conducting keyword research will help you to find these keywords. There are different ways to do so, as well as many strategies to incorporate them into your product listings in the most effective way. These strategies are deserving of their own article, so let’s move on!

 

• • If your listing is keyword optimized, and you are using highly relevant keywords in your ad campaign but not getting many impressions, try different bid strategies. Amazon shows you a bid range for your keywords, so you may need to bid on the upper end or above this range to generate a good amount of impressions.

 

The Middle of the Funnel

After potential customers see your product in search results, you want to achieve clicks. Clicks are where advertising charges accumulate, so you must ensure that the people clicking on your listing might actually be interested in purchasing. This means that your keywords and your product must be highly relevant to what the customer is looking for. Maintaining high relevancy is an essential part of lowering your advertising costs.

• To check and improve relevancy: Run a search term report on Seller Central. The “search terms” column shows you exactly what the potential customer typed into the search bar. It also shows you which “keyword” in your ad campaign triggered your ad to show in that particular search. If you see “search terms” that are not relevant to your product, add them to your “negative keywords” in your ad campaign.
  • For example, if you are selling hats for kids, but notice search terms relating to hats for adults, take those search terms and add them to your negative keywords. This will ensure that when people search those terms related to hats for adults, your ad will not show up. This will then prevent non-relevant clicks, lowering your costs on this campaign.

The clickthrough rate is a helpful metric to determine how effective your keywords are within your campaign. This is calculated by dividing impressions by clicks. If you have received 10,000 impressions and 100 clicks for a certain, your clickthrough rate is 1%.

 

• To improve your clickthrough rate: Check for relevancy first! If your relevant keywords are generating impressions, but not enough clicks, check the price, title, and main image for your product. Ensure that the title and main image are compelling to click, and the price is competitive. Additionally, not having enough reviews or having a low average review score (below 4 stars) will hurt your clickthrough rate.

 

 

The Bottom of the Funnel

You have now generated impressions and clicks on your product. The bottom of the funnel is where the purchase behavior occurs. How do we get potential customers to decide to purchase your product?

• Is your product Prime eligible, or at least offers Free shipping? According to a Forbes article from December 2016, “Eighty-five percent of Amazon users hesitate to buy because of shipping charges, while slow shipping deters both Prime and non-Prime members (60% and 41%, respectively).” – https://www.forbes.com/sites/tompopomaronis/2016/12/19/these-12-astonishing-shopping-facts-perfectly-sum-up-e-commerce-for-2016/#795715d938be
• Is your product priced competitively? If you need to have a higher than average price to have your profit margins make sense, consider either implementing cost-cutting measures to be able to lower the price (see below “Beyond the Funnel” section), and/or make the higher price more attractive by bundling products or somehow offering more value to the customer (like better warranties, etc). Also consider using subscribe-and-save, coupon offerings, and promotions (eg. buy 2 save 10%) where they make sense.
• Are you fully utilizing the image gallery space? If a customer only looks at the images and does not read any of the product listing, will they understand your product and be convinced to purchase? Make sure that you have at least 7 images in the image gallery of your product listing. If you are unsure of which photos to use, a good strategy is to have at least 2 photos clearly showing the product, 2 lifestyle photos to show the product in use, and at least 2 photos containing text (think infographic-style). This text can be used to outline features of the product or your brand. Be sure to read over the Amazon guidelines and policies to determine what you can and cannot include in the image galleries, as they can vary by category.
• Is the information in the bullet points and product description clear and keyword optimized? You want to strive for a balance between having enough information about your product, but not too much that it becomes wordy.
• Do you have product reviews on your listing, with at least an overall/average 4 star rating? 97% of customers read reviews before deciding to purchase (https://www.businesswire.com/news/home/20180319005257/en/PowerReviews-Finds-Virtually-Consumers-97-Percent-Depend). If you don’t already have reviews, start to build them now!

A helpful metric to keep track of your conversions is called the Unit Session Percentage (aka conversion rate), and it is viewable in your business reports on Seller Central. Keep a close eye on this metric over time, and especially after changes are made to your listing and pricing. This will help you to determine when and where helpful changes are being made, as well as when your listings are converting poorly.

