Last week, our team exhibited at the Seller’s Conference for Online Entrepreneurs (SCOE) in Philadelphia. It was great meeting many of you in person and having the opportunity to demo our software to a room full of Amazon retailers!
At the conference, Teikametrics CEO Alasdair McLean-Foreman, was asked to give a thought leadership presentation on the most important Fulfillment by Amazon (FBA) metrics. For those of you who missed it, here’s a quick recap of his talk.
Why Revenue is Vanity in a Retail Business
As one of the first retailers on Amazon’s third party platform, Alasdair began a sporting goods retail business from his Harvard dorm room. Though he eventually grew his company to a million dollar FBA business, success didn’t come overnight. As with launching any business, mistakes were made, lessons were learned and Alasdair quickly saw the importance in the lesson “learn to fail or fail to learn.”
The success and eventual sale of Alasdair’s retail business taught him what became the seed of an idea for Teikametrics: that retail is heavily data-driven.
His most important lesson was that despite growing top line revenue rapidly, his actual profitability was questionable, and worst of all, he started running into serious cash flow issues.
Data-Driven Decision Making
J.C.R Licklider, the “father of computer science,” correctly predicted that by the year 2000, millions of people would be connected via a network. In 1960 he wrote his “Man-Computer Symbiosis” paper outlining the strategy of letting computers facilitate formative thinking to enable men and computers to cooperate in making decisions and controlling complex situations. Today, we’ve translated this to mean that computers should do about 80% of the work, and humans the other 20%.
From his retailing experience, Alasdair knew that the data and the numbers only got him so far. It takes an educated human to look at that data and make the decisions. So, this ideal became the foundation for Teikametrics, our software solution that does the heavy lifting in identifying investment opportunities while still relying on a buying team to complete the decision making process.
Data can prioritize the right opportunities and identify where they are, aggregate the data, and help to visualize the actionable items needed for execution, but it can’t account for every external variable or execute correctly.
Metrics and Analytics: Using the Right Metrics
Since metrics are only beneficial when used appropriately, you must follow three steps:
1) Identify the right metrics to measure that will tell you where the right decisions are
2) Collect and measure routinely and use these numbers to make decisions
3) Make decisions and manage and adjust constantly. Ask yourself why you made each decision and identify the key pieces of data driving your process.
The Big Question: What are the Right Metrics?
There are 8 key metrics to focus on for which we use the acronym GRIT RULE.
Part 1: Grow with GRIT
Gross Margin: This number is important because it gives you a clear picture of each individual sale
Revenue: This is factored into your gross margin. Your GM does not make sense without your revenue.
Inventory to Sales Ratio is a proxy for the inventory turn ratio. How efficient is your business at turning inventory? This is a critical ratio because it tells you how much money you need to generate sales and how quickly your investments are generating profits.
Total Inventory Value: Indicates your current total inventory value fulfillable in FBA. This is how much money you have in Amazon at any given time.
Remember that you can open a restaurant and have every table filled up every night, but it doesn’t mean that you’re actually making money. The only way to know if your profitable is to know these numbers.
Part 2: Adjust to RULE
Return Ratio: This number is very specific to Amazon. A large percentage of business is returns that are essentially out of sight. This can be a painful number, especially if you aren’t keeping tabs on it.
Unsold Inventory: The silent killer. Unsold inventory ties up cash and costs you money while sitting in FBA. Find a way to exit out of these investments.
Long Term Storage Fee: These constantly changing fees will creep up on you. Always keep these in mind and make adjustments.
Extra Costs: Amazon fees, shipping fees, etc. The little things that add up and eat away at your bottom line.
GRIT RULE = Disciplined investing; measure and adjust
While focusing on your growth, be prepared to make adjustments. Think about your Amazon business like investing in the stock market: it’s all about the numbers and looking for inefficiencies in the market.