Building Your Amazon Portfolio

We all know that I love to think of online selling in terms of Economics and Financial markets, so this blog post should come as no surprise to most of you.

This is one of those posts that I hope becomes an essential read for all online sellers.

Here we go:

Selling on Amazon is a lot like buying and selling stocks. We buy goods (products from the shelf) and sell those goods in a marketplace. With each item that we buy, we are taking a risk that someone else will buy it from us for more money (thus where we make our profit). Knowing that both markets operate in a similar manner, we should be able to use existing knowledge from the financial markets and translate it over to the Amazon marketplace.

Think back to when you started your retirement account (if you haven’t done this – DO IT NOW). You most likely met with a financial advisor who walked you through all of the benefits of investing. You heard about building a diverse portfolio of stocks and mutual funds (or other types of investments) and you were also briefed on the topic of risk.

That is the first major topic: Risk

Risk = Reward or Loss – The higher the risk, the higher the reward or loss. It is a basic law of investing and we can use this gauge and build our portfolio of products.

Think about all of the products that you scan during a retail arbitrage trip. Some of the items you scan have extremely high sales ranks, but extremely high returns. There are other items that you scan that have a lower sales rank, but lower profit margins. The spread between the profit/potential loss is the risk of an item.

Now how you perceive risk is a whole separate topic, but it has to be touched on in this post. Some people are naturally more conservative than others. Other people love to take risks and love the thrill that comes with big wins and big losses. You need to gauge your risk tolerance level before we move into the next section.

Pull out a piece of paper and write down YES or NO to the following questions:

  1. If I purchase an item, I have to sell it for a profit.
  2. If I lose money on an item, I will have financial issues.
  3. I have multiple streams of income to support myself and family.
  4. I am willing to hold an item for a long period of time to get make a high return.
  5. I have money to invest into inventory.

If you answered no to all of the questions, you have a low risk tolerance level (when it comes to selling on Amazon). You will want to follow the conservative portfolio that is listed below.

If you answered yes to all of the questions, you have a high risk tolerance level (when it comes to selling on Amazon). You will want to follow the aggressive portfolio below.

If you had a mix of yes and no answers, you fall in the middle (risk neutral). You have the option of following any of the below portfolios.

Now that we understand risk and our tolerance for it, we can start looking at the different groups of items that are sold on Amazon and the risk that are associated with all of them.

Thrift Shop Items and Items with Low Cost and High Returns – Risk Level: LOW

These are the items that you typically find at garage sales and thrift stores such as Goodwill. They tend to be harder to find (now you will get better at finding them, but it takes time), but they do have a low risk level. These items are typically low in their initial investment and they have a high return possibility. These are the items that most people start off with when they are first starting to sell on Amazon. There are many successful sellers who have a large percentage of these type of items in their portfolios, but they typically spend longer amounts of time searching out these items.

Books– Risk Level: LOW

This is how I got my start with selling online. Books can usually be purchased at a low cost point they have ability to be sold (or traded in) for high profit. One benefit of books is that they can be shipped via Media Mail (a whole separate topic) and tend to sell year round (with textbooks selling spikes during the fall and spring semesters of college). One downside of selling books is that there are millions of books on the market, so you tend to spend more time searching for books from stacks and stacks of them.

Items with Low Sales Ranks and Low Returns – Risk Level: LOW

This is one of the more interesting groups since this goes against a lot of the teachings of most Amazon coaches/experts. These items are the ones that are typically under 10,000 in sales rank and have a return between 10-40%. These items also have a strong price and sales rank history that support the current supply and demand levels. The reason these items are low risk is that they almost always sell within days of arriving at the Amazon warehouse. I like to imagine these as money laying on the shelves of your local store. They sell time after time and you are able to make a decent return for each item you sell.

Items with Medium Sales Ranks and Medium Returns – Risk Level: MEDIUM

This are the items that most of you are familiar with from this blog and the Amazon selling groups online. These are the items that typically have a sales rank of less than 150,000 (in most categories) and have a return greater than 50%. They have a strong price and sales rank history and are typically found as replens, clearance, or liquidation items. These are what we typically like to find while sourcing via retail or online arbitrage. These items can sit in the warehouse for anywhere from a few days to a few months. They tend to have a little bit higher cost point than items found at a thrift store, but that may not always hold true. These items also tend to sell year round and fall into categories such as health, beauty, grocery, etc.