 

Doing the Math and Checking Results

Before and after conducting work to improve your profit margin, you can use the sales funnel to check the efficacy of your ad campaigns and product costs.

1. Check the total spend for your ad campaign over a certain time period. For example, $300 for the month of August.
2. Check the total sales generated from that ad campaign over the same time period. For examples, $1000 (50 units) in sales revenue for the month of August.
3. Calculate your total product variable costs. Remember that this includes the cost of the actual product, the packaging, shipping materials, costs of UPC stickers and labels on your product, and costs to ship the products to Amazon. For our example, we will have our variable product cost at $5.
4. Calculate the Amazon fees. This depends on the price, size, and weight of your product. For our example, we will assume that we sell the product at $20 and the Amazon referral fee is 15% ($3). We will also assume that we use Fulfillment by Amazon, and our FBA fee is $4.
5. Check the contribution margin. This is the product selling price minus variable costs and fees. In our example, we sell the product for $20. From this, we subtract $5 (product cost), $3 (Amazon referral fee), and $4 (FBA fee). This leaves us with $8 as our contribution margin.
6. Multiply your contribution margin times the number of units sold as a result of your advertising campaign. In our example, this would be 50 units sold and a contribution margin of $8, leaving us with $400.
7. Subtract the advertising spend from the last figure calculated (contribution margin times number of units sold on ad campaign) to get your ROI. In our example, this would be $400 generated minus $300 spent, for a result of $100. This means that your ad campaign is effective in generating profit. If the result here is low or negative, consider implementing the strategies above to improve the results of the sales funnel on Amazon.
8. Look at data and make improvements. Use figures such as the clickthrough rate and conversion rate to see where the sales funnel needs help to generate better results.

 

Beyond the Funnel and In Conclusion

You’ve done the math – great! If you have found that your contribution margin is suffering, consider making adjustments to your product and/or shipping costs:

• Check for different suppliers or different price breaks. If you purchase 500 units at a time at a cost of $5 per unit, but at 1000 units the cost is $4.25, consider purchasing the higher amount. Keep track of your sales so that you know when buying the 1000 units makes more sense.
  • Do the same thing with your suppliers for product packaging and shipping supplies.
• Make sure that you are getting the lowest possible shipping costs. Compare costs across carriers, and try to lower the weight and/or dimensions of your product where possible. Use Amazon Partnered Carrier shipping to send goods to FBA, as their costs are often lowest.
  • If you are not using Fulfillment by Amazon, ensure that your cost of shipping goods to customers is the lowest possible. Check all possible shipping costs across carriers, including using flat rate shipping options.
• Reduce the FBA fee. Double check that Amazon has the correct weight and size for your product to ensure that you are being charged the correct fee. Check the Amazon product size tiers to see where you may be able to fit your product into a lower tier through changes to the packaging.

 

The ultimate goal of selling on Amazon is getting organic sales and ranking, but it’s nearly essential to use good advertising campaigns to get there. Using the sales funnel is a great way to view the customer journey within Amazon and see where improvements can be made.

 

At the end of the funnel, a purchase is made. However, remember that good selling practices do not end here. A few things to consider post-purchase:

• Get repeat customers! Offer follow-up emails with promotional codes for your product listings. Activate subscribe-and-save on listings like supplements, skin care products, or food items.
• Build reviews! Follow-up with customers via email with a link to review your products. Make it simple for customers to do this, and convey the importance of doing so.
• Have the best possible customer service! Amazon customers are used to receiving exceptional customer service from Amazon. They may or may not understand the distinction between Amazon and third party sellers such as yourself – either way, strive to meet or exceed Amazon customer service standards.
• DON’T violate Amazon policies. Do not offer incentives for writing reviews (such as free products). Do not call customers with promotional messages. Do not send customers a link to your website. Do not attempt to drive Amazon customers away from Amazon in any way. Make sure to learn all Amazon policies and follow them to a T.

 

Keeping track of the important metrics, such as clickthrough rates, conversion rates, and contribution margins are essential to keeping your costs in check when selling on Amazon. Take the time to learn the best practices in selling on Amazon, as well as the policies. Success on Amazon is not guaranteed and sometimes takes a while to achieve, but by implementing great strategies and keeping an eye on your metrics, your success as an Amazon seller is much more likely!