#317 – The Three Numbers That Amazon Sellers Need To Know With Arnold Shields
In episode 317 of the AM/PM Podcast, Kevin and Arnold discuss:
- 02:00 – Arnold’s Backstory And How He Got Started In Amazon
- 04:00 – Managing 600 Amazon-Selling Clients
- 05:10 – Talking About The Amazon Australia And Its Seller Community
- 07:55 – The Keys To Success For His 7-Figure Amazon Business
- 08:40 – The Financial Side Of Your Amazon Business
- 12:30 – Business Earnings That Can Pay You A Salary And Enough To Fund Growth
- 13:10 – Is It Possible To Start A Business With $12K Or Less?
- 16:35 – Common Accounting Disaster Stories From Arnold’s Clients
- 19:10 – Arnold’s Cashflow Spreadsheet Inside The Freedom Ticket Course
- 21:40 – What Is The Objective Of A New Amazon Business In The First Year?
- 22:50 – The Three Numbers That Amazon Sellers You Need To Know
- 26:00 – Kevin King Explains What TACoS Is
- 31:10 – Why Are People Not Paying Attention To These Concepts?
- 32:50 – The Different “Financial Hurdles” For Different Levels Of Sellers
- 36:20 – What Business Buyers Want To See On Your Books
- 38:30 – Expanding International And Other E-commerce Sites
- 43:30 – How To Reach Out To Arnold?
- 46:30 – This Week’s Golden Nugget Of Advice
Transcript
Kevin King:
Welcome to episode 317 of the AM/PM Podcast. In today’s episode, my guest is Arnold Shields. Arnold is from Australia, where he’s a chartered accountant, which is similar to a CPA in the US. He’s got close to 600 clients that he works with that are in e-commerce, primarily Amazon sellers, as well as he’s a seller himself doing several million dollars per year on Amazon. So he really knows this business and he really knows this game. And more importantly, he really knows his numbers. And that’s what we’re gonna be talking about today. Not the most exciting thing. It’s not the glamor of selling on Amazon and all the cool pictures and video and everything. It’s all about the numbers, but it’s crucial that you understand this and hopefully, after listening to today’s episode, you’re gonna revisit some of what you’re doing and take a good hard look and make sure you know your numbers. Arnold Shields, welcome to the AM/PM Podcast. I’m happy to have you here, man, welcome.
Arnold:
It’s fantastic to be here, Kevin.
Kevin King:
It has, when was the last time we saw each other? I think the Billion Dollar Seller Summit, right?
Arnold:
Yeah, 2019.
Kevin King:
I know. And then you bought an early bird pass to like the next one, then Covid hit, and so you couldn’t come. And then I remember you were eager to come back to this last one, and you’re looking at these airfares because you’re coming from Oz down in Australia, and it was like some crazy amount of money to actually fly here and you’re a taller guy, so, you know, economy seats are just not gonna cut it for a 15-16 hour flight. So I’m looking forward to hopefully maybe seeing you at the event next year.
Arnold:
Yeah, no, it sounds good. At Puerto Rico, isn’t it?
Kevin King:
Puerto Rico, exactly. In June.
Arnold:
Yeah, it sounds good. I’d love to be there.
Kevin King:
Awesome. Well, let’s tell everybody, a lot of people probably don’t know who you are. They may have taken the Freedom Ticket course and they may have seen that you have a little module in the Freedom Ticket where you’re talking about a bunch of numbers and spreadsheets and stuff. But tell me a little bit about yourself. What brings you to this Amazon game, this e-commerce game?
Arnold:
Well, I’m an accountant, so we got a chartered accounting practice. And we specialize now in Amazon businesses. But a long time ago, about 2015, I had someone I knew come to me and said, “oh, I’ve done this Amazon course” and they were doing lots of different internet courses at the time, and they said, “oh, I think it might be okay and can you have a look at it and see how our numbers are going.” And they’d actually done fantastically well in their first year. This is back in 2015. And we got a couple more clients after that. And then we just kind of basically said, well, I was using one of their accounts to go in and check which reports we had to download. And I thought this is a bit silly. Why don’t we just set up our own product and kind of order 500 units? It’s just something that we kind of need anyway. And if it sells, great. If it doesn’t, well we’ll give them away. As corporate merch. So that was 2016, and that product just started selling. So we’ve been selling consistently now since 2016.
