Within your business, how can you expand your sales velocity and profits? How much inventory do you need to buy per month to achieve specific sales goals?

As discussed in this post, metrics are the key to understanding the Amazon resale market. If you can identify products that are selling well, and understand how to analyze price history, trends, competition, and future projections, then you are in a position to make progress and grow your ecommerce business.

A few months into selling with Online Arbitrage via Amazon FBA, we wanted to get to around $35k in sales per month before we felt comfortable leaving our jobs. But, as the sales in the business grew, so did the overhead and expenses.

Are you selling enough volume to cover your cost of living, your business expenses, your virtual assistant salaries and the rest of your systems?

When we added up all of our expenses on paper, we knew we needed to sell around $35k/m to be able to pay for everything and reinvest a small % of profits in the business for growth. This number may vary for you based on the systems, team, and model of your business. In general, having about 20% of income to reinvest in scaling your inventory is a good place to start.

Create a Habit for Tracking Your Sales and Goals

One of the most important habits that you can create is the habit of setting, tracking, and measuring your business and personal goals. If you can be consistent with this, you will have a much better idea of what is positively and negatively affecting your results. If you are constantly aware of what you are working towards, and you measure your progress for achieving your goal every day, then you can easily project where you will end up.

For an Amazon business, it means you can create a road map that ends at any sales number that you set. If you actually work towards achieving what you project in your goals, there is nothing that can keep you from them.

Aim for 50% ROI When Setting Your Inventory Reinvestment Goals

As discussed in previous posts, we aim for a minimum of 50% ROI for our inventory, and this goal helps us calculate how much inventory we have to buy to make a certain amount of sales.

In an Arbitrage model, many items will sell for much higher than 50% ROI, while others will sell for lower and maybe even lose money. The goal is to have an average of 50% ROI, despite the high and low outliers.

That means if you buy $5000 worth of inventory, you will make $5000 back plus an extra $2500. That is a 50% return on the $5000 investment you made initially.

How Do These Figures Correlate with the Gross Amount of Sales You Need Per Month?

There are tons of incredible tools available that can automatically calculate ROI and profit margins for inventory you are analyzing. Below, we are going to do our best to manually break down how we estimate the amount of products we need to buy to hit a certain sales number. These examples are shaped around using an Amazon FBA model, and your margins may actually be larger if you are doing merchant fulfillment because your Amazon fees will be lower. This isn’t going to be exactly the same for you because your overhead may be completely different, but you’ll get an idea of how you can mold your own plan. This breakdown is based on the position of our company when we first started scaling the business. We spent around $2k per month on prep fees, had multiple virtual assistants, and included a small personal salary. These items drastically affect overhead. You may be working on your business solo and prepping items yourself, which drastically reduces your overhead.

This example is strictly to show you how we project business sales and may not work exactly the same for you. We hope it gives you an idea on how you can project your own sales too.

Also, keep in mind that if we spend X amount of dollars this month, the sales for that amount of spending is usually projected in the following month when the inventory actually arrives. The engine of the business is constantly in flow. While we do our best to buy products that we think will sell right away, it’s not always the case. Sometimes it takes up to 6 months for a product to sell, and that’s why it’s really hard to project exact numbers based on purchases.

Breaking Down Sales Scalability Goals for an Online Arbitrage FBA Business

For this example, let’s pretend that we are spending a certain amount of money and that all products we will buy will sell over the first few months of being live. This is a system that has to catch itself, as multiple months of sales velocity have to be in action for it to work effectively.

Here are the questions we need to answer:

• What is the total amount of sales we want to achieve for the month?
• How much inventory do we need to buy to hit the amount of sales we want to achieve?

Let’s look at some generic examples:

If our goal is to sell $1,000 per month, how much do we have to spend to hit that sales number?

The hardest part of this estimation is understanding how the gross sales figure relates to the amount of money actually made. It’s impossible to calculate the exact number because the pricing, supply, and demand of the free market is constantly changing. But, by analyzing our average margins from the history of our business, we were able to determine that the gross profit margin was about 25% of the gross sales figure. (It may be closer to 17-20% nowadays)

If our gross sales are $1000, then our gross profit is $250.

This means that if we sell $1,000, we will make the money we invested in products back plus an extra $250. (.25 x $1000 = $250)

So, How Much Do We Have to Buy to Sell $1,000 Worth of Product?

Remember, our projected ROI is an average of 50%. If we are buying a unit that costs $10, we expect to make our $10 back plus an extra $5, because $5 is 50% of the $10 investment. To make our money back + an extra 50% return on the investment, we have to sell the unit at around double of what it costs us. This is fairly average for a normal size and weighted product.

Unit Cost: $10.00
Sale Price: $20.00 (2x the unit cost on average)
Amount Amazon pays us back after: $15 (roughly 75% of the Sale Price)

To make $1,000 in gross sales, we must spend about $500 on inventory.

General Ratios for ROI

Here is how the general ratios work in simple algebra formulas. Again, we are basing everything off a 50% ROI estimate.

If Gross Sales: X
If Unit Cost: Y

Then the following are true:

Projected Gross Sales: 2Y
Inventory needed to achieve gross sales: .5X
Cash paid back to you by Amazon for hitting your gross sales: .75X (this is generally unit cost + ROI)
Cash kept by Amazon for FBA fees and commission: .25X

Estimated Profit (if factoring off total purchases): .5Y
Estimated Profit (if factoring off gross sales): .25X

Using the formulas above, we have had success in projecting how much we need to spend to make a certain amount of sales, and vice versa.

