This post is by Jae Jun, a seven-figure Amazon seller and founder of Gorilla ROI, Amazon seller tools that connect Seller Central data to Google Sheets.
Key Performance Indicators for Amazon Sellers
Today I’m going to focus on 5 different KPI’s (Key Performance Indicators) that you should consider implementing if you sell on Amazon or are at all involved with online arbitrage.
The objective of keeping track of KPI’s is to make your business:
- Grow in the areas that match your goals
The majority of sellers stick to looking at the basic stats that Amazon provides.
- Inventory on hand
This is a bare bones view of your business and does not give enough depth into how strong and healthy your business is.
Amazon has added new stats like:
- Inventory Performance Index
- Brand dashboard (which more acts like a checklist)
- Pricing alerts
It’s great if you want to find something to do, but there’s nothing that provides a strategic overview and understanding.
One thing to clarify. KPI’s are not your key to business success. If you focus on the wrong metrics, your business will go off in the wrong direction.
Also known as Unit Session Percentage within Amazon.
The calculation is the number of units sold divided by the number of sessions.
Sessions are visits to your product page within a 24-hour period. Multiple views within 24 hours only count as one session.
This is called a ratio.
You take two numbers that does not mean anything independently. You combine it to create a single meaningful data point. It’s done throughout accounting, finance and is the basis to discovering unique metrics and KPI’s for your business.
Why you should care
In the screenshot above, the first number in the green column shows 22.17%. Last year in August, I had a conversion rate of 22.17%.
This meant, for every 100 people who visited my products, just over 22 people purchased.
The number you see above is the total average conversion rate. As a whole, my business is doing great in terms of converting visitors into customers.
You can dig deeper to look at it on a per SKU basis.
Go to reports > business reports > detail page sales and traffic by child ASIN
From this breakdown,I can see that my:
- Best seller has a conversion rate of 30.9%
- Number 2 seller has best conversions at 36.4%
- Number 3 seller has a conversion rate 28.6%
I also see products that can use some extra work to try to get it to the 20% mark.
The products highlighted are below 20% in conversion rates.
To increase conversions, there are many things you can do:
- Improve the listing, product’s labels, description, and features
- Improve photos
- Improve PPC
- Run focused external ad campaigns (FB, Instagram, Twitter etc)
- Run promotions
- Run coupons
- Run lightning deals
- And so on
Unless you are tracking conversions rates as a KPI, you wouldn’t know and act on it.
For products that are already doing well, you could squeeze more out of it. Taking a product that converts at 30% and getting it to 33% will add a flurry of cash to your account.
If you are only tracking sales, you will fall into vanity metrics. It’s the most convenient and easiest number to see in your account.
That’s the problem.
Which one is better?
- $1M in sales with a conversion rate of 10%
- $1M in sales with a conversion rate of 20%
Obviously B because you are turning over more products, less inventory to hold, less fees, better prices.
B is a stronger business overall although A and B are both doing $1M.
Ad Spend to Sales Ratio
This is a ratio that I prefer over ACoS.
ACoS (Advertising Cost of Sales) is the detailed number of how much you are spending to make a sale through PPC.
However, if you focus only on ACoS, you miss the forest for the trees.
If you know your costs inside out and know what margin you are targeting, then it’s the right KPI for you. But I doubt this is the case for other sellers.
If you have more than a handful of products, tracking ACoS and calculating whether the product is doing well or not, becomes a nightmare.
Here’s another simple quiz.
Product A has an ACoS of 10%. Good or bad?
The initial answer is “good”. But what if the gross margin on the product is 20% to begin with? 10% ACoS doesn’t look so good now.
This is why using ACoS alone is not a good standalone number.
PPC can boost your organic ranking, organic sales and increase conversions. These are hidden factors that are not assigned to the ACoS number.
Instead use Ad Spend to Sales Ratio, calculated as:
= Total Ad Spend ÷ Total Sales
You can take this further by doing:
= Total Ad Spend of ASIN ÷ Total Sales of ASIN
This is how I set up my PPC Amazon template to track spend vs sales.
Why you should care
You can see that products are not created equal. Some need more marketing budget than others.
Internally, our spend to sales ratio target is 10%. This means we spend 10% of total sales on Amazon PPC.
If you only focus on ACoS, potential winners will be defunded as it performs poorly.
When it comes to PPC, you should look at your whole account and calculate ROI based on total figures.
Some expensive PPC campaigns can be supported because your best performers can help boost and cover the weakness.
This isn’t to say that you should keep losers. Only if there is potential and to get over initial launches or tough competition.
Tracking spend to sales per ASIN also help you see how the product performs over time.
If there is a big jump and the ratio becomes large, it is easy to spot and you can figure out whether it’s seasonal, a competitor is attacking your campaigns, or bad reviews are affecting your sales.
Or if the spend to sales ratio is too low, you can increase your bid to gain more exposure to the product to block out potential competitors.
