How to calculate return on investment for Amazon sales

Sam Carter, Blogger for Profit Runner

Last updated: 15th June 2024

Having a target return on investment or ROI is helpful and necessary to weigh up the viability of your Amazon sourcing decisions.

This blog covers everything you need to know about calculating return on investment in your Amazon business.

We answer three key questions on calculating return on investment for Amazon:

1. Why do you need a target return on investment for Amazon sales?

2. What is a good return on investment for Amazon sales?

3. How do I calculate return on investment for my Amazon sales?

So without further ado, let's jump into the what's and why's of how to calculate return on investment for Amazon sales.

Why do you need a target return on investment for Amazon sales?

The answer is simple; without one you can't set boundaries around inventory sourcing or final sale price decisions. The profitability of your Amazon business hinges on the choices you make in these two areas, therefore your ability to frame your decision-making around a desired target is crucial.

Here are some reasons to set a target return on investment for your Amazon business:

• Improve your financial planning: Establishing a target ROI allows you to plan and budget for your Amazon business more effectively. Armed with a clear target you can determine how much to invest in inventory, make more informed sourcing decisions and allocate resources effectively.
• Manage risk more effectively: A target return on investment can help you assess risk during the product research phase of inventory sourcing. If your prospective inventory has an incredibly high return on investment in relation to your target this may indicate an issue such as potential IP infringement, or complicated prep and shipping requirements. In comparison, a lower ROI in relation to your target may signify oversupply or a lack of demand.
• Maintaining motivation and accountability: Having a defined target ROI can motivate you and your team to work towards a specific financial goal. It provides a clear framework for decision-making and can be used to ensure consistency and accountability.

Is it realistic to hit the target every time without fail and never deviate? Of course not - you are in business, and that level of rigidity will get you nowhere.

However, having that target etched into your mind from day one will enable you to speculate accurately, helping you make the best buying and selling decisions possible.

What stops sellers from setting a target return on investment for Amazon sales?

So why do some Amazon sellers fail to set a target return on investment for their business?

New sellers occasionally fall into the trap of thinking that it doesn't matter what your return is as long as you are making a profit. Nothing could be further from the truth. Setting a target return on investment should be the cornerstone of any Amazon business owner's strategy.

What is a good return on investment for Amazon sales?

It is a broad question, and the answer depends on the type of Amazon business you run.

For example, a private label business owner can typically command a higher return on investment than a reseller.

Insider info: A reseller or third-party seller, also sometimes referred to as an arbitrage seller, is someone who sources products from retail shops, online stores or wholesalers for resale on the Amazon marketplace.

In this example, we will focus on return on investment for resellers, but the same principles apply to all Amazon sellers.

Return on investment for Amazon resellers:

When beginning an Amazon arbitrage business, a common target to aim for is a return on investment of 30%.

If your Amazon strategy involves retail or online arbitrage, you will typically be selling lower-priced goods purchased from sales or discount retailers.

• Thirty per cent is a perfectly achievable and yet still worthwhile target to aim for both retail and online arbitrage sellers
• If you are planning on using a wholesale Amazon arbitrage strategy, between twenty and thirty per cent is a suitable target to aim for

Whichever model you choose, all new arbitrage sellers will experience equal parts frustration and excitement when aiming for a 30% return whilst sourcing products.

Sometimes you will score big and find items with fantastic ROI potential. Other times you will struggle to find anything - except a surefire loss!

• Keeping that 30% target in mind will help you frame your sourcing decisions
• Your target will help you decide which items to purchase or discard
• You will be able to make faster decisions with greater clarity
• If your business is still in its infancy, you should be able to follow the 30% rule with ease

As your business and inventory begin to grow, you might wonder how to continue sourcing ever-increasing amounts of product with a requirement of a 30% return.

So, is it ever acceptable to knowingly source products under your target return on investment?

Return on investment for experienced Amazon arbitrage sellers:

Once you have gained more experience as an Amazon seller, you can take a slightly more fluid approach to calculate return on investment for your Amazon sales.

Keeping ROI at the forefront of your mind will always be a driving factor in Amazon your business. However, once you have a more nuanced understanding of your business, you can make more speculative sourcing decisions.

• You will know when a popular item with a slightly lower ROI is an acceptable choice because you will have trialled it
• A 20% ROI is perfectly acceptable if you know a product sells well and isn't facing fierce competition
• Knowledge and experience of the stock you are selling will enable you to weigh up factors such as; sales velocity, customer return rates, and the consistency and quality of your supply
• You might also consider a slightly lower return on investment if the product you are selling is of a higher value

In summary: The success of your Amazon business depends upon your ability to generate a positive return on investment. Learning how to calculate return on investment for Amazon sales is a must!.

How do I calculate return on investment for my Amazon sales?

Having established a target return on investment, you now need to learn how to perform the calculation:

Return on investment = Profit / Cost x 100

Pro tip: To learn more about the return on investment metric, the definition, application and limitations of ROI, visit Investopedia. 

For Amazon arbitrage sellers, the trickiest part of calculating return on investment for Amazon sales is understanding how to determine your costs.

What are some typical costs for Amazon resellers?

When you sell on Amazon, your sales will be subject to many fees and costs.

To understand your return on investment, you must outline the costs applicable to each sale. These may include:

• Referral fees
• Fulfilment fees
• Packaging costs
• Prep costs
• Shipping costs

Learn more: If you want to view the Amazon fee structure for FBA and FBM sellers in the United Kingdom, you will find a complete breakdown on the Amazon pricing page.

Determining costs before investing in a particular product may not always be an exact science.

For example, estimating how many products will fit in your chosen shipping container can be difficult. Factors like this can impact your bottom line if left unaccounted for.

Top tip: To help account for these unknowns, use your best judgement until you have finalised the shipping of your stock. Once your exact costs are known, you can re-examine your return on investment and alter your sale prices accordingly.

Read more: If you struggle with calculating your packaging and shipping costs for your Amazon business, read the Profit Runner blog How do I add packaging and shipping costs to my Amazon selling price? 

Are there any tools which can calculate return on investment for Amazon sales?

Luckily, there are tools to help you simplify this process and calculate your return on investment.

Amazon even has a revenue calculator, which can be an invaluable asset for product research.

Many software solutions can help you calculate return on investment for Amazon sales. Profit Runner is one of them!

Profit Runner can calculate your return on investment and set an Amazon selling price in line with your target ROI. You can alter your packaging and shipping costs, chosen fulfilment programme and even VAT status - Profit Runner will calculate everything for you in seconds.

Try it now: Check out the Profit Runner free tool and calculate your return on investment now - you don't need to create an account, hand over an email address or credit card details, and it's free!