Welcome to Episode 3 of the Treehouse metrics podcast
My name is Arnie Shields and I am your host, helping you with the skills and knowledge to work ON your Amazon business rather than IN your Amazon business.
In the last episode, we discussed the two fundamentals of business – Cashflow and risk
In this episode, I am going to introduce you to the first stage of a framework for understanding and running your Amazon business but in fact any business because the principles are the same.
This framework will enable you to forecast where your business is heading and make the necessary changes before it’s too late to ensure that you acheive your goals.
In today’s episode, I am going to introduce you to the five multipliers of business. Understanding these multipliers and how they work together will decide whether you succeed or fail in your business.
Understanding the multipliers will help you determine where you spend your time in your Amazon business, how to focus on the most important aspects of your business that are going to have the biggest result.
The importance of the multipliers is the understanding that it is not one big thing – product, tool or marketing idea that makes a business successful, it is the gradual systematic increases in each of the five multipliers.
So lets look at the 5 multipliers and how they are connected and how they work together.
The 5 multipliers are:
We are 4 profit multipliers and one asset multiplier
- Leads: or in Amazon Sessions or in Ecommerce unique visitors
- Conversion Rate: the percentage that leads convert to sales
- sessions x Conversion rate equals number of units sold
- Average Sale Value – average price that you get for your products
- Leads times conversion rate times average sale value equals sales
- Gross profit percentage which is a function of costs and sale price
- Valuation Multiplier – the multiple that is used to calculate the value of your business.
Increase just one of these profit multiplier and your profit increases linearly a straight line but if you increase 2 or more of these multipliers and you get exponential growth.
You can double your profit in 12 months just by just increasing each of the multipliers by 1% each month. so that is just tiny 1% increases.
Increasing the number of people that visit your product listings by 1% each month. That means increasing the number of sessions from say 10,000 sessions per month by an extra 100 extra visitors each month.
Amazon could deliver those extra visitors just by optimising your keywords and picking up another search term.
Increasing your conversion rate or unit sessions percentage – you can find your unit session percentage in Seller Central Business Reports.
We want to increase your conversion rate by 1% each month, So in the first month we increase the conversion rate from 10% to 10.1%.
An increase in your conversion rate in Amazon can be just due to getting more 5 star reviews by looking at your review follow up process. But 1% increase can be acheived by reviewing titles, bullet points and images.
An increase in the average price. Increasing your prices by 1% each month from $20.00 to $20.20.
Increasing your gross profit rate by 1% each month. Part of that increase will be from your price increase but lets assume that you decrease your costs by just 1% each month – so unit costs decrease from $14.00 to $13.86
This could be just asking your supplier for a better price being more organised with inventory and supply and sending by a slightly slower freight which is cheaper.
So in Month 1 we were making $6000 per month and by increasing each of the 4 profit multipliers by 1% each month, profit doubled to over $13,000 by month 12.
The doubling in profit was not due to a big new idea, it was just tiny increases that would not even cost anything – gradual consistent improvements.
In Amazon, you are going to be able to increase the session and conversion multipliers by more than 1% per month. Increasing your conversion rate will result in higher rankings in Amazon search results which leads to more sessions. Increasing prices and gross profit may be harder .
When looking at your multipliers and what to target – look first for the low hanging fruit, the easy wins especially if those easy wins have no additional cost like optimising listings, keywords and reviews.
As the multipliers are so powerful they also dictate where you should spend your time – where your activities are going to have the biggest impact – the multipliers
Your time should be focused on the multipliers – sessions, conversion rate, price & gross profit rate.
now because you can only change some things on a monthly or quarterly basis like prices, new products, supplier renegotiations – your time needs to be focused on a daily and weekly basis being sessions and conversions.
You will know which one needs attention – just as a guide the best selling products ( position 1 to 3) in the search rankings with have a conversion rate between 20% to 30%.
In an Amazon business, your conversion rate is key – higher converting products will rank higher, get promoted by Amazon, advertising costs are cheaper.
So the Four Profit Multipliers in an Amazon business are:
- Unit Session %
- Average Price
- Gross Profit Rate
The 5th Multiple is the Valuation Multiplier which we will deal with in another episode.
So if we look at the multipliers in terms of business divisions:
- sessions = marketing
- Conversions = sales
- Price = marketing for creating premium product and sales for upselling
- Gross Profit = production
- Valuation = CEO
so where do admin, finance, HR Accounting fit in – well their role is to support the operations of marketing sales & production and to provide the information to make decisions.
You may have heard of these multipliers before or in a slightly different form but they were really difficult to measure on a consistent basis. With eCommerce businesses all the information is readily available to get timely data.
So why do we need to measure the multipliers – well because they work in reverse at frightening speed changing a profitable business to one making losses in a very short period of time.
which is why price wars can be so devastating.
Lets look at a simple example, instead of increasing the 4 profit multipliers by 1% each month, we are going to decrease them by 1% each month. A slow decline, a 1% decline each month is almost a rounding error but it adds up. In the earlier example, the business with $6000 monthly profit doubled it’s profit in 12 months with 1% increases.
A 1% decline would turn the profitable business to making nothing in 12 months. Nothing major happened – the business just didn’t innovate but slowly slipped away. Get to the end of 12 months and wondering what went wrong.
Successful businesses don’t have one big thing that propels them to riches and success – they have many small wins consistently applied all adding up to massive manageable growth with strong cashflows and low risk.
In fact, the one big thing can be disasterous because poor planning and a lack of understanding of cash flow, risk and the power of multipliers can lead to the other multipliers falling and negating the effect of the one big thing.
I have built a tool where you can see the effect of the multipliers on your business – its a free tool – just go to www.treehousemetrics.com/multiplier
So in this episode we covered the first stage of our business framework being the multipliers: Sessions, conversion sale price gross profit rate.
In the next episode of the Treehouse Metrics Podcast, we are going to go in depth into the Fist Profit Multiple – Leads or Sessions.
We are going to look at the different ways that you can increase the number of sessions and how we can measure sessions.
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Plus if you have any questions, please go to the show notes on our blog and leave your comments and I will answer them.
Until next week.