Something that all business owners struggle with is being able to put a value on their time.
I can remember the first time I had to quote a DJ job. It was horrible. I knew that I was going to be there for 4 hours, but how much do I charge per hour? How much is my time worth?
We all know that time equals money, but do we really know what that means?
In order to better understand what our time is worth, we need to be able to quantify it in some fashion. In the world of selling on Amazon, it is exactly quite easy.
This is where I get to do a first. I get to name something that will be used by sellers everywhere!
We are going to find our Sourcing Rate Per Hour or SPH for short. This is going to tell us how much money we make on average during an hour of sourcing.
Sounds easy right?
Well yeah it is, but it is extremely powerful once you are able to calculate it.
Here is what you need to do:
- Each time you go sourcing, time your trip. I want you to write down the time when you are getting into the car and I want you to end it when you get home. I also want you to track when you enter and when you exit a store. Start making this a habit and it will become easier and easier as you continue to source.
- Once you get home, it’s time to track your time for packing and prepping. Make sure to keep detailed notes as you go through this process.
- If you are using Inventory Lab, you know that you will be able to assign each item a price and a store. Make sure to do this for all your items from this trip.
- Once you are done with your shipment, now the real fun begins.
There are a few different ways to calculate your SPH, but I am going to show the few calculations I recommend for every Amazon seller.
- Total SPH – Take the amount of projected profit from your sourcing trip and divide it by the number of hours you took sourcing. It can also be written as: expected profit/hours sourcing. This will tell you on average (make sure to track this each time and average it out) how much you make during an hour of sourcing.
- Store SPH – Take the amount of projected profit from your sourcing trip for a given store and divide it by the number of hours you took sourcing in that store. It can also be written as: Store expected profit/store hours sourcing. This will tell you on average (make sure to track this each time and average it out) how much you make during an hour of sourcing in a given store.
Let’s do an example shall we (you all know that I used to be a college math teacher right?):
I go out sourcing from 8 a.m. until 1 p.m. (5 hours total).
During my sourcing trip, I am able to find the following:
Walmart – $900 expected profit (2 hours)
Walgreens – $500 expected profit (1 hour)
Big Lots – $100 expected profit (1.5 hours)
Kroger – $500 expected profit (.5 hours)
Total expected profit = $2,000
Sourcing rate per hour = $2000/5 hours = $400 SPH
On average, I make $400 per hour I spend sourcing.
Now let’s figure out what my store SPHs are:
Walmart – $900/2 hours = $450 SPH
Walgreens – $500/1 hour = $500 SPH
Big Lots – $100/1.5 hours = $66 SPH
Kroger – $500/.5 hours = $1000 SPH
Now here is where the real insight comes to light:
If these rates were to hold true for all other sourcing trips (lets just imagine it does), I would be able to derive a few conclusions from this:
- If I was going to plan a sourcing trip, I would prefer to source at as many Krogers as possible. At $1,000 SPH, I am making the most bang for my buck.
- I should not go to Big Lots if I can do another activity that pays me more that $66 per hour. I would rather drive 2 hours to a Kroger than spend 4 hours in Big Lots
Now let’s take it even farther:
Imagine that it took me 4 hours to prep and pack up this shipment. What did it cost me (in terms of opportunity costs) to do this myself? In other words, how much money could I have possibly made if I would have spent my time sourcing instead of prepping?
We know that the average SPH is $400. So the quick math is: $400 x 4 = $1,600. If I went out sourcing, I could expect to make $1,600 in potential profit.
What if I just went to Kroger?
Well this would make a huge impact on my business. $1000 x 4 = $4,000
If I would have gone sourcing instead of packing, I could have made $4,000 more in potential profit.
Now here is the real kicker.
Say I have a guy who is willing to come over to my garage and prep and pack my shipments for $10 an hour.
Knowing your SPH can help you determine if this is a smart investment.
He is going to be a little slower than you at packing and prepping, so let’s say he does it in 8 hours while you take your 4 hours to go shopping in a new city.
Here is the math:
Cost of help: $10 x 8 hours = $80
Potential profit from sourcing = $400 (SPH) x 4 hours = $1,600
Total increase in potential profit = $1,520
See how the SPH can help you make educated business decisions?
The rule of thumb is: Always pursue options that allow you to make the most out of your time. This can also be stated as:
“Only do what only you can do.”