Why Selling on Amazon is Like Trading on the Stock Market

Old Retail Model vs New Retail Model

This post is by Lauren Shepherd, a marketer at Teikametrics. Teikametrics helps Amazon FBA sellers drive traffic to their listings and scale their business using data-driven software and consulting for inventory optimization, repricing, restocking, review management, ad optimization, and product scouting. This post was first published on the Teikametrics Blog as What the Most Successful FBA Sellers Do Differently.

Selling on Amazon is a bit like life in the Amazon jungle – it’s survival of the fittest. But what gives certain sellers that edge? What makes them stand out from the pack and become king of their domain?

Top Amazon sellers aren’t like the rest.  The most successful sellers have adapted to the evolving ecosystem that is online retail by treating selling on Amazon like trading on the stock market.

Amazon has resulted in an increasing commodification of retail, putting the focus on price and convenience rather than value and selection. Just as traders take a strategic, analytical approach to their stock portfolios, successful sellers apply the same mentality towards their inventories.

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Part of the strategy that successful sellers pursue is using Fulfillment by Amazon (FBA) to help scale their business. Experienced sellers know that merchant fulfillment can eat away at your margins and ability to pack and ship efficiently, and could potentially cost millions of dollars of investment.

FBA sellers save time by not worrying about logistics, and are focused on gaining a competitive advantage. (Not to mention gaining access to millions of Prime customers looking for the convenience factor.)

Creating the Winning “Portfolio” and Making Bets

Third party sellers make up 40% of Amazon’s unit sales, but those sales aren’t evenly distributed among sellers. A select few are making up the majority of the volume. The most successful sellers use a stock trading model: their investments are short-term focused on wringing the most profit from their portfolio.

These types of sellers are less focused on what manufacturers are presenting to them and more focused on seeing products as commodities completely driven by the dynamics of the market.

Successful FBA sellers maintain a diverse portfolio of products and inventory levels that depend on many different variables in order to mitigate risk. All in all, making large bets is the only way to generate sufficient scale – whether it be take-all inventory, or a strategy decision designed to stock out your competitors (of course, you want to test those bets on a smaller scale first).

To intelligently utilize this stock trading model, it’s best to make decisions using an accurate, fact-based data analytics program to mitigate risk even further and unveil profitable opportunities. This could be done through excel spreadsheets or software, depending on the size of your business.

Through speaking with clients over the years we have found that many successful Amazon sellers share the same unique traits required of successful stock traders.

Here are the five key traits successful stock traders and elite FBA sellers possess:

Why Successful FBA Sellers Are Like Stock Traders

1a.) Focused

1a Focused on Scalable Profit

Focusing on investments that are high margin, high volume is imperative to scaling your business. Sellers with poor performance often focus on low volume inventory and find themselves backed into a corner – even if you have high margins you can’t successfully scale a business with a low volume of products. You don’t see stock traders making major profits on insignificant, low-risk investments.

As we mentioned before, one of the easiest ways to scale and maintain a high volume and high margins is to sell with FBA. If you try to support all of the fulfillment logistics yourself you will eventually reach a ceiling on volume and lose out on potential profit.

1b.) Flexible

Focusing without flexibility can be dangerous. As an Amazon seller you need to be prepared to make bad bets, and have a game plan to manage these bets with flexibility if they go wrong.

Of course, it’s only human to make mistakes and poor buying decisions. Even the most seasoned stock traders or FBA sellers make bad investments. However, smart sellers are able to identify and admit to a bad investment when they’re wrong. They acknowledge their wrongdoing and move on to more profitable ventures. Poor investments tie up capital and potentially have the capability to cripple your business.

Smart, successful sellers and traders make adjustments to correct the fallout from bad decisions and learn from their mistakes in order to improve upon future buying decisions.