Here is how the formulas look if we plug in our X and Y.

If we have a unit that costs $10, and we want to project how much we need to sell it for to make our average 50% ROI:

If Unit Cost: Y = $10

Then all of the following are true if you estimate from the above formulas:

Projected Gross Sales (X)= 2Y
X = (2 * 10)
X = $20.00

Cash paid back by Amazon if we sell the unit for X: .75X
.75*20
.75*20 = $15.00
Amazon will pay us $15.00 back if we sell the unit for $20.00.

Cash kept by Amazon for FBA fees and commission: .25X
.25 * $20.00 = $5.00
Amazon will keep $5.00 in fees and commission if we sell the item for $20.00

Estimated Profit if factoring off total purchases: .5Y
.5 * 10 = $5.00
We will make $5.00 profit off of a unit that cost us $10.00

Estimated Profit if factoring off gross sales projection: .25X
.25 * 20 = $5.00
We will make a $5.00 profit if our projected sale price for a unit is $20.00

Estimated profits should always match, no matter if you estimate them off of your unit cost or projected gross sales.

Let’s look at a more technical example:

Example 1:

If we want to make $35,000 is total gross sales, how much inventory must we buy? What will the projected profit be? How much money will Amazon pay us back? How much money will Amazon keep in commission and fees?

How much inventory must we buy to make $35,000 in sales?

Remember, Projected Gross Sales = 2Y
And
Inventory needs to achieve gross sales = .5X

Since we know our projected gross sales are $35,000, then:

$35,000 =2Y
$35,000 / 2 = Y
$17,500 = Y

We need to purchase $17,500 in inventory to make $35,000 in gross sales.

What is the estimated profit?

Estimated Profit = .25X
.25 * $35,000 = $8,750

OR

Estimated Profit = .5Y
.5 * $17,500 = $8,750

How much will Amazon pay us out if we sell $35,000?

Cash Paid Back by Amazon = .75X
Since $35,000 = X, then:
.75 * $35,000 = $26,500

Amazon will pay us around $26,500 back if we sell $35,000 worth of product (which we paid $17,500 for)

How much will Amazon keep in commission and fees if we sell $35,000 in products?

Cash kept by Amazon for FBA fees and commission: .25X
.25 * $35,000 = $8,750

Amazon will keep roughly $8,750 in commission and fees if we sell $35,000 on Amazon.

Using the formulas above, you can also estimate sales figures, profits, cash received, and fees paid based on the amount of money you spend on inventory.

Example 2:

If you buy $12,222 in inventory at a projected ROI of 50%, what will be the projected gross sales, profits, cash received from Amazon, and cash paid in commission and fees to Amazon?

Gross Sales = X
Unit Cost = Y

What will the projected gross sales be if we buy $12,222 in inventory?

Remember, Project Gross Sales = 2Y
And
Inventory needs to achieve gross sales = .5X

Since we know we purchased $12,222 in inventory, then:

X = $2 * 12,222
Projected Gross Sales = $24,444

If we buy $12,222 in inventory, we can project that our gross sales will be around $24,444.00 (which is double).

What is the estimated profit?

Estimated Profit = .25X
.25 * $24,444 = $6,111

OR

Estimated Profit = .5Y
.5 * $12,222 = $6,111

How much will Amazon pay us out if we sell $24,444?

Cash Paid Back by Amazon = .75X
Since $24,444 = X, then:
.75 * $24,444 = $18,333

Amazon will pay us around $18,333 back if we sell $24,444 worth of product.

How much will Amazon keep in commission and FBA fees if we sell $24,444 in products? (If you haven’t noticed, Amazon commission and estimated profits are estimated around the same amount.)

Cash kept by Amazon for FBA fees and commission: .25X
.25 * $24,444 = $6,111

Amazon will keep roughly $6,111 in commission and fees if we sell $24,444 on Amazon.

Making the Estimations Simple

Overall, if you buy $12,222 worth of inventory, you can project that:

• Your gross sales will be $24,444 (double the inventory you bought).
• Your estimated profit will be $6,111 (½ of the inventory you bought).
• You will pay out $6,111 to Amazon in fulfillment fees and commission (½ of the inventory you bought).
• You will receive $18,333 back from Amazon in cash, which is the sum of your original investment of $12,222 and your profit of $6,111. This is exactly 50% ROI.

The formulas are really simple when you get the hang of it. Again, these numbers are not exact, but this is how we generally estimate sales and profit potentials using Amazon FBA for fulfillment. Amazon is also constantly changing their fee structure, so make sure you account in the future if they raise their fees.

Now that you know how to project sales numbers based on the amount of money you spend on inventory, and you know how much inventory you need to buy to hit certain sales projections, you can create a roadmap to scale your Amazon business, just as we did when we started.

In our next post, we break down the process of creating a roadmap for achieving your sales goals.

Read The Next Post:

Creating a Road Map for Achieving Gross Sales Goals for Your Amazon Business (+ Free Template) 

About The Authors

Heath Armstrong is a creative alien and the co-founder of Rage Create. He is the author of The Sweet-Ass Journal to Develop Your Happiness Muscle in 100 Days, Sweet-Ass Affirmations, and the host of the Never Stop Peaking podcast. @heathfistpumps | heatharmstrong.com | sweetassjournal.com

Jason Berwick is a serial adventurepreneur, e-commerce automation junkie, and the co-founder of Rage Create. He spends most of his time building systems to scale digital businesses while traveling the world. @jasonsepicquest | JasonBerwick.com