Kevin King:
So in 2015, you were just minding your business, you’re just an accountant down in Australia, which part of Australia?
Arnold:
In Sydney.
Kevin King:
So you’re just an accountant and just dealing with a bunch of stuff. Somebody comes to you, an Australian seller that was probably selling in the US. Comes to you and says, Hey, I need some accounting work done. Says I’m selling on Amazon in the US. You’re like, you might have like, oh, okay, that’s great and you take a look at it. It looks interesting to you, so you’re like, you know what, I wanna dabble on this as well. Let me see what I can figure out. And just did it almost on a lark just to kind of figure out how the system works. And now that’s turned into actually a business that’s still running. And you’re still doing the accounting for a bunch of people on the side?
Arnold:
Yeah, so we’ve got 500 or 600 Amazon clients. And yeah, the businesses we, we kind of said in the beginning, we’re just gonna grow this organically, so we’re not gonna put extra money in. So we put in I think it was about 12 grand at the beginning, and it’s grown from there now, multimillion-dollar Amazon business. So it’s kind of fun.
Kevin King:
And now, are you running that yourself, or do you have a team that’s under you and you’re just kinda supervising?
Arnold:
No, I’m just running it myself. I’m about to get a team on. It’s got a bit more serious now, so I’ve gotta get a team on to do some of the things. Some things are just annoying on Amazon. Seller Central just takes some time. So just getting a team in place to do some of that stuff.
Kevin King:
So you’re going in there yourself and actually creating the shipping plans and doing the PPC and all that kind of stuff and, and checking the customer service. How many SKUs is it in this account?
Arnold:
We’ve got 20 SKUs now.
Kevin King:
Okay. And just selling in the US?
Arnold:
Well, we’re actually in the UK and Europe as well. Kind of a messy place there at the moment. Not that keen on that one, so we’re just probably gonna just concentrate in the US for a bit longer.
Kevin King:
But no, Australia
Arnold:
A bit in Australia, but it’s only what’s in the garage type thing.
Kevin King:
It’s just not much volume down there.
Arnold:
The leftover samples. When you get an order done, you might say, oh, let’s ship one box back here and we’ll get some photos done. And then you take two out for samples and photography and you’ve got another box. So I can ship them off to Amazon, Australia, and see how they go. It’s not a big market, it really takes focus away.
Kevin King:
eBay is a big market still for a lot of Australians when it comes to e-commerce, is that correct?
Arnold:
Yeah, it’s a different type of stuff you get on eBay as well. It’s probably the same in the US but eBay is much bigger, and Amazon’s catching up quickly.
Kevin King:
Australia has a big Amazon seller community, and you got the endgame network down there. You got some other big outfits. So most of those people are selling in the US then, primarily?
Arnold:
Absolutely. Unless they’re just beginning. Okay. We’re just starting out to see how it’s going. You know, going into Amazon Australia is a very cheap way to get into the whole Amazon marketplace.
Kevin King:
Now, with 500 to 600. You said clients on the accounting side. So are you in the US there are CPAs, what’s the CPA equivalent in Australia? Is there something similar to that?
Arnold:
Yeah, so Chartered Accountants are similar to CPAs in Australia.
Kevin King:
Okay. So you have a team then of like bookkeepers and people that are doing the books, and since you’re the chartered accountant, you’re just doing the final sign-off basically?
Arnold:
Yeah, I’ve got a team of Chartered Accountants as well.
Kevin King:
Oh. Okay.
Arnold:
Yeah, so they kind of handle that stuff, and I kind of look towards, they handle all the tax and all the compliance stuff, and I kind of look at the more strategic direction of people’s businesses.
Kevin King:
So there’s probably quite a bit of stuff that you’re doing. Are most of your clients Australian sellers or do you have people from all over the world?
