Bruce Merrifield, President — Merrifield Consulting
•QPM •Quantum Profit Management (QPM) •business math for distribution •cost-to-serve math •LIPA •line-item profit analytics in distribution
Wednesday, August 30, 2017—Amazon Tactics: Know Your SKU Profit Winners and Losers
Most likely, 200 of your SKUs are hugely profitable, but another 200 are hugely unprofitable. Amazon knows SKU profitability and exploits informational blindness in this area. Want to get smarter, too? Here's how.
Know Your Profit-Equation Data
Amazon calculates the following profit equation for every SKU (customer, etc.): GM$s – CTS$s = P$s
Breaking it down, gross margin dollars are summed for all SKUs' annual picks. Subtract from that the cost to serve dollars for all those picks and this equals the profit (or loss) dollars for the picks.
This profit equation helps you to see why your most profitable 200+ items are typically very popular commodities with lots of picks for lots of customers with a high average sales dollar per pick. But, because customers shop big spend items, they are sold at a seemingly low gross margin percentage. However, the average gross margin per pick is still much higher than the average cost to serve per pick.
As an example, for 500 picks at $500 in sales per pick at a 20% gross margin, you'll see $100 in gross margin dollars per pick, or $50,000 (500 picks times $100/pick).
If you assume an average cost to serve of $5000 (500 picks times $10/pick), you can plug this into the profit equation: $50,000 (GM$s) - $5000 (CTS$) = $45,000 (P$s)
The profit equation also helps to see that the most unprofitable 200+ items are also typically very popular with lots of picks for lots of customers, but have a low average sales dollar per pick ($3.00 or less) at a 50% gross margin. The high margin is justified because few shop price for small, add-on items. But at $10 cost to serve per pick, the popular small gross margin dollar per pick SKUs are all big losers. You can't buy one AA battery at any retail store, but distributors will hand pick (and more) many small dollar onesies for you.
When distributors first start to use profit equation data they discover – on average – that 70% of all line item picks are unprofitable. Thank goodness for those 200 profitable commodity items!
Your SKU Whale Curve Strategies
This video is an excerpt from Lesson 5 of the CTS (Cost to Serve) Math program we recently launched. In this lesson, you'll learn:
• What a SKU whale curve is
• What a SKU whale curve tells you
• What to do about them before Amazon takes advantage of your legacy: mark-ups, packaging, and service model cost blindness.
Here are three other ways to gain cost to serve fluency and insights:
Go to WayPoint Analytics. Request a demo for the must-have analytics (visit www.WayPointAnalytics.net).
Attend the Advanced Profit Innovation Conference (www.APICConference.com) on April 20th and 21st in Phoenix, AZ. See you there!
For more information about Bruce Merrifield, visit: www.merrifieldact2.com
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