Amazon provides this number from their inventory dashboard.
Look for the number Days in Inventory and below that is the inventory turnover.
The higher the number, the better as it means you are selling your inventory quicker.
I also track this by SKU using the value Inventory Days on Hand based on last 30 days via our Google Sheets integration.
To get your inventory days remaining based on last 30 days:
- Get your last 30 days sales velocity
- Get your total available inventory
- = (total available inventory ÷ 30 days sales) x 30
This number will give you the number of days your inventory will last based on 30 days velocity sales.
If you track your inventory based on last 14 days, you would do:
- = (total available inventory ÷ 14 days sales) x 14
If you track inventory based on last 3 months, you would do:
- = (total available inventory ÷ 90 days sales) x 90
My inventory KPI looks like this:
Why you should care
This number is different depending on how you handle inventory. If you ship everything from your supplier directly to Amazon, your inventory turnover will be lower as you are sending in big numbers.
I take the extra step of receiving inventory from suppliers and then shipping it directly to Amazon. This way, I can limit the inventory in stock.
Why would I do this?
Amazon changed they assign inventory space. The slower you sell, the worse your inventory performance metrics.
By keeping inventory on hand at my location, I send inventory to keep roughly 30-40 days on hand. This keeps my Amazon inventory numbers at optimal levels.
If I get stuck with bad sellers, then it’s not rotting in the Amazon Fulfillment Centers where I have to pay again to remove them.
The products on the right have excess inventory even at my warehouse. Definitely don’t want it sitting on Amazon’s shelves and getting dinged for it.
Another benefit of having Inventory Turnover or Inventory Days on Hand as a KPI is that it prevents stock out.
Stock out means:
- Other sellers opportunity to sell more
- You lose sales
- You lose your ranking position
Cash Conversion Cycle
Unless your accounting books are accurate and up to date, this one is harder to calculate and keep an eye on.
But if you can do it, it’s one of the most powerful KPI’s for any business.
Cash is king.
This is what the cash conversion cycle looks like.
- Start with cash
- You buy inventory
- You sell inventory
- You get paid for the sales
This is the cash conversion cycle.
Pretty much everyone on Amazon gets paid two weeks after the item is sold. If you sold directly to retail stores, it’s common to get paid 30 to 60 days after you ship the goods.
The big difference comes down to
- How quickly you have to pay your suppliers
- How quickly you can sell inventory
If you can get net terms with your suppliers, awesome.
The longer you can delay payment to suppliers, it adds cushion to your cash flow.
The faster you can sell inventory, the quicker it turns to cash.
The formula for all this is:
Cash Conversion Cycle =
Days Inventory Outstanding (DIO)
+ Days Sales Outstanding (DSO)
– Days Payables Outstanding (DPO)
- DIO = (Inventory/COGS) x 365
- DSO = (Accounts Receivables/Revenue) x 365
- DPO = (Accounts Payable/COGS) x 365
If you don’t know what all this means, then it’s likely because your accounting is based on cash as opposed to accrual basis.
Even if you don’t know how to calculate the formula, try to work out how many days it takes to pay your supplier to getting it all back.
Let’s say you pay $10,000 for a product on Jan 1
- then it takes 30 days to manufacture
- 30 days to ship and Amazon to receive
- 90 days to sell out
This means your cash conversion cycle is 5 months. Your annual cash conversion cycle for this product is 2.2 (you can do it 2.2 times per year).
The higher the cash conversion cycle, the faster your business operates, the less strapped for cash you will be.
Return on Assets (ROA)
ROA measures how efficiently your business is using assets (after tax) to generate returns.
ROA = Net Income / Total Assets
Net income is the profit after COGS, operating expenses, salaries, interest and taxes.
Net income is not the profit after COGS. That is gross profit.
The higher the better and is powerful when you track it over time.
ROA is not ROI (Return on Investment) which looks at how much you made compared with how much you invested.
A software company has a much higher ROA than your Amazon business because software companies don’t need to buy and hold inventory. So every dollar generated returns much more than the lower margins of an Amazon business.
Also, if you are running a small Amazon shop, it differs to a company like etailz that has high overhead.
If you have net income of $1M at the end of the year with total assets of $1M on the balance sheet, your ROA is 100%. This means you earn $1 for every $1 of asset you hold.
In real life this is much different.
Target is one of the best retail companies out there and their ROA hovers between 6-8%.
My ROA hovers around 20% but I know it can be improved to 25% with better asset allocation. As you track this quarter over quarter, or even on a yearly basis, you will get a better understanding of your business.
If you are currently at 10%, and see that you should really be at 20%, you end up strategizing to figure out how to increase ROA by 10%.
If you only track sales and gross profit, you miss out on maximizing your business as you are blind to leaks. These 5 KPI’s show how differently you can analyze your business to optimize and prep it for growth.
What has been your go to KPI until now?
Leave a comment below.