Arnold:
Most of ’em are Australian sellers. We get some international sellers coming to Australia, but most of ’em, are Australian sellers.
Kevin King:
So they probably like that then, because then you can come in and you can hone the US tax stuff. So you can help them with that navigate that process that if they’re based in the US, especially that a lot of ’em might be foreign to them or might be scary to them, you can really kind of hold their hand and make sure they feel comfortable and safe doing that. Would that be correct?
Arnold:
Absolutely. Plus, because we’ve been running an Amazon business, quite a successful Amazon business where one of our most successful clients, because we’ve been running it, we know everything they’re spending their money on. We know where the pitfalls are and you know when to change things, when to keep on going when to slow down when to speed up.
Kevin King:
So your product, what category are you in, the product that you have that you personally have?
Arnold:
We’re in office products.
Kevin King:
In office products. Okay. What do you think the key to that success was? You said you started out with about 500 and now you said I think an eight-figure business. Is that correct?
Arnold:
Yeah, no, we’re doing a couple of million a year. Okay.
Kevin King:
So a good healthy seven-figure business. Were yours at the right place right time in 2016? Or is there something that, was it luck or something that you did that made actually take off to your surprise?
Arnold:
I think it was just a case of all the things you need to do properly. I mean, we’ve launched more products since then, and some of them have gone okay, but I think some of them have done very well. So I think it’s just getting in those basics of making sure you’ve got a good converting page.
Kevin King:
But one of the basics when it comes to is, I mean, there’s lots of basics in the sexy stuff about the marketing and the converting pages and the videos and all that, but one of the basics that a lot of people overlook is the financial side. And I don’t know how many. I know you do all kinds of spreadsheets and you have stuff that you offer for free to sellers, and I’m sure you have some more advanced stuff that maybe you help with your clients and you did the module and the Freedom ticket, that’s it’s a spreadsheet. So, anybody that has access to Helium 10, you can go, freedom Ticket is free. You can go in there and you can find Arnold’s module in there. And there are some spreadsheets and stuff there.
Kevin King:
And I think he may have a couple of others that he’s gonna share as well in a little bit. But that’s so important that most people just, they don’t do that. They watch a course or a YouTube video and it says, “you’re selling it for 20 bucks. You can buy it from the factory for three bucks. You know, Amazon’s gonna take a couple of dollars, a 15% commission, look at these profits you’re making a $13 on every one of ’em that you’re selling or something.” And they forget everything. And they’re like, that’s cool. So if I spend $5,000, I’m gonna make–, it’s got this kind of ROI, I’m gonna make $10,000. Cool. I’m off to the races, here are my life savings of five grand. And then boom, two months later, they’re broke as a skunk. It didn’t work. They’re outta stock. Why is it that so many people can’t understand the financial side? Is it just because it’s numbers? Is it because they don’t understand because nobody teaches it because it’s not sexy? What is it about this that always stumbles people?
Arnold:
I think it’s a case of, there’s a couple of things. The first one is about cash flow. Every business is about cash flow. And in Amazon’s business, it basically means you’ve gotta be making and understanding what that cash flow means. So we see a lot of people who will grow really quickly and then basically have no money go outta stock. So it’s about tempering that business. So quite often we’re talking with people about, you don’t need to grow super fast, or you can’t afford to grow super fast, you’ve gotta slow it down. And that’s really where we started with where we met a long time ago was one of the first spreadsheets I did was just explaining how that cash flow model works. Because in the first really three or four years, any money that you profits you make, you’ve just gotta buy more and more stock. And you’ve gotta keep on doing that for quite a while to just build up that level of stock that you need.
Kevin King:
Yeah. I think so many people get into this where they think that they wanna quit their day job or their other job and like, oh, if I can do this, I can, you know, start taking a salary and living high on the hog six months or three months from now and it doesn’t work that way.
Arnold:
Yeah, absolutely. And we did some studies on our clients and so converted to basically US dollars if all our clients who had sales of over $700,000 a year were able to pay themselves a salary, and none of them under $700,000 were able to pay themselves. So basically if you were under 700,000, you couldn’t afford to pay yourself a salary, but if you are over $700,000 in sales, they all paid themselves a salary.
