Within this guide for Amazon Vendors, we'll demonstrate methods to circumvent CRaP ('Cannot Realize any Profit') products through comprehension of Amazon's NetPPM.
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How does Amazon’s profit margin impact your operations?
Ensuring Amazon's profitability is paramount for you as an Amazon vendor, and monitoring the Net PPM (Net Pure Profit Margin) metric serves as a valuable tool for this purpose. This metric indicates the profit margin Amazon earns from selling your products. While it may not precisely mirror Amazon's net profit margin, comprehending Net PPM is crucial for enhancing both Amazon’s and your own profits.
Why are Amazon’s objectives and targeted profit margins significant for you? In the vendor model, which operates on a B2B basis, Amazon is not obliged to purchase your products unless it proves profitable for them, similar to any other B2B partner. However, Amazon's transparency in revealing costs, sales prices, and margins distinguishes it from other platforms.
Hence, a solid understanding of Net PPM is pivotal for any manufacturer aiming to fortify their partnership with Amazon. By correctly interpreting and utilizing Net PPM data, you establish a mutually beneficial scenario and mitigate the risk of being caught off guard by CRaP (“Can’t Realize any Profit”), commonly referred to as CRaP-out, which occurs when products lack profitability for Amazon.
What is CRaP and its impact on vendors?
CRaP refers to Amazon's strategy of phasing out unprofitable products, often catching manufacturers by surprise. This process entails various actions, including the removal of A+ Premium content, discontinuation of price matching (resulting in vendors losing the Buy Box), and withdrawal of advertising eligibility.
Why does Amazon curtail your sales-boosting efforts? Simply put, they've identified products that aren't profitable for them. In the final phase, Amazon ceases ordering the product and removes the offer altogether. If it reaches this point, your revenue abruptly plummets to zero. Re-listing the products is a challenging and time-consuming process, potentially resulting in substantial revenue losses. To mitigate this risk, understanding Amazon’s profit margins is imperative.
What role does Net PPM play and how is it computed?
Net PPM, expressed as a percentage, is the profit margin conveyed by Amazon at the product level, indicating what Amazon earns from selling your product. It is calculated based on the variance between the sales price and cost price, adjusted for vendor terms and conditions like trade agreements and sales discounts, while excluding Amazon’s operational costs. Typically, this calculation relies on manufacturing data rather than sourcing data.
By merging Net PPM with the reported Shipped Revenue, you can determine Amazon’s Total Net Pure Profit (e.g., in EUR or USD).
Total Net Pure Profit = Shipped Revenue * Net PPM
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How can Net PPM help in identifying and averting CRaP-out?
Recognizing and responding to the notion of ‘profit per unit’ is crucial. This metric illustrates the profit Amazon accrues from selling each additional unit. If this margin falls short, Amazon typically triggers the CRaP-out process.
As previously mentioned, Net PPM excludes operational costs. A general approximation is that Amazon necessitates 3 EUR to fulfill a product, although this figure varies among product categories. Thus, comprehending Amazon’s operational cost (per unit) for your product types holds significance.
Here’s how to calculate Amazon’s Net Pure Profit per Unit:
Net Pure Profit per Unit = Total Net Pure Profit / Shipped Units
To derive the Adjusted Net Pure Profit per Unit, subtract Amazon’s operational cost from this metric:
Average Revenue per Detail Page View = Total Revenue / Glance Views
This calculation allows you to identify products that yield a net negative profit for Amazon with each unit sold, thus indicating susceptibility to CRaP-out.
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How can you apply your understanding of Net PPM in practice?
To gauge which products are vulnerable, it's advisable to compute Amazon’s Net Pure Profit per Unit for your entire product range on a quarterly or monthly basis.
During this assessment, consider the following factors:
Once you've identified which of your products are at risk, what steps can you take?
While offering Amazon better purchase conditions presents a straightforward solution, there are alternative strategies you can employ:
Assess the impact of customer returns on Amazon's profitability. Investigate and address the underlying reasons behind products with high return rates.
Keep an eye on any third-party (3P) sellers offering your products at lower prices. In response to such competition, Amazon may opt to match the price, potentially reducing profitability, or refrain from matching it, leading to decreased sales volumes.
Implement retail promotions to enhance both Amazon's margin and sales volume, thereby helping to avoid the CRaP-out process.
If a product at risk contributes relatively little revenue and holds low strategic importance, actively consider delisting the product. Ultimately, Amazon optimizes towards total manufacturer Net PPM, compensating for losses elsewhere.
Explore alternative ways to attract customers to the product, such as offering multi-packs and bundles. Additionally, utilize the product comparison feature to steer customers towards higher-margin products.
What are the key learnings?
In essence, effectively leveraging Amazon's Net PPM is crucial for manufacturers seeking to foster a successful partnership with Amazon. To safeguard your products from potential phase-outs and ensure alignment with Amazon's profitability standards, prioritize the following steps:
Utilize historical data, seasonal patterns, trends, and promotional activities to estimate inventory needs for each product and time frame. Tools like Catapult offer assistance in optimizing inventory planning and replenishment on Amazon.
Keep a close eye on your inventory levels and replenishment status. Utilize resources such as the Vendor Central dashboard or Catapult module to track inventory on hand, shipped to Amazon, and ordered from suppliers.
Tailor your inventory approach based on product lifecycle and performance. Different products may require varying inventory levels depending on demand, profitability, and competitive landscape. Adjust inventory levels accordingly, whether increasing for top-sellers and seasonal items or reducing for slow-moving or low-margin products.
As you’ve seen, these calculations are manageable using data available through Amazon's Vendor Central and spreadsheet programs. For those seeking to streamline processes further, automated solutions like Catapult offer an alternative worth exploring.
Bringing it all together
Catapult empowers ecommerce managers to swiftly and effortlessly identify products susceptible to CRaP and proactively mitigate risks.
If you’d like to explore if Catapult might also be able to help your business, send us a message or check out our website. If you prefer seeing the tool in action instead, you can simply schedule a free demo here.
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