What Return On Investment should I look for when selling via Amazon FBA?

August 22nd, 2014

In today’s post I want to talk about the amount of return on investment (ROI) that you are looking to achieve when sourcing products to sell on amazon.  The most common strategy employed related to this, particularly for new sellers, is to look for items that you can sell for triple what you pay for them.  This is often called the “3 times rule” or the “3X rule” and in general creates a 100% return on investment.  The idea with this rule is that if you buy an item for $5, you should be able to sell it for $15.  In this scenario, $5 is paid for the item, $5 is paid to amazon for shipping and fees, and the remaining $5 is your profit.  $5 profit on a $5 purchase equals a 100% return on investment.

Now, the above strategy sounds good, but let’s dig a little deeper and see if lowering margins a bit would allow for an overall increase in income.

Let me start by saying that always going for 100% margins is a great way to get started when selling online.  It provides significant room for error, and lowers risk to an acceptable level.  I do think once a certain comfort level is gained with selling online that it makes sense to consider accepting a lower return on investment.

Now, if you are able to consistently spend your entire sourcing budget on items that provide a 100% ROI, then I would keep sourcing 100% ROI items, but if you are unable to spend your full sourcing budget on 100% ROI items, then I would consider lowering your acceptable ROI a bit if you are looking to expand your business.

Here’s a chart (click to enlarge) showing how much you end up with if you start with a $100 sourcing budget and are able to obtain your desired ROI each month and you reinvest all profits each month (a month is an arbitrary period of time, you could make this a shorter or longer period for your own purposes, but for this example we will use the time period of 1 month).

initial image

So here you can see what reinvesting all of your profits will get you to if you were able to spend your entire sourcing budget each month, and have all of the items sell again every month.  Basically it assumes month 1 you buy $100 in inventory, it all sells before the end of month 1, month 2 you have $200 and spend it all on inventory, this entire amount then sells again, and you begin month 3 with $400, and these steps continue (this example was for the 100% ROI).

Now, I am guessing you are going to start running into problems continuing to spend your entire sourcing budget on 100% ROI by month 7, and run into very strong resistance around months 9 to 10 based on the chart above.  There are multiple reasons for this, but being able to find enough items that make 100% return on investment will likely be one of the more significant issues.

So here’s an example of 2 scenarios to demonstrate what I am getting at with this post.  A couple of overarching assumptions are that this individual is able to find $5,000 in cost of items that will yield a 100% ROI, and $10,000 in cost of items that will yield a 50% ROI every month.

Example #1:

  1. You begin with a $10K sourcing budget
  2. You WILL NOT buy anything with an ROI less than 100%.
  3. You can consistently find $5K in cost of 100% ROI items per month
  4. You consistently pass on every item that has an ROI less than 100%
  5. You consistently find $10K in cost of 50%+ ROI items that you never buy.
  6. You end up making $5K per month.  Your sourcing budget for the subsequent month has now increased to $15K.
  7. Even though your sourcing budget has increased, you are consistently making $5K per month, with a few months being better and a few months being a bit less, depending on how your sourcing turns out month to month as there are only so many 100%+ ROI items that you can find.

Example #2

  1. You begin with a $10,000 sourcing budget
  2.  You are willing to buy items with an ROI as low as 50%
  3. You buy every item that has a 50% ROI or greater regardless of when you find it during the month.
  4. The first month you spend $10K on inventory, $6.7K on 50% ROI inventory, and $3.3K on 100% ROI inventory.
  5. You end up making $6.7K in profits the first month.
  6. Your sourcing budget for month 2 is $16.7K.
  7. In month 2 you are able to buy all $10K of the 50% ROI items, and all $5K of the 100% ROI items with $1.7K unspent.  At the end of the month once these items sold, your sourcing budget increased by $10K up to $26.7K.
  8. You continue to source all of the 50% plus ROI items you can find and continue to make $10K per month.

Now, this is more of in theory versus in practice, as it’s highly unlikely that you will be able to find the exact same amount of inventory every month and have it all sell within the month.  Also, the numbers used are arbitrary.  You could change the sourcing budgets around as you see fit to make them work for your personal situation.  Just make sure to redo the math.  Even though this is somewhat theoretical, I believe there is real value in considering the above example when choosing your required ROI when sourcing products.

