In this article you will learn about the Net PPM, a performance metric to measure your success on Amazon. We will explain what it is, how to calculate it and how to improve it.
What is Amazon Net PPM?
Amazon Net Pure Profit Margin (PPM) is a metric for vendors selling products on the Amazon marketplace. In this section, we will take a look at the definition of Amazon Net PPM and why it is important for Vendors to always have an eye on that.
Importance for Amazon Vendors
Net PPM serves as a key performance indicator (KPI) for Amazon Vendors, allowing them to assess the financial health of their products. By monitoring the Net PPM, Vendors can identify areas for improvement and take measures to enhance their profitability.
Moreover, Net PPM plays a significant role in negotiations between Amazon Vendors and Amazon itself. During annual vendor negotiations or when discussing trade terms, Amazon often uses Net PPM as a benchmark to evaluate a Vendor's performance and determine the profitability of a partnership. Vendors with a higher Net PPM are more likely to secure favorable terms and maintain a strong position in their relationship with Amazon.
By optimizing Net PPM Amazon Vendors can:
- Ensure long-term profitability and sustainability of their business on the platform
- Reinvest profits into product development, marketing, and expansion opportunities
- Minimize the risk of Amazon ending their partnership
Factors Affecting Amazon Net PPM
The Average Selling Price (ASP) directly impacts the Amazon Net PPM. It represents the average price at which a product is sold on the Amazon marketplace over a specific period. A higher ASP generally leads to a higher Net PPM, assuming other factors remain constant.
Another important metric is the Cost Price, also known as the Cost of Goods Sold (COGS). It represents the total amount of money needed by the vendor to produce or acquire the products sold on the Amazon platform.
Trade terms also have to be included when determining the Net PPM for Amazon Vendors. These terms include various agreements between the vendor and Amazon, such as allowances or discounts. Sales Discounts are typically negotiated between the vendor and Amazon, and they can significantly impact the overall profitability of a product. Sales discounts are usually expressed as a percentage of the selling price and are applied to the total sales volume for a given period. By negotiating favorable trade terms, vendors can significantly impact their profitability on the platform.
Net PPM Formula
There are two different formulas to calculate the Net PPM. There is one formula for a single ASIN and one for your whole vendor account.
The formula for the Net PPM for a single ASIN:
Net PPM = Average Selling Price – Cost Price + Vendor Terms – Sales Discount
The formula for your whole vendor account:
Net PPM = Shipped Revenue – Shipped COGS + Vendor Terms – Sales Discount
How to improve Net PPM
Improving Net PPM to maximize profitability on the platform is a main factor for vendors.
To optimize the Amazon Net PPM, vendors must strive to minimize their Cost Price without sacrificing product quality and hence losing customers. This can be achieved through :
- Negotiating better prices with suppliers
- Implementing efficient inventory management practices
- Optimizing production processes to reduce waste and improve productivity
- Exploring alternative materials or components that offer cost savings without affecting product performance
An improved Net PPM can also be achieved by negotiating favorable terms and agreements with Amazon. Since the costs and fees of these agreement directly influence the Net PPM, better negotiations mean a better Net PPM.
Another important factor to consider during negotiations is the timing and duration of promotional activities. Vendors should strive to align their promotions with peak shopping periods, such as holidays or seasonal events, to capitalize on increased consumer demand. Additionally, negotiating for longer-term agreements can provide vendors with greater stability and predictability in their marketing efforts, allowing them to plan and budget more effectively.