2) Disciplined

Successful sellers combine these performance metrics along with data analysis to build long term success for their Amazon business:

2 Disciplined

Routine performance metrics:

  • Gross Margin Hurdles: Maintain a minimum gross margin benchmark (after all of the FBA fees) where you would begin to be interested in selling a product
  • Total Inventory Value: It’s important to know how much you have invested in a product to effectively manage your business, know where your capital is allocated, and see where the biggest profits lie.
  • Stale Inventory: It’s crucial to pay attention to any stale inventory (over 90 days old) that might be weighing your business down.
  • Inventory to Sales Cash Flow Ratio: This shows you how much cash flow you need to generate a certain amount of sales.
  • Profitability analysis: How profitable are individual SKUs? Pay attention to the net impact of returns of a particular product. If you don’t take this into account, you may falsely believe a product to be performing well.

Data Driven Management

  • Delegation
  • Risk Management
  • Cash Flow Management

3) Excellent Money Management

Without money management or access to capital it’s impossible to earn money trading stocks or to run a successful Amazon business. It’s imperative to focus on cash flow and access to working capital in order to place orders and purchase the inventory you need to grow your business.

As we mentioned earlier, knowing your inventory to sales ratio is crucial to the success of your business, and it directly relates to proper money management. You can’t effectively manage a business without knowing where your capital is going – if your money is tied up in bad investments you will lose out on potential profit and potentially sink your business in the process.

3 Money Management

Another important aspect of money management for top sellers is credit. The most successful sellers are constantly developing access to working capital, and continuously seek credit for new investments through these three options:

  • Vendor Credit Terms: Going to manufacturers and asking for net 30, 60, or 90 days. To get these terms you must have already built a solid credit history with your retail business.
  • Credit Cards: Certain credit cards, like the American Express Plum Card or Chase Ink, have great cash back rewards for small businesses.
  • Term Loan/Revolving Credit: This includes Amazon lending (a program where Amazon will give you 3-6  months to repay your loan with interest), Kabbage, or going directly through your bank.

Utilizing these options allows sellers to plan ahead for high velocity periods like Q4. The holidays are where many sellers make the bulk of their profits for the year. The more upfront capital you have, the better your ability to see substantial returns in profit.

Any time you borrow money it’s especially important to keep an eye on your profitability. Sellers that don’t monitor profitability can easily fall into debt trying to pay off the capital they borrowed.

4) Emotionally Controlled

“It’s not about being right, it’s about making money.” While this may sound like a cold statement, it’s important to not get hung up on buying decisions that sounded like a good idea at the time and turned out to be less than profitable. Successful sellers react to bad investments the same way a stock trader would, with a rational response rather than getting hung up on proving they were right.

In addition, any buyers you have on your team need to be held accountable using a set of transparent metrics. This enables you to manage your buyers objectively and places your whole team on the same page for expectations.

5) Patient

5 Patience

The most successful retailers measure their growth by quarters or years, rather than week to week. Consistent and sustainable growth is the key to long term success. Look how the overall business is doing in the long term rather than quick spikes by a particular brand or product.

Similar to the stock market, certain products or stocks go up and down in popularity. Stocks might be down one day but booming the next. You can’t assess success on too short of a time period, or else you’ll be distracted by statistical noise.

Secondly, even if you have the upfront capital, it’s important to remain patient when looking to invest. Successful sellers want to make sure their strategies are proven before placing their bets. If you start on a smaller scale and prove a product has a high sell through rate, then you know it’s safe to continue reordering and sell more volume.

Conclusion

Lauren Shepherd
Lauren Shepherd

At Teikametrics, we have found that the most successful Amazon sellers have adapted to the new retail model by using a strategic and analytical approach similar to trading on the stock market.

These strategies include:

  • Maintaining a diverse portfolio of products and predicting accurate reordering based on key variables like sell-through rate.
  • Efficiently scaling their business by focusing on high volume, high margin, short term investments. This can be done well through FBA.
  • Focusing on cash flow by getting rid of slow-moving inventory and constantly developing their access to working capital.
  • Making intelligent business decisions using key performance metrics rather than relying on a “gut feeling.”
  • Focusing on consistent and sustainable growth over quarters and years, rather than months or weeks.

If you would like to hear more about how Teikametrics helps sellers implement these strategies, please feel free to email me at Lshepherd@teikametrics.com.

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