Kevin King:
What do you see on that salary scale? So if I’m $700,000, I mean, I know there’s, there’s lots of variables in this, but just as a kind of a rule of thumb, for someone listening that’s maybe just starting out, if I got to $700,000, what could I maybe expect? You know, is that a $30,000, $50,000 salary? Maybe depending on if you’ve got some good numbers, or is it I could make a hundred thousand or what, where do you see that most of the sellers need to be at to actually start making now, let’s say a hundred grand a year that they could put actually into their pocket and pay their bills and pay their rents? Assuming, you know, you know, there’s a number of variables, but just on average, where would that be?
Arnold:
So you’ve got two factors there. One is you’ve gotta, every time you take money out of the business, then that is money that you can pay for the stock. So at some point, the business has gotta be big enough and it works out about that 700,000 to a million dollars in sales, were at that point you’ve got enough money, the business should be generating enough money that it can have enough to pay a salary and also have enough to fund growth. So if you wanted to pull out a hundred thousand you’re probably, I would say you’re probably looking at about one and a half million dollars in sales
Kevin King:
Top line gross sales. I would say that’s about, that’s about right too it depends on your turnover, it depends on your margins, and a few other factors in there. But I would say that’s about right. So these people that are, you said you started with $12,000 back when you launched your 500 units. Do you think it’s possible in today’s world to start with $12,000 or less and actually grow a business on Amazon? Or can you start with 12,000, it’s just gonna be a slow climb and maybe you’ll have some beer money on the side. What do you think that it’s evolved over the last six or seven years since you started?
Arnold:
Okay, since I started this couple of things, and this has happened in the last two years, is the profit margins reduced? So before we were looking at net profit margins Yeah. After advertising, after all expenses, kind of in that 25 to 30% range
Kevin King:
For private label.
Arnold:
For private labels, yes, definitely for private label. And in the last two years, we’ve seen that drop to probably 18 to 22. So there are freight costs increase, PPC, bit more competition, driving the margins down a bit. So it makes it a bit slower. But yes, you can start with a smaller amount. Probably not 12, maybe 20 thousand Aussie, so 15,000 US, but just means you have to go slower. It means the first year you’re getting 50 to a hundred grand in sales, the next year you’re getting $250,000 in sales the next year, $500,000 in sales, or you can put more money in. You can just do that. It’s, it’s about having real expectations of what that growth level is. Cause the faster you grow, the more cash the business is gonna need. So if you can grow slower and grow slower in Amazon business doubling it every year, as opposed to going from $200,000 to 1 million dollars, you can’t do that organically.
Kevin King:
So if I’ve got five grand, I don’t live in the US. I live in maybe Pakistan or South America or somewhere like that, and I’ve got like five grand saved up, or I can borrow it from my family members. Should I be starting an Amazon business? Are there still opportunities there, do you think? Or is it just gonna be such a slow climb that I’m not gonna be able to really make any money on this for a while most likely?
Arnold:
You’re not gonna be making on it while anyway, so even if you’ve got more money, it’s still three or four years before you can realistically expect to, you might pay back that five grand, but it would be, it’s gonna be a few years anyway before that money comes out before you can pay yourself a salary from the business. At five grand, what we are telling our clients who are in Australia who hasn’t got as much, we say, okay, start on Amazon Australia. Start building up, build up that experience. And what you really wanna do is you wanna turn that five grand into 10 grand, into $20,000, and building up those inventory levels so you got enough. If you’re in Pakistan, would, could you try an Amazon Singapore or Amazon UAE
Kevin King:
Just to get your feet wet and learn the system and learn how it works and just to get something where it’s not so competitive and doesn’t have to do such a big thing.
Arnold:
Yeah. Rather than going into Amazon USA and getting in. It’s always a tricky thing picking products. You think that you might have a great one but find out it’s cut-throat. You can do your money quickly if you’re not quite sure.
