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Five things brands can do to win with a margin-minded Amazon

August 22, 2023
Alex Khmurets
Written By
Alex Khmurets

Any period of growth is followed by a hardening phase.

Breaks punctuate rapid expansion, allowing businesses to catch up, solidify gains, and clean up accumulated waste before resuming strategic overreaching. Given the tighter post-pandemic economy, it’s not surprising that Amazon is taking some time to focus on profitability, operations efficiency, and retail margin recovery. It’s working: Amazon posted record Q2 profits after just a year of cost-cutting initiatives. 

Knowing that margin is the key metric, brands need to align their strategies around Amazon’s priorities.

Here are 5 ways brands can prepare for the 2023 holiday season and beyond.

 

1. Enter negotiations and each purchase order (PO) with the right data.

While essential during annual vendor negotiations (AVNs), profitability metrics are now being scrutinized for individual POs. 

  • Amazon is looking at your net pure profit margin (Net PPM), which is a function of revenue, costs, and vendor-funded contra-COGS (i.e. trade terms). Make sure you have your sales, pricing, and trade terms calculated at the product level and at the brand level. Know if any products are frequently price matched across other retailers. Be prepared to reference qualitative metrics like new product launches, efforts to reduce prep charges, and examples of new, rich content changes.

Beauty-pricing-graphic

Source: Profitero

  • Media spend: Even though marketing is not included in the Net PPM calculations, ad commitments can be leveraged to obtain more favorable trade terms. 

  • Know your worth: While brand rank, in-stock rate, and intraday featured offer (FKA buy box) metrics are no longer available in Amazon Retail Analytics, that data can be obtained from providers like Profitero. Sales teams often must educate Amazon about how much value their brands add to category shoppers. 

 

2. Improve your item-level Average Sales Price and Net Pure Profit Margin.

Since Amazon is looking to sell more while spending less, item-level profitability is now responsible for the majority of purchase decisions. Introducing higher margin products can also relieve the pressure on less profitable SKUs and keep them from CRaPing out. 

  • Premiumization: Amazon continues to woo premium brands like Victoria Secret to attract high-end consumers. With proven market demand for premium products, consider product innovation and marketing strategies that justify a higher price point.

  • Price-pack architecture: Bulk and variety packs are a proven way of driving up the ASP. Conducting a price-pack analysis can identify favorable product combinations. Amazon has ramped up Subscribe & Save, so ensure your multipacks are set up for subscriptions and have active offers.

 

Advise-PPA

Source: Profitero

  • Bundling and unbundling: Test different virtual bundles to identify desirable product combinations. Amazon is already algorithmically creating virtual bundles for brands without sharing the sell-through data in Amazon Retail Analytics. Profitero’s Sales & Share data shows which virtual bundles are truly incremental. Hard-bundling the proven winners under a new ASIN can increase your overall Net PPM by several percentage points.

 

3. Own your logistics.

The endless aisle is getting a trim: Amazon is reducing its fulfillment center footprint, unprofitable products are losing warehouse slots, and some brands are being removed entirely from Vendor Central. Net PPM does not include Amazon’s costs to receive, store, and deliver the product to its shoppers, but it’s being tracked on the backend. 

  • Reviewing your prep issue chargebacks can show which products require extra handling before getting boxed. While it’s possible to dispute false charges for properly-packaged items, it’s usually more effective to proactively improve the packaging or apply for frustration-free / ships-in-own-container certification.

  • For manufacturers with strong logistics functions, programs like Direct Fulfillment, VendorFlex, or the returning Seller-Fulfilled Prime can improve margin metrics by taking fulfillment out of the equation. It can also make becoming a third-party seller on Amazon less daunting for brands getting squeezed off Vendor Central.

  • Plug channel leaks to control pricing. Authorized reseller programs, brand enforcement, and trademark litigation can help shut down rogue third-party sellers. But keeping your most profitable assortment separated from distributors and resellers is the only surefire way of preventing getting undercut on price across your hero SKUs.

 

4. Be prepared to invest more, but spend wisely.

Amazon knows that creating competition motivates brands to invest more in their product content, promotions, and marketing. For example, a recent layout change replaced lifetime reviews with each product’s current rating and last month’s sales.

Apple Headphones_Blog

Source: Amazon

Brands have to fight to stay relevant every month. Fortunately, there are advanced techniques to stay relevant: 

  • Leverage generative AI to optimize product content and keep it fresh with trending keywords and seasonal use cases.

  • Invest in offsite traffic to balance increasing search costs. Not only is offsite media sometimes cheaper, but the external traffic to your product pages gives them a boost in search rank. Ensure your promoted products are in stock because traffic without conversions will tank your backend discoverability metrics.

  • Run campaigns that outmaneuver your competition instead of trying to outspend them. Conquest your competitors when they’re out of stock. Reduce your own ads when pricing is not favorable. Adjust your budget upon reaching market saturation.

 

5. Automate your operations.

Like many tech firms, Amazon made several large layoffs. A leaner structure means that vendors must now take on more operational responsibilities. This requires a deep understanding of Amazon's rules, retail regulations and best practices. Not only that, but managing inventory, invoices, and product listings is time-consuming and labor-intensive. 

When calculating Amazon budgets ahead of AVNs, sales teams should include the headcount costs of supporting transactional, business-as-usual Amazon activities. Instead of committing more spend on advertising, it might make more sense to invest in automation that keeps products live, listings clean, and the flywheel spinning so that ad ROI is maximized. 

Being able to automate invoice shortage recovery (which can cost brands up to 5% of their sales) can deliver huge quick wins for boosting profitability. With tools like Profitero Autopilot, Amazon Account Managers can prioritize accomplishing their innovation goals, JPBs, and negotiations instead of being bogged down with housekeeping tasks. One of our clients, NAOS, used Autopilot to reduce their new product launch time from months to days.

Watch our video below to hear how Profitero's product ecosystem provides an end-to-end approach to optimizing Amazon performance.

 

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