Now, a few notes on the above examples.  If you get to a point where you are comfortable with the amount you are making, and the amount you are working, then by no means should you consider it necessary to lower your ROI to increase your income.  But, if you consistently have part of your sourcing budget leftover at the end of each month, and you would like to make more money each month, I think it’s worth considering lowering your ROI a bit to do this.

In comparing the 2 examples, it’s worth noting that it would take the person in example #2 less time to source $5K in cost of products to resell than in example #1.  The individual in each example would be scanning the same number of items, but in example #2 would be buying a significant number of items that would not meet the ROI requirements of example #1, and would simply be left behind in example #1.  So, in reality lowering your ROI is unlikely to add too much time initially to your sourcing, and might even decrease it.  Lowering your ROI will likely increase your prep/shipping time as you will have additional items to deal with, but the time savings from sourcing will help to cover this additional time.

There are some additional risks to lowering your required ROI, such as prices going down to a point where you are unable to profit, and returns cutting more significantly into profits, among others.  So, be sure to account for these risks if you decide to accept a lower ROI.

Overall, I am not saying that it makes sense for everyone to lower the ROI that they require when sourcing.  I simply want you to consider the possibilities of what would happen if you did.  If you are hitting a wall and seeing little growth, lowering the minimum ROI a bit when sourcing could open some new opportunities.

Before I wrap this up, I wanted to post quick about 2 exclusive discounts that are available through my blog on 2 services that I am using.

The first is for Shoeboxed, which is a service that I am using to manage my receipts.  I simply send my receipts to Shoeboxed in the mail, and they scan them into an online portal where they are stored and easy to access.  If you sign up through THIS LINK you can get a 30 day free trial, and if you decide to pay for the service you will receive a 20% discount for your first 6 months.

The second is for Appeagle.  This is a repricing service that I have been using for about the past month.  So far I am really liking the results of this,  as it has helped me to sell through some older inventory, as well as sell through some of my newer inventory quicker and sometimes for higher prices than I initially listed the item for, it will save me a lot of time versus repricing manually going forward.  You can sign up for a 14 day free trial through THIS LINK and if you use coupon code “RYAN_G” for 50% off your first month if you decide to continue using the service.  Note: the coupon code is entered when entering your payment details if you decide this is a service you want to use, and not when signing up for the free trial (no credit card is required for the free trial).

That’s all I have for today. What ROI do you look for when sourcing? What other factors should be considered? Any questions for me? Let me know in the comments below!

 

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19 responses to “What Return On Investment should I look for when selling via Amazon FBA?”

  1. Will B. says:

    Hey Ryan,

    I see where you’re coming from and the logic behind accepting lower ROI. You might remember I asked a sort of prelude to this from your last post.

    The problem that I’m having right now is finding ANY inventory, even stuff that’s 50% ROI is hard to come by.

    I live in a pretty sizable city that’s pretty non-tech savvy, I never see any other scanners out there. But it’s almost impossible to find any inventory. Toys R Us, Target, Walmart, you name it, I’ve tried it. The most I ever leave with is like around $100 worth of inventory.

    So my question is, is the inventory heavily location dependent? Do you gotta look beyond clearance and just scan everything? Or am I missing something totally obvious?

    This guy’s post on this website summed up the experience that I’ve seen:

    http://imimpact.com/truth-about-fba/

    In fact, I’m fairly certain Howard Harkness reads your blog haha. Or at least his wife does. She commented on your post about sales tax.

    Anyways, comments shouldn’t be longer than the actual post. So I’ll stop myself now.

    Looking forward to your insights,

    Will B.

    • Ryan Grant says:

      Hey Will,

      Thanks for the comment, and yes I do remember your prelude to this question. This post is not strictly about retail arbitrage, as the lowering of margins can be applied to any method of sourcing. It definitely can be applied to retail arbitrage, but that is not the only means that I am using to source product. I also source product online, and have just started wholesale sourcing, and this post can be applied to each of those as well.