Kevin King:
So when a new client comes to you and says, Hey, I’ve heard some good things about your firm. You know, we’d like you to take a look at our handle and start handling books. What are some just disasters that you see? Someone comes to you and they’re maybe doing a million, 3 million, 5 million, and you, and you, you take a look and you’re like, holy, this is just a freak show here. This is just a mess. What are some big mistakes you see a lot of sellers just constantly making when they’re coming to you? When it comes to the accounting side of things.
Arnold:
Okay. Consistently is drop shipping. Okay. That just is a world of pain. There are no margins in dropshipping. So I’ve got very few people doing that, but when we get those ones, it is always a world of pain. It may work well in the US in from working, drop shipping from Australia. Just doesn’t work in terms of it. It’s mainly where people have gone basically too hard with things. Now they’ve gone, yes, we’re fully psyched up for this. We’re going in and they’ve probably gone in and said, we’re going to discount our product now. This is what we quite often see. So they’ll go in as a cheap start. So they’ll lower a lot of units. They’ll try and muscle their way into the market by starting off with a really cheap price, hoping to increase it later. The problem with that is, everything about their listing is designed for a cheap price, and they haven’t actually worked out whether it actually converts at a higher price, then they place another water. Cause sales are so fantastic at that cheap price, they try and sell it at a higher price and it’s just gone, I think the other one. And so they just can’t sell. They end up with 5,000 units of a product that just is not gonna sell at the price they want. So
Kevin King:
Do you have a lot of clients that come to you that think they’re doing well and then within a few months or six months or a year, they’re not a client anymore, they’re outta business?
Arnold:
Not many like that. Cause most of them do these pretty good courses. In Australia, there are a couple of good courses around that really do train them properly in terms of what to expect. And, you know, don’t go too hard on it. Don’t order 5,000 silicon spatulas. Just take it easy order 500 units, sell that 500, get some more, and build it up slowly. And Freedom Ticket’s the same thing. They don’t push them. You’re not giving them wrong advice and things. So the mistakes we go are where people probably go really hard on something. They’ve got more money to spend, they’re really keen to make the successful and they push a lot of money in without learning the basics first.
Kevin King:
So I know you create a lot of spreadsheets like you have a cash flow spreadsheet and the freedom ticket, and I think that’s how I first found out about you, maybe it was 2016, 2017, you were doing like a little, I don’t know how it got on your list, but I think there’s like seven listeners or something like that. And you would offer like you would do this little recording and 20-minute thing and you’d walk some way through a little spreadsheet like that. Man, there’s nobody doing this out there. Nobody is actually showing giving spreadsheets. You know, they’re all on these webinars and stuff, just saying it’s $20 selling Amazon, $3 to buy it from Alibaba. Look at you at $17 profit. And yes, you can start with $500 and you know, if you buy my course, I’ll give you another $500 off the discount.
Kevin King:
So you have now a thousand dollars or whatever. There’s crazy stuff like that. But you came up with a spreadsheet that’s like mapped it out for like, I think three to five years or something like that. How to do, and it showed you like your checking account, and you’re like, you started with this and okay, if you order this much and this is your price, this, your checking account’s gonna go negative you know, on this date, and you’re gonna have to call your rich uncle and say, Hey, I need a quick loan, or you’re gonna have to go sell the car or whatever. And I was like, nobody is showing this kind of stuff and this needs to be taught because people have a wrong, as you said earlier a wrong expectation. But what if I don’t know what my costs are? A lot of the projections are just guessing. So how can I best manage that if I’m new at this and I’m just trying to project out how can I best manage that to try to have a realistic view of what I really need to do?
Arnold:
Okay. There are a couple of easy reasons why. Going back to that spreadsheet, the reason we initially developed it is that people were saying, oh, if I just make a dollar profit, then it’s okay. I said, well, you know, okay, that’s wrong because the issue is if your profits are not high enough you are, you’re gonna need $10,000 this year, but you’re gonna need $50,000 the next year and $200,000 the next year to keep on running this business. So getting back to that issue of that financial information they need, it’s really, and the forecasting, it’s really just getting a feel for it yourself. I mean, at some point you end up taking a risk. That first product is always a risk. You’ve got no idea whether it’s gonna sell or not. But just saying, okay, I’ve got 500 units there, let’s see how it goes.
