Online Arbitrage Unit Economics: How To Calculate It
Online arbitrage is a great way to make money on Amazon, but it's important to understand the unit economics of your business. This means accounting for your costs and profits on a per-unit basis.
By knowing your unit economics, you can ensure that you're making a profit on each item you sell. Once you understand your unit economics, you can start to make decisions about how to improve your profits.
In this post, we'll take a closer look at online arbitrage unit economics and discuss the key factors that you need to consider.
What Is OA Unit Economics?
Online arbitrage unit economics is the calculation of the costs and profits associated with selling a single product through online arbitrage. It is important for Amazon sellers to understand their unit economics in order to make sure that they are making a profit on each item they sell.
The key factors to consider in OA unit economics
Cost of the item
This includes the price you paid for the item, as well as any shipping or handling costs.
This is the amount of money you make on each item after you factor in the cost of the item and the Amazon fees.
How to Know Your Profit Per Unit?
Profit is the money you make after you pay for the costs of producing and selling something. It's an important measure of how well a business is doing.
There are two types of expenses: direct and indirect.
Direct expenses are the costs that are directly related to making or selling a product, like the cost of a product you purchase for reselling or the cost of shipping.
Indirect expenses are the costs that are not directly related to making or selling a product, but are still necessary for running a business, like salaries of VAs researching your products.
To calculate profit, you need to subtract the total expenses from the selling price. The amount left is your profit.
What Makes Indirect Expenses?
Indirect expenses are costs that are not directly tied to the creation or sale of a product. They are also known as overhead expenses, and they include things like utilities, seller tools you use to research the profitable deals, and more.
This includes the salary or wages paid to employees involved in various aspects of the online arbitrage business, such as sourcing, listing, customer service, or administrative tasks.
Seller tools and subscriptions
Expenses related to using specialized software, applications, or services designed for Amazon sellers. These tools assist with product research, inventory management, repricing, and other tasks necessary for efficient operations.
OA deals purchase
These are the costs of acquiring ready-to-sell online arbitrage deals you can immediately trade on Amazon. You can get such deals on the Seller Assistant Deals marketplace.
Costs related to the physical office space used for business operations. This includes rent, utilities, office supplies, and maintenance costs.
Mobile phone and computer
The expenses associated with purchasing and maintaining communication devices, such as mobile phones and computers, are essential for managing online arbitrage activities.
Payoneer сard fees
Payoneer is a payment service provider commonly used by Amazon sellers. This expense refers to the annual fee of $30 charged by Payoneer for their payment card services.
The cost of online arbitrage educational courses, training programs, or workshops that sellers may undertake to enhance their knowledge and skills in online arbitrage or related areas.
Fines or penalties imposed by Amazon for inadequate or non-compliant packaging of products. These fines are typically levied when packaging does not meet specific guidelines or requirements.
Payment Processor/Bank Fees
Fees charged by payment processors or banks for processing transactions and transferring funds. These fees may vary based on the payment method and the financial institution used.
Miscellaneous expenses that do not fall into specific categories but are relevant to running the online arbitrage business. These could include legal fees, insurance premiums, professional services, or miscellaneous business expenses.
Tip. One of the most popular online arbitrage Amazon seller tools is Seller Assistant App. This is a comprehensive all-in-one extension designed to streamline your product research process. With its powerful features, you can quickly assess a product's profit, margin, and ROI.
This tool lets you quickly identify any sales restrictions or previous issues related to account health. It consolidates multiple functionalities into one convenient tool, including an FBM&FBA profit calculator, Quick View for instant insights, Stock Checker to ensure inventory availability, and a Restriction Checker to ensure compliance. By leveraging the Seller Assistant App, you can optimize your product selection and make informed decisions to drive your Amazon business forward.
What Makes Direct Expenses?
Direct online arbitrage unit expenses include COGS, which refers to the purchase cost of the product at the supplier. Direct expenses include the components listed below.
Any discounts or promotional offers applied to the product's purchase price reduce direct expenses.
Applicable sales tax (0 to 9,75%) based on the jurisdiction where the sale occurs. Registered companies having licenses, sales tax permits, or resale certificates are typically sales tax-exempt.
Card Processing Fee / Transaction Cost
Fee (up to 2%) charged by the payment processor for accepting card payments.
Potential cashback received from credit cards or other reward programs reduces direct expenses.
Supplier picking and labeling costs
Charges incurred for picking and labeling services provided by the supplier.
Payoneer transaction fees
Fees charged by Payoneer for payment card transactions.
Prep center receiving fees
Costs associated with receiving products at a prep center.
Prep center shipping fees
Fees for shipping inventory to a prep center.
