- Ridgeline Insights
Q4 Profitability: Volume vs Margin
Many retailers selling products know that Q4 and the holiday season have the most customer demand opportunities of the year. It’s often the way retailers make their most revenue. Operating on Amazon is no different. However, it may not be as profitable as you want the season to be. Below are the areas to watch to get the most financially out of your holiday season:
Q4 brings about increased competition. More sellers, more products, and a fairly fixed demand for most categories limits the amount of visibility your product will have in search. To get ahead, you’ll have to spend more on advertising, both on and off Amazon. Assuming your ads can even get served in a competitive environment, the average cost-per-click during this time period will often increase. However, because many consumers are browsing, getting inspiration, and not necessarily purchasing, the conversion rate compared to what you experienced pre-holiday could be much lower. This means you’ll spend more each time a customer clicks with a potentially lower conversion rate.
Also, with more competition, you’ll run into knee-jerk pricing reactions. Lightning deals, coupons, and pricing fluctuations can persuade you to change your average selling price. Avoid the race to the bottom and hold steady. Oftentimes, competitors only temporarily change prices so try to avoid the temptation and maintain your margin.
2. Increased costs
The largest bite into your profitability on Amazon during Q4 is in holiday storage and FBA fulfillment fees. These vary by category, size, and length of time at the fulfillment center. Storage fees are the fastest and sneakiest way to lose potential margin so planning accordingly is crucial. Every strategy varies, but more clients succeed by sending in the minimal amount of inventory during Q4. This reduces excess inventory storage costs while allowing for the opportunity to raise prices as inventory levels go down. Plus, by being conservative, you’re able to hit your Q4 forecast comfortably without the need to liquidate in January.
3. Inventory management
Another area of opportunity to have the best holiday sales is inventory planning. This is always an educated best guess but ensuring you have your best-selling styles adequately covered is the key to conversion, sales volume, and getting the highest price possible during a competitive season. The second key to inventory planning is giving yourself plenty of time to get products in stock, especially if you will heavily rely on FBA. It’s recommended to get all your Q4 planned units fully available at FBA by early November. This means getting the shipment en route by mid-October to allow for carrier or fulfillment center delays.
It can be tempting to send in overstock “just in case” but, if you don’t sell through what you planned, you may be forced to liquidate, leaving you in a situation where you’re selling higher volumes but at low or no margin. It is good to have a backup plan in case you run thin. For most products, having a third-party warehouse with D2C or FBM capabilities can help you capture the upside of sales without the burden of excess inventory on Amazon.
In order to have your most profitable Q4, our recommended strategy is to have a conservative forecast, prioritize best sellers, and be able to sell your units at the highest price possible. When you’re not dependent on moving through high amounts of inventory, you’ll have more control over the outcome and more levers to pull to continue to get the most profit from your inventory.