In late July, Teikametrics hosted an event in NYC for elite FBA sellers who were interested in optimizing their Amazon business. Our guests were able to attend talks from a panel of experts on how to use cutting edge analytics to grow their Amazon sales. We got such great feedback on the event that we wanted to make sure our blog readers got the chance to get the inside scoop on everything from the latest tips and tactics for FBA, to strategic insight on scaling your FBA operations. We hope you enjoy our Elite FBA Summit series!
Metrics are the backbone of any successful retail business. These numbers indicate the value and overall health of your business, the rate at which you are growing, and how well you are performing. You use these numbers to weigh in on the most important inventory decisions, but how do you know if the numbers you are crunching are the right ones?
Focusing on the right metrics sets the top businesses apart from fledgling novices.
Trevor Lohrbeer, Chief Data Scientist at Teikametrics, highlights which metrics to focus on to optimize your business and increase cash flow.
A Metric Framework
Trevor emphasizes that not all metrics are equal. Here is an overview of the metric framework he laid out for the attendees at the Elite FBA Summit:
Contribution Metrics vs. Comparison Metrics
- Contribution metrics tell us the impact these details have on your business. For example, you can analyze time or money spent by brand. This type of metric uses a sum of individual values.
- Comparison metrics are rates or percentages that let you know how your business is performing, and how the input (time, money, etc.) relates to the output (revenue or profit). This metric uses an average of the individual values, as is weighted by relevant contribution metrics.
Single vs. Multiple Area Metrics
- Management metrics allow you to unearth an existing problem and combine multiple areas at once. For example, at Teikametrics we use an inventory-to-sales ratio, which combines your sales rate and your margins. This key management metric gives you enough information without having to look at several areas at once.
- Diagnostic metrics tell you where or why the problem exists and covers a single area.
Aggregating Your Data
It’s important to gather data using metrics at different levels of your business. Traditional retail businesses manage at the portfolio level and evaluate their inventory as a whole. You need to assess by individual buyer, brand, product, and at the SKU level in order to truly understand your strengths and uncover any underlying weaknesses. Comparing all of these factors will get you the best margins on your products and help you stay on top of your business.
The Bane of Averages and Single Metrics
Averages often hide critical information. For example, if you are analyzing your business at the portfolio level you might not realize that one of your buyers is performing poorly.
Taking that one step further, once you delve deeper into your buyer’s performance, you may discover that a particular brand is causing their low numbers and decide to liquidate that brand.
Or, if you are able to pinpoint a product that is dragging down your average margin at the SKU level, it’s important to assess the impact it’s having on your numbers. If a certain SKU isn’t selling well but you only have a very small amount invested in it, it may or may not be more cost effective for you to keep it in Amazon’s warehouse in order to avoid any costs you would incur by having the product sent back.
It’s essential that you avoid focusing on single metrics, and instead focus on metrics that are affecting your inventory on the largest scale. When you aggregate your data, you should be using a weighted importance metric that will differ depending on the decision you are going to make. For example, if you are aggregating your sales rate and want to look at investments, you might aggregate that by revenue. Or if you are trying to hone in on stale inventory, you might aggregate your sales rate by inventory value.
Trevor asserts that growth occurs in a business when you are able to “increase future profit reliably.” He breaks down growth strategies into three parts: revenue, cost, and risk.
In order to accurately measure growth, you must take these metrics into account over time. If you are able to produce an increase in revenue for one or two months but aren’t able to replicate that amount of revenue consistently, you have not increased the value of your business.
- Sell Faster – Increase your sales rate.
- Inventory-to-Sales Ratio – You can calculate this by taking your total inventory value, divided by revenue for the past 30 days. This metric indicates the overall health of your inventory, as well as highlighting your sell through rate and your margins.
2. Sell More –
- Expand your product selection.
- Breadth – Sell more SKUs. Measure what percentage of your SKUs generate 20% and 80% of your profit.
- Depth – Sell profitable SKUs. Fixed categories (as shown in the table below) ensure stable monthly reporting. The goal is to increase both the number of SKUs and the percentage of SKUs in higher categories.
3. Sell Higher – Set your products at a higher price, either by pricing the same products higher or shifting to higher margin products over time.
This can be calculated in two ways: you can divide your totals sales by your inventory value, or calculate your total COGS of sales divided by your average inventory value (the latter is recommended by Trevor).
Measure the COGS Margin:
- Use the weighted average to aggregate:
Types of Cost:
- Uncontrollable – Amazon fees
- Controllable – Shipping, storage & return fees
- These can be managed and altered with negotiation or readjustments
- Visualizing storage costs will help you from incurring a large annual storage cost (you can do this with Amaze Analytics)
- Overhead – Salaries, taxes, interest
Manage and Reduce Risk
Trevor defines risk as “the inability to predict the future.” It’s important to take risk into account when you’re reordering, but how do we calculate that risk?
Relative standard deviation is a metric that will tell you how risky a particular product is. Make sure you determine your pricing based on risk. Anything over 50% is risky, but over 100% is extremely high risk.
How Do You Reduce Risk?
- Measure demand through sales rank.
- Measure sales through revenue, sales rate, or Buy Box percentage.
- Measure margin through your Adjusted Gross Margin.
Now that you are an expert on the most important metrics to measure to optimize your Amazon business, it’s important to remember that not all metrics are equal. They should be weighted differently depending on what exactly you are trying to determine and the improvements you want to make.
In addition, averages and single metrics cause you to overlook important areas of your business. Make sure you examine metrics at the buyer, brand, product, and SKU levels to truly understand your strengths and weaknesses.
Finally, metrics are only useful when measured over time. Just because you see an increase in revenue over one month, doesn’t necessarily mean a product or brand is profitable in the long run.
About The Presenter
Trevor has more than 20 years of technology leadership and development experience. He is the former CEO and founder of Lab Escape, a visual data discovery company with clients like Wal-Mart, Costco, Dell, and US Army, which was acquired by Teikametrics in early 2015.
Trevor is currently Chief Data Scientist at Teikametrics, focusing on leveraging data visualization and analytics to help Amazon retailers make better decisions around revenue and profit growth.
Top Amazon sellers trust Teikametrics for a data-driven approach to scaling their businesses for growth. Founded by a former multi-million dollar Amazon seller, Teikametrics offers FBA inventory management software, repricing, and marketing services.