Prep center services
Charges for services provided by a prep center, such as inspection, labeling, and repackaging.
Cost of materials used for repackaging items, including bubble wrap or creating product bundles.
Sending inventory to Amazon
Cost of shipping inventory to an Amazon fulfillment center.
Amazon FBA distribution fee
If you send inventory to one of the fulfillment centers, a fee is charged by Amazon for distributing inventory across multiple fulfillment centers.
Amazon labeling and prep
Fees for labeling and preparing products at Amazon's fulfillment centers.
Charges for storing inventory at Amazon's fulfillment centers based on the duration of storage, 1+ months.
Related: Amazon FBA Storage Fees Explained
Amazon Referral fees
Percentage-based fee charged by Amazon on the sale price, depending on the product category.
Fees associated with Amazon's Fulfilled by Amazon (FBA) service, covering storage, picking, packing, and shipping.
VAT on European accounts
Value Added Tax applicable to fees charged to European seller accounts.
Value Added Tax applicable to the sale of goods, depending on the jurisdiction.
Fees associated with factoring services, providing sellers with immediate access to funds. The services are offered by such companies as Payability, SellerFunding, etc.
Lost and damaged inventory
Costs incurred due to damaged or lost units.
Expenses related to customer returns, including shipping, restocking, and potential refurbishment costs.
How to Accurately Calculate Per-Unit Costs?
Once you have a clear understanding of your costs, assessing the profitability of the products you source is crucial. Ensuring a good profit margin is vital for successful selling on Amazon.
With Seller Assistant App, this process becomes simplified as it calculates all the necessary profitability metrics for you. Simply review the corresponding numbers in the FBA&FBM calculator.
Seller Assistant App’s FBA&FBM calculator shows:
- FBA or FBM costs;
- 'Fees': Total amount of Amazon commissions;
- 'R15%': Amazon Referral fee (15%);
- 'Sto': Monthly storage cost of goods in Amazon warehouses;
- '3PL': Third-party logistics costs;
- 'Ship': Cost of shipping the item.
Related: Amazon Product Hunting Tips in 2024
Additionally, Seller Assistant App extends comprehensive support for European VAT requirements. It offers various VAT schemes to suit your specific needs.
These options include No VAT for non-VAT registered sellers, the Standard VAT rate applicable to your country, the Reduced VAT rate for particular products, Non-registered VAT for UK sellers, and VAT on fees for European sellers on Amazon US or Canada.
The extension ensures regulatory compliance and enables seamless selling across European marketplaces by simplifying the complex VAT process. Choose the VAT scheme that aligns with your business and confidently expand your presence in European marketplaces.
What is unit economics?
Unit economics is a way of measuring the financial health of a business by looking at the costs and revenues associated with each individual unit or product. It's important to understand unit economics because it helps make better decisions about pricing and product development.
How to calculate unit economics?
To calculate unit economics, you can utilize Seller Assistant App's FBA&FBM calculator. The calculator shows your profit, return on investment (ROI), and profit margin.
How to find profit per unit?
To calculate the profit per unit, deduct the cost of purchasing the product from its selling price. This calculation gives you the gross profit per unit before considering any additional expenses such as overhead costs or taxes.
Do I need a business name to sell on Amazon?
You don't need to have a registered business to sell on Amazon. While Amazon itself doesn't require business registration, it's important to note that your local government might have its own regulations regarding online businesses that you may need to comply with.
Do you need money to start Amazon FBA?
Yes, you need money to start an Amazon FBA business. There are various costs involved, including product sourcing, inventory purchase, shipping, and Amazon fees. The amount of money required can vary depending on the type of products you plan to sell and the scale of your business.
In conclusion, understanding and optimizing online arbitrage unit economics is crucial for Amazon sellers aiming for long-term success and profitability. By delving into the unit economics of your products, you gain valuable insights into revenue, costs, and profitability at a granular level.
This knowledge empowers you to make data-driven decisions, such as selecting the right products, setting competitive prices, and managing expenses effectively. Leveraging tools like Seller Assistant App and staying informed about crucial metrics like COGS, profit, fees, and logistics costs allows you to maximize your profitability and navigate the dynamic landscape of online arbitrage with confidence. Remember, mastering unit economics is the foundation for building a sustainable and thriving Amazon business.
Additionally, consider utilizing tools like Seller Assistant App to streamline your search process, saving time and effort when identifying potential opportunities across multiple websites. This all-in-one extension incorporates all features vital for product research. Seller Assistant App shows you the product’s profit, margin, and ROI. It also helps you immediately see if a product has any sales restrictions or has previously triggered problems with account health. It combines an FBM&FBA profit calculator, Quick View, Stock Checker, and Restrictions Checker in one tool.