Arnold:
750 units, you can just keep on building up from that. I usually tell people in the first year, their object is to get that first product stable. So the inventory is stable on that. That’s their object for the first year. If they try and launch too many products in the first year, they basically run out of money. And then the next year, you’ve got probably the second or the third product. And a lot of the forecasts are really just based on, okay, how many products do we realistically, how many units we realistically gonna sell a day per product? Yeah. Sometimes it’s a hundred, sometimes it’s 10. But you can get quite a good business just selling 10 units a day.
Kevin King:
Yeah, you can. Sometimes it’s not about the quantity you sell, it’s about how you’re selling or what the margins are. So it’s a lot of times you can actually sell less and make more money than selling more. And a lot of people don’t realize that. They just see big dollar signs. I need it, they see people showing screenshots of high sales amounts, but you have no idea what their take-home is off of that. Or if that was in the middle of a launch in a giveaway or some sort of promotion or something when they’re showing these screenshots or the price was low like you said earlier, someone comes in really, really low, and then when they try to raise it up, it just falls. It’s a house of cards and falls down. So if you had to tell people the three most important financial things that they need to know, whether they’re a brand new seller or they’re an experienced seller, what are the three numbers that you’ve got to freaking know or backward and forwards in your business?
Arnold:
Okay, so the first one is your gross profit rate. So that’s your sales less, your Amazon costs, less your cost of your product, down to that gross profit rate. You need to understand that that needs to be at least over 30%.
Kevin King:
Let’s back to that just to break that down. So that percentage is, you said it’s the cost of the item, so whatever I’m paying my factory, the cost of the shipping right? And taxes and whatever it takes to get it in. And that would include like if it’s just, if the shipping price might be, you know, you’re paying, I don’t know, $5,000 to your broker to get it to California from a factory in China, but then you gotta get it from California into all Amazon’s warehouses. You have gotta include that price, that cost too. You’re including a TACoS or a percentage of something that you’re assigning to advertising or not, that?
Arnold:
Not at this point.
Kevin King:
Not at this point. Okay. So you’re not including that. So then you’re including any inspection cost, are you including any fixed cost in that at all? Like your package design or any of that kind of stuff?
Arnold:
Generally not, because that’s usually a once-off cost. But then it’s gonna be FBA costs.
Kevin King:
Okay. So fulfillment fees, storage fees?
Arnold:
Yes. Seller commission, 15% should also take into account refunds. The refund percentage, if you’ve got a 6% refund rate, it’s probably costing you about 2% of sales.
Kevin King:
So should I just factor in, I don’t know my refund, if I’m selling clothing, my refund or something with the size of my refund rate might be 20-30%? But if I’m, what should I do just before I know the refund rate I’ll figure that out later on. But before I know that, what’s a good just ballpark number just to pencil in?
Arnold:
2% of sales. Unless you’re in fashion. Okay. And then it’ll be higher. But 2% of sales is a good number to be with. And so yeah, all those costs. And then, so it’s the gross profit, which is sales less all those costs equals your gross profit. Then your gross profit rate is your gross profit divided by your sales.
Kevin King:
And that needs to be ideally above 30%, you said.
Arnold:
Over 30%. Okay. If you’re under 30%, you’re gonna have cash flow problems.
Kevin King:
Okay. So that’s number, that’s number one that you got it. You gotta know that number. What’s number two?
Arnold:
Okay, the second one is TACoS. You’ve gotta have an understanding of what your TACoS are. And a lot of people kind of, and it needs to be moving in the right direction. You want it to be, so if you’re just launching a product, your TACoS is gonna be horrible, but you want to be having a system so that that TACoS does company.
Kevin King:
Just to explain that for someone listening to that may not know what TACoS is, it’s your ACoS which is advertising cost to sale, which, so if I sell an item for $20 and it costs me $2 and advertising, maybe I was spending 20 cents a click and it took 10 clicks to make a sale, that’s a two. That $2 divided into 20, that’s a 10% ACoS. But on top on top of that, though maybe I sold one by advertising, and also at the same time, someone just found me organically, I didn’t have to pay for an ad and they clicked on it. So I sold two units. And so then instead of 10%, it’s now 5% and that’s where the TACoS is, it’s the total advertising for all the sales, not just the sales generated from what you sold because you advertised. So I just wanna explain that for those that may not understand that. So he’s saying that the talk back on TACoS, you gotta know this number, so go ahead.
Arnold:
Yep. So I mean, that’s gonna be different along the way. Depending on this, what we find is businesses that have high gross profit rates generally will have a high TACoS as well. But businesses that are successful, and that have a low gross profit rate will generally have a low TACoS. But you gotta understand that and what that number is and which direction it’s going. If you’ve got a product that’s got a high price on it, well you’re gonna be advertising more for that. So if you’ve got a premium product, you are not automatically gonna be showing on the top of the ranking, cause your product’s too expensive. So you’ve gotta advertise there. So those will have higher things. It comes back to the point where your net profit, your net contribution margin, which is your gross profit, fewer TACoS, needs to be around 20%.
Kevin King:
Okay, so TACoS, that’s about a 10% TACoS then?
Arnold:
Yeah. So 30%. Yep.
Kevin King:
So 10%. And like you said, when you first start, that might be a hundred percent because you’re having to get some positioning and you’re having to introduce the product and get it going. But over time you should be shooting for somewhere in 10% or less on your TACoS. Would that be fair?
Arnold:
Well, you should be moving towards a 20% contribution rate.
Kevin King:
Okay.
Arnold:
That’s where the market seems to be sitting at the moment. Okay. and 20% will generally mean that you can grow your business and have enough profits there to buy more stock.
Kevin King:
So if my gross profit is 35%, then I might have room for like a 15% in there to get to that 20% ideal that you’re saying on the contribution margin. Okay.
Arnold:
Yep. Absolutely. And we see our clients just range all the way through that. We have got clients who have got and this is for the bigger clients, not the ones who are starting, they range all around the place, but that’s kind of how they ended up, you know, it ended up being around just over 22% profit margin after advertising. And then on average, I think it was about a 15% TACoS.
Kevin King:
Okay. And what’s the number three thing that everybody needs to pay attention to?
Arnold:
I think the next one is something, especially for bigger players, it is their inventory rate. So basically your inventory at cost is divided by your sales. And there’s no special number for this. It’s gonna be different for everybody and everyone thinks, but you want that to be moving downwards because that is where everyone’s–, you made all these profits, you’ve got this big business and it’s all sitting in inventory you want it in cash. So if you can make your inventory, and your supply chain more efficient, basically you’re turning that inventory into cash much quicker.
Kevin King:
That’s not about inventory turns. That’s a different figure. This is almost like an ROI kind of thing. Like how much, how fast can you turn, what you invest and how big can you make that, and how fast can you make that.
Arnold:
Bam. Exactly. So it’s very similar to inventory returns. It’s just an easier way of looking at it. You know, the inventory cost of auto divided by sales and it’s a number just for you, but if you can lower that, it’s just kind of free up cash. So what we are doing with our business, because I was running it myself and it was kind of easy, I’d be ordering stock every three months. You order stock every three months, and ship it into a 3PL directly to Amazon. And that was kind of the system. It ends up a bit inefficient in a way. Cause I’m kind of guessing where the next, you know, sales of the months two and three and it’s kind of six months out anyway. So it’s a lot of guessing. So what we are doing is looking at placing orders monthly and sending to Amazon basically weekly. And with that, we should be able to reduce our stock requirement by half so we can sell.
Kevin King:
So why do you think a lot of people just don’t pay attention to this? Just cause it’s boring and they don’t like doing numbers or why are so many people they just, they not pay attention to? This is a core, the fundamental key to your success and so many people ignore it. Why do you think that is?
Arnold:
One’s difficult? Well, it’s not that difficult, but it does require more work. But it’s not sexy and fun. This is just the hard-nose business side of it which comes down to the efficiency of your inventory and the efficiency of cash. But that’s something we’re seeing across the board. And for most Amazon businesses out there, unless they’re concentrating actually on doing that, they’re probably sitting with, they could have the amount of inventory they’ve got. So if they had $400,000 of inventory, they could probably do the same job with $200,000 worth, but that means there’s $200,000 extra cash for them.
Arnold:
So it’s just a matter of looking at it a different way. So that’s what we’ve started to do this year. That’s kind of been a big focus and it was difficult to do in the last two years. You know, the last two years on the supply chain were just horrible. Amazon board in their variety of inventory restrictions, it was slow getting product in. Shipping prices went through the roof, you couldn’t find containers, all those types of things. So it was really difficult to put that in place in the last two years. But the combination of the extra competition and the declining margins means that you have to become more efficient with your inventory if you want to continue to succeed in it.
Kevin King:
So do you think it takes a different mindset depending on the level of seller you are? There’s one mindset when it comes to maybe the financial side at zero to half a million, another mindset up to 5 million, or another mindset one’s 10 million plus, or is it all pretty much the same fundamental stuff? Or is there any shift that needs to happen?
Arnold:
Oh, there are definitely a couple of different mindsets. You’ll see it quite often. You get someone who’s a fantastic product developer and they can develop all these products and they create beautiful, successful products. But then when you get to the 1 million mark, 5 million mark, then it becomes an issue of, okay, we’ve gotta do inventory management. It becomes an issue. Once you get over that point, you’re suddenly going, okay, this is an inventory management top game now. So you then looking at saying, well you’ve got a bunch of products, you’ve gotta keep them all in stock, you’ve gotta keep them flowing through the process. Keeping that efficient almost becomes a full-time job. And what we are quite often saying is the position, you’ve got sales up to a million, you can basically run it and you can run the business reasonably inefficiently.
Arnold:
Then from 1 million to 5 million, it becomes an inventory game. At that point, you need to be putting on staff and one of those staff’s gonna be inventory management. And then for 5 million plus, it’s a whole combination of new things in there. It becomes far more of an inventory cash flow. You’ve gotta just add those next people in and you’ve gotta start looking for different areas to go. A lot of people actually pull out. They cash in at the 2 million to 5 million mark cuz they don’t want to have to then grow this big team that you need to at 5 to 10 million needs a team. And so you end, so
Kevin King:
You see that’s where the big adjustment happens when it starts getting scary and starts becoming real and not just something you can like you’re doing, you know, a one-man show doing a couple million a year when it starts actually becoming a true like enterprise. That’s what a lot of people say, okay, I’ll sell to an aggregator or sell to somebody through one of the brokers or something like that, just so they don’t have to go down that rabbit hole.
Arnold:
Absolutely. Absolutely. And that’s one of the, you know, when you get to, you know, 5 million, you then it’s, it’s then having a people business. You’re no longer being a, an inventory management person or a content creator or you know, this great designer. It’s like, okay, you’ve gotta manage a team, and you’ve gotta have all these people doing all these different things. And that’s where I think the differences come in. And some people just, don’t wanna be running a team, they just love running their little business themselves.
Kevin King:
So if I go down that route, I start my business, let’s say I build it to four or 5 million, I’m like, okay, I’m done. I, I wanna put this up for sale. I’m gonna throw it out there, maybe an aggregator buy it, and maybe one of the brokers will sell it on one of the sites. And then those people, I find some leads, some people that are interested. Maybe I go under LOI and then they wanna look at my books and they’re calling you. I say, yeah, talk to Arnold, he’s my guy. You know, he, he can share everything with you. What are some things that they just love when these buyers come in that you’ve done for your clients that they’re just like, holy cow, I love this. This is awesome. So what? So that way I know what should I be doing to make sure that I’m buttoned up. What are some like, just really like deal sealers or something that just makes the process go so smoothly?
Arnold:
Okay, so there’s two parts to it. One is this is what my business is worth. Get an LOI and then they go into due diligence. If you wanna fail due diligence, you don’t have any accounts done. So doesn’t really happen with me cuz all my clients have got their accounts, all their accounts are right anyway. But not having your accounts done, