The Four Most Important Numbers for Online Arbitrage Buying
Updated: Feb 15, 2022
Staring at a list of online arbitrage leads can be intimidating. There is a lot of data you can use to make buying decisions. Sales Rank, Buy Box price, Keepa trends, Amazon stock position, etc...the list goes on and on. Fortunately, lots of leads can be qualified or disqualified with 4 simple metrics.
At The Profit Mine we call these the Power Metrics as they are by far the most important numbers to consider when analyzing leads.
Power Metric #1
Profit is without a doubt the most important metric. It is the life blood of your business. Without profit, your business will shrivel up and die!
Each lead you buy will either add to or take away from your overall profit. So that is why every buy must be made after carefully considering its impact on your profit.
Two questions immediately come to mind: how do I figure out how much profit there is in a given lead and how much profit should I try to make with each lead?
The first question is easily solved when you use an onscreen calculator like AZ Insight. AZ Insight allows you to see data on the Amazon product page and make quick decisions. The photo at the start of this post is a partial screenshot of the AZ Calculator in action.
So how much profit should you try to make? The answer is not as straightforward as it may seem. The most accurate answer is it depends.
Perhaps you want to make $500 per month from your Amazon business and you think you can sell 100 items per month. In that case you would want at least $5 profit per item ($5 x 100 items =$500) and perhaps a bit more to account for returns, damages and price drops.
Your business model might be quick flip oriented so maybe $3 or $4 per unit will suffice if you plan on sourcing only fast selling items.
Ultimately, pick a number and adjust over time as you evaluate your results.
Power Metric #2
ESTIMATED SALES PER MONTH
AZ Insight uses trends over the last several months, combining sales rank, size of the category, price, number of sellers and inventory to arrive at a reasonable estimate as to how many units will sell over the next 30 days.
When you combine this estimate with the amount of inventory already listed you can reasonably surmise how many units you will sell. For example, if an item is selling 100 units per month and there are 9 other sellers then you will make the 10th seller. That means you can expect to sell roughly 1/10th of 100 units over the next 30 days or approximately 10 units. This estimate depends on several factors including the other sellers pricing and reviews as well as your own reviews and pricing since Amazon will often rotate the Buy Box among sellers.
Power Metric #3
ROI (RETURN ON INVESTMENT)
Ok so not those kind of returns...
ROI is one of the most misunderstood metrics. The reason is many people get hung up on the percentage and lose sight of the fact that actual dollars are what matter most. A 100% ROI on a $10 buy cost is not as good as a 20% ROI on a $100 buy cost.
Still, ROI gives you a great way to evaluate a lead in terms of risk of capital. That is a fancy way of saying how much are you likely to make if you risk a certain amount.
Most sellers set a minimum ROI they will accept on an item because they have performed a risk vs reward analysis for their business. In other words, if I risk $1,000 this month on product and my expected ROI is 30% that means I am likely to make a $300 return on my investment. Compare that to the stock market's long term return of 10% and you see just how lucrative an Amazon business can be but there are other costs which will come out of that return.
For new sellers it is recommended to aim for at least a 30% ROI but you need to be ready to move items at a lower ROI if they are not moving at the higher price point. Cash flow is important and you cannot allow your inventory to sit.
Power Metric #4
Profit Margin may be one of the least discussed metrics in Online Arbitrage Selling however it is vitally important.
Margin is calculated by taking Profit and dividing it by the Selling Price. It is usually expressed as a percentage of the Sales Price although it can be expressed in actual dollars as well.
A good way to think about margin is what is left over after Amazon fees and your Cost of Goods is taken out. Let's look at an example.
Suppose you spend $10 to buy an item that eventually sells for $50. Let's say Amazon fees are 30% so $15. So what we will make is $50 - $15 or $35. We take back our $10 we used to buy the item and are left with $25. $25/$50 is 50% which is our Margin.
So what do we do with that $25? We pay the operating expenses of our business. We have supplies, subscriptions, travel expenses, tax prep fees and hopefully a salary ! If you add up all those expenses each month and divide them by your monthly sales you will get a percentage that is your Operating Expense percentage. (Sound like too much work? Don't worry there are great software options that do all this work for you like Inventory Lab ).
Let us suppose that our operating expense percentage is 25% each month. That would mean that if we keep selling 50% Margin items we will have 25% left over of that total on each sale which is profit for the business. It also means that when we analyze a lead we can check if the margin is high enough given our business expenses.
Putting it All Together
Each of these metrics is important but in any given situation you may favor one over another. Personally, if a lead doesn't meet my minimum amount goal for each metric, I don't buy the lead. You may decide to overlook one area where a lead doesn't meet your minimum because it is superior in another area. That is totally up to you but you won't go too wrong by setting minimums and disqualifying leads that do not meet the criteria. There are way too many great leads out there to risk much on leads with questionable metrics.