Contribution Profit Overview
Contribution profit is an internal metric at Amazon that measures a product's profitability. This metric helps determine the viability of products and is often used in terms negotiations focused on profitability.
To estimate true contribution profit, it's essential to account for the cost of fulfillment and inventory storage. Understanding your products' contribution profit enables you to make data-driven decisions that drive joint success for your business on Amazon.
At CommerceIQ, we estimate contribution profit using Seller Central fees as a proxy for Amazon's variable costs. Since Seller Central operates as a for-profit business, the actual cost of fulfillment and storage is likely slightly lower.
Contribution Profit Formula:
Contribution Profit = Shipped Revenue - Shipped COGS + Accrual - Cost of Fulfillment - Cost of Inventory Storage
Contribution Margin Formula:
Contribution Margin = Contribution Profit / Shipped Revenue
Difference between Net PPM and Contribution Profit
Net Pure Product Margin (Net PPM)
Net PPM = (Shipped Revenue - Shipped COGS + Accruals - Sales Discounts) / Shipped Revenue
The key difference between contribution profit and Net PPM is that contribution profit accounts for inventory storage and shipping costs, while Net PPM does not.
Amazon publishes Net PPM, but this metric does not provide the full picture of an item's profitability. Items can show high Net PPM (35% or more) but still be unprofitable. For example, heavy or bulky items are often Net PPM positive, but their high shipping and storage costs can make them ultimately unprofitable.
Examples
Profitable Item
The example below shows an item that is said to be profitable or CP positive. In this example, Amazon is making $8.72 for every unit sold.
This item is well positioned for ecommerce profitability and has latitude if the vendor needs to adjust pricing, and/or invest in advertising/promotion.
Factor | Description | Value |
Selling Price | The price the customer pays | 25.00 |
Unit Cost | The price that the vendor invoices to Amazon | (15.00) |
Accrual (15%) | Total amount paid to Amazon through accruals (COOP, Damage, Freight, etc.) | 2.25 |
Cost of Inventory Storage | Estimated cost of storage per unit sold | (0.03) |
Cost of Fulfillment | Estimated cost for Amazon to pick, pack, and ship | (3.50) |
Contribution Profit ($) | Total profit per unit | 8.72 |
Contribution Margin (%) | Margin per unit | 34.9% |
Unprofitable Example
The example below shows an item that is said to be unprofitable or CRAP (cannot realize a profit). In this example, Amazon is making $3.58 for every unit sold.
Amazon will often accept unprofitability on flagship items to maintain product parity and an expansive product selection. However, as profitability remains a top priority for the retailer, profitability standards are expected to become more stringent.
Factor | Description | Value |
Selling Price | The price the customer pays | 15.00 |
Unit Cost | The price that the vendor invoices to Amazon | (13.00) |
Accrual (15%) | Total amount paid to Amazon through accruals (COOP, Damage, Freight, etc.) | 1.95 |
Cost of Inventory Storage | Estimated cost of storage per unit sold | (0.03) |
Cost of Fulfillment | Estimated cost for Amazon to pick, pack, and ship | (7.50) |
Contribution Profit ($) | Total profit per unit | (3.58) |
Contribution Margin (%) | Margin per unit | -23.9% |
How to Deal with Unprofitable (CRAP) Items
When an item becomes unprofitable, you need to take action to reverse it, or the product will remain suppressed.
Increase price
Decrease cost
Create a profitable multipack
Adjust product attributes
Modify agreements
Increase Price
Since Amazon controls pricing, increasing prices is not always straightforward.
Within Vendor Central, you can increase your list price, which typically acts as a ceiling price for Amazon. By raising your list price, you remove this restriction and enable Amazon to increase their price.
If you control third-party offers or pricing on external retailers, prioritize pushing price increases there. Amazon is a price-matching company and will adjust its prices based on higher pricing in the marketplace, both internally (3P) and externally (e.g., Walmart, Target, Best Buy).
Decrease Cost
If your product is unprofitable, you can reduce cost to help Amazon realize a profit. Use a combination of CommerceIQ's estimated contribution profit and the data from Amazon to ensure you don't reduce cost too low.
If you don't have vendor manager involvement, consider gradually stepping down your cost in small $0.05 increments until the profitability suppression is lifted.
Important: Before reducing cost, carefully evaluate the impact on your own profitability to ensure the decision aligns with your business objectives.
Create a Profitable Multipack
Some items that are unprofitable as a single unit can become profitable when sold as a multipack. If you cannot reduce your cost or increase your price, consider offering a multipack (e.g., 2-pack, 3-pack) of your item.
When creating an ecommerce-specific multipack, consider:
Consumer preference: Review your category to ensure the pack size is a viable purchase option. For example, most dog food bags top out at around 45 pounds—it wouldn't make sense to offer a 6-pack of 45-pound bags, as there is no market precedent and 270 pounds of dog food is too much for the average consumer.
Profitability: Within the acceptable range of multipack options, use estimated contribution margin to model the profitability.
Ease of creation: Consider virtual bundles or simple packing options, such as taping two items together, instead of creating new packaging for a 2-pack.
In the example below, this brand was able to identify opportunity to add multipack assortment with break-even profitability, enabling them to switch demand away from the unprofitable single pack.
Adjust product attributes
Incorrect product attributes can lead to inaccurate profitability calculations. When setting up a new item, ensure that product dimensions, weight, and other key attributes are accurate to avoid incorrect fees or fulfillment costs.
Modify Agreements
Negotiate with Amazon to improve your account profitability. Identify what is driving the profitability issues and ensure that any adjustments will yield the intended result. For example, if there is a damage issue, first investigate the root cause and try to resolve it before simply increasing your damage allowance or adding a 1% increase to COOP.
In certain cases, you can create special accruals that target specific ASINs. For example, you can allocate 0.5% of your accrual to three specific ASINs that are unprofitable. This method targets the unprofitable ASINs directly without spreading the accrual across your entire account or increasing your total COOP payment.
Things to Avoid with Unprofitable Items
Guaranteed Minimum Margin Agreement (GMM)
In a GMM, you (the vendor) are agreeing to maintain a specific net PPM. If your products drop below a certain threshold, you will be billed for the difference. Since you don't have control over your pricing, Amazon can price match at any time and you will be stuck with the bill. In certain cases this can lead to millions of dollars of vendor payments. Avoid GMM whenever you can.
Blanket Increase on Terms
Amazon will sometimes request a 1% increase on COOP to account for unprofitable items. This will help the overall profitability of your account, but it won't always ensure that your products remain active. Even if you increase your overall terms, items can still get CRAPd out.
Reducing cost without considering your own profitability
Before agreeing or submitting to any type of cost decrease, carefully consider its impact on your own profitability.
Price increases can be difficult to negotiate, so if you don't need to reduce your cost, it is best to find an alternate solution.