Wholesale Items – Risk Level: MEDIUM

Now here is where we have to back track and define the difference between wholesale items and private label items. Wholesale items are those that can be purchased from manufactures and/or distributors at costs that are lower than retail. Wholesale items tend to already have a brand name associated with them and are currently listed on the Amazon marketplace. Private label items are items that are purchased from a manufacturer or supplier and you place your own brand on the item. More about this below.

Wholesale items carry a medium risk because they tend to have lower returns, higher initial investment amounts, and a few more barriers to entry than retail or online arbitrage. Sellers typically have to have a legitimate business (registered with the government) and they have to find suppliers that are willing to sell them the items. All of this leads to items have good ranks, a decent amount of competition, and decent returns.

Seasonal Items – RISK LEVEL: HIGH

Now you have probably heard that Q4 is the most profitable time for most online sellers. They see a huge spike in traffic and then in sales. It might surprise you that I would classify seasonal items into a “high” risk category. I think most of the toys that fall into the spike in Q4 sales (and other items that sell well during that time of year) fall into the medium risk section (Items with Medium Sales Ranks and Medium Returns). The reason the returns spike during the holiday months is that there is an increase in demand and the supply is unable to adjust to it (thus driving profits and prices higher).

The seasonal items I am talking about are those the are specific to only a certain time of the year (Halloween decorations, Christmas tree, Valentines, etc). These products tend to have higher prices during the season and huge price drops during the off-season. The cyclical nature of these items makes them quite risky for those who are not willing to wait until the next peak in prices.

Items with Large Initial Investments – Risk Level: HIGH

The more money that you have to invest into an item upfront, the higher the risk level is (because you are not spreading your investment over a period of time – a.k.a. you have more to lose.) These items tend to be high priced electronics, private label items, or items with high minimum purchase quantities. Although these can be very smart and lucrative investments, they still have to be viewed as high risk.

Now that you have a general understanding of the different levels of risk associated with different product groups, it is time for us to build your Amazon product portfolio. There are a few things that I have to say before we get started with your portfolio:

  1. There is no perfect portfolio. It all depends on your risk tolerance level and the marketplace. One portfolio might perform better than another one during certain parts of the year (or vice versa) and some people might be able to find better products in each product group than others.
  2. You can move between portfolios. Just because you pick one today, does not mean that it has to become law for you and your business. Situations change and portfolios can as well.
  3. The below portfolios are meant to be guides (not rules) for your business. Please make edits as you see fit.
  4. The portfolios are displayed as percentages of the above product groups. Please feel free to adjust the percentage to fit your preferred sourcing model.

Now to the portfolios!

Conservative

60% Low Risk

40% Thrift Shop Items and Items with Low Cost and High Returns

      20% Books

30% Medium Risk – Items with Medium Sales Ranks and Medium Returns

10% High Risk – Seasonal Items

 

Moderately Conservative

40% Low Risk

30% Thrift Shop Items and Items with Low Cost and High Returns

      10% Books

40% Medium Risk – Items with Medium Sales Ranks and Medium Returns

20% High Risk – Seasonal Items

 

Moderate

30% Low Risk Thrift Shop Items and Items with Low Cost and High Returns or Books

40% Medium Risk – Items with Medium Sales Ranks and Medium Returns or Wholesale

30% High Risk – Seasonal Items or Items with Large Initial Investments

 

Moderately Aggressive

20% Low Risk Thrift Shop Items and Items with Low Cost and High Returns or Books

40% Medium Risk – Items with Medium Sales Ranks and Medium Returns or Wholesale

40% High Risk – Seasonal Items or Items with Large Initial Investments

 

Aggressive

40% Medium Risk – Items with Medium Sales Ranks and Medium Returns or Wholesale

60% High Risk – Seasonal Items or Items with Large Initial Investments

 

Extremely Aggressive

100% High Risk – Seasonal Items or Items with Large Initial Investments

Now I hope this post has helped you understand the whole notion of building your Amazon product portfolio. As you can tell, it really all depends on the amount of risk you are willing to take and the amount of capital you have to invest into your business. I hope you are able to find a portfolio that fits and are able to make it your own. I wish you the best in your business and if you ever have any questions, please feel free to ask me in the comments below.
Cheers!

CW

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