      As far as nothing being available in your stores, it’s definitely possible that your area is not as retail arbitrage friendly. I would also bet that there are items that you have not discovered yet in these stores. For example, I have purchased full price items at Walmarts, Targets, Toys R Us, and many other stores and made over 50% ROI. Some of these are consistent sellers for me, while others I sold a few of and that was it. I am betting that there are more deals out there, they just are a little hard to find. I would also recommend trying some online sourcing, thrifting, and possibly wholesaling to get to a point where you are getting inventory from a variety of places.

      That interview post with Howard Harkness is quite interesting, I just read through the whole thing. I think that’s a realistic view of retail arbitrage and shows that it’s a good amount of work to get any solid results. I can’t speak for every area of the country, but so far, from the traveling I have done I have been able to source inventory in every area where I have tried. This doesn’t mean I never walk out empty handed, and sometimes I do only spend $50 or so per store, but even spending a relatively small amount per store can add up if you make it to 10+ stores in a day.

      Hope some of this helps, and let me know if you have further questions.

      Best Regards,
      Ryan

      • Will B. says:

        Thanks for your response Ryan. I knew there must have been something I was neglecting, the full priced items.

        I’ll have to make more time to get acquainted with them in my local stores. Do you recommend a grind it out philosophy? Just going in and scanning everything? From the books/research I’ve read, it seems like this is the best way to get that “feel” & knowledge for FBA friendly items.

        Also, read your review for the Online Sourcing from Jessica. I’ll be picking that up to work on my online game. You mentioned wholesale as well. I don’t see any books/courses from your resources section. Do you have one that you’ve found to be helpful?

        • Ryan Grant says:

          Hey Will,

          If you have the time I think a grind it out philosophy and scanning virtually everything makes sense at certain times. Generally, I will scan an additional 10-20 full priced items every time that I am in a retail store. Scanning a significant amount of items does let you get the “feel” for what will likely sell well.

          As for wholesale, ThriftingforProfit.com has a podcast that covers quite a bit of info on wholesale, but I haven’t found any books/courses thus far that I have used. If I find something further, I will be sure to share.

          Best Regards,
          Ryan

          • Will B. says:

            Hey Ryan,

            Thanks for that. Time is definitely not a commodity I have. At least, not in terms of being away from the computer. As you know, I also have a full time job that requires quite a bit of my time in front of a a monitor haha.

            But wholesale is very appealing cause it deals in research, a lot of which can be done online.

            I’ve come across thriftingforprofit in the past. I never saw their podcast session though.

            Hey, hopefully I can start giving you some help/knowledge instead of always asking for it!

            Cheers,

            Will

          • Ryan Grant says:

            Hey Will,

            You are welcome, and yes wholesaling can be very attractive due to the amount of time you have available. No worries on asking for help, but if you learn something you think would be particularly helpful that you are willing to share, definitely feel free to let me know.

            Best Regards,
            Ryan

    • Marc says:

      Hi Will B I’m in the same situation as you. I live in one of the largest cities in the country with tons of all types of stores within a within a stones throw and having a heck of a time myself finding inventory. I’ve been at this for a week and haven’t found anything. Probably because I’m not sure of the metrics I need.

      • Will B says:

        Hey Marc, where are you based out of? I’m in Northern California, in/around the Bay Area (SF, San Jose, etc).

        Since I posted that I’ve tried more stores and it’s about the same. I can find things here and there but definitely not enough to keep up a >300 items inventory.

        My guess is that places with high average income doesn’t need to discount their prices as much? I could be totally wrong on this.

  2. Dawn says:

    Great post. One additional factor to consider is the time it takes inventory to sell. In general, fast-selling items have low ROI, and high-ROI items sell slowly.

    Say you sell items that have 100% ROI and take a month to sell. In one month, you’ll double your money. If you reinvest the profits, in two months you’ll have four times your original investment.

    You also sell items that have 50% ROI, but take only two weeks to sell. In one month, you can sell out your stock, reinvest, and sell out again. You’ll more than double your money by the end of the month, and after two months you’ll have over five times your original investment.

    In the right circumstances, a lower ROI can actually be more profitable.

  3. Chris Potter says:

    I love posts with “numbers” in them. I’m a numbers guy, so it’s great to see posts like this.

    There is another factor to think about here when you are determining weather to take a lower ROI item or not. All of the factors above assume all items sell once per month. In a good majority of cases, lower ROI = higher sales volume. Of course, this isn’t a rule – but is something to keep an eye out for.

    An example: You have $1,000 to source. If you find $1,000 of product that has 100% ROI that will sell within a month, then you will have an additional $1,000 the next month.

    Say you have that same $1,000, and you find $1,000 of product that has 50% ROI, but it will actually sell within a week. That same $1,000 will be able to reinvested every week, instead of every month. That same $1,000 turns into $1,500 after week 1. If you only reinvest that original $1,000, you’ll gain another $500 after week 2. Ultimately, at the end of the month, if you actually didn’t utilize any of the profits at all for sourcing, you would end up with $3,000 total, instead of $2,000 total like you would in the 100% ROI scenario above.

    Of course, all of this is hypothetical to get you thinking. In reality, there are lag time issues you have to worry about – specifically the Amazon payout lag time. You might send in 100% ROI product that sells once per month, but if the timing is right, you might not see the proceeds of a good chunk of the sales for up to 6 weeks due to the bi weekly payout most Amazon accounts have. Having items that sell on a quicker pace at a gives you working capital much faster to be able to turn again.

    • Ryan Grant says:

      Hi Chris,

      Great insights, and I definitely agree that lower ROI items can/should turn over faster. Hopefully the examples I initially gave, as well as yours here, will help people to consider the potential outcomes of lowering their desired ROI.

      Best Regards,
      Ryan

  4. Diana says:

    Hi Ryan, I’ve been selling on Amazon for 3 ½ months now. So far, I’ve lost money in May, June and July because even though I saw great ROI’s on many of my items, I didn’t have enough volume to cover my front end expenses – supplies, printer, training videos, state tax registrations, etc., so I did lose money each month. However, this month, August, I am confident that I’ll see my first monthly profit as sales as I have my highest sales month thus far without any large expenses.

    Though ROI plays into it, I tend to also look at profit, number of items, ease of prep and end goal.

    Let’s say that I have a goal of making a $1000 profit each month. By using the 3X Rule that you mentioned, I would get there by buying $1000 of products and selling them for $3000.00. Though it makes sense, my brain doesn’t operate that way and it’s easier for me to say that I need to buy 25 items per week that will give me a $10.00 profit each. So now, I have covered my target profit and number of items to shoot for. (25 items x $10.00 profit x 4 weeks = $1000.00 month profit)

    Then, ROI is my next factor and I’ll consider a product even if the profit is under $10.00 or I may not buy it even if it will give me a $10.00 profit. For example, I’ll pay $1.00 to make $6.00, but I won’t pay $30.00 to make a $10.00 profit.

    If the profit and ROI makes sense, then I look at prepping. If it’s a large, odd-shaped item with 5 price stickers on it, I may pass on even if it’ll give me a $10.00 profit. If it’s tiny, brand new, no stickers and costs just $1.00, I’ll buy a few even if my profit will be under $10.00.

    Well, to wrap this up, my point is, is that I do look at ROI but it’s not my only determining factor. Of course, also the item ranking is a consideration also.

    • Ryan Grant says:

      Hi Diana,

      Thanks for sharing, I definitely agree with many of the things you are looking at as well! Just in case it wasn’t clear in the initial post, I am factoring in many additional factors besides ROI, but I just wanted to focus on the ROI piece of the sourcing puzzle in this post post.

      Best Regards,
      Ryan

  5. Jessica says:

    This is a great post, Ryan. Thanks so much for sharing your insight!

    I just started FBA about 30 days ago and have so far found that I am sourcing a lot like Diana’s comment above.

    However, I really want to be a lot more strategic about purchases moving forward and this post is exactly what I needed to help get me there.

    I am doing a lot of thrifting and loving the ROI on my thrifted items, but am finding that most of them are long-tail items, so it’s interesting game to prioritize ROI or rate of sale.

  6. Jeffrey says:

    Hello Everyone,

    I have a question about the formula. I would like to put the formula that is in the table in excel so I can do calculations to help forecast how much budget would get me to a end result.

    What is the formula and is this called compound interest calculation or exponential growth calculation?

    • Ryan Grant says:

      Hi Jeffrey,

      I’ve approved your comment, so we will see if anyone comes up with an answer.

      Best Regards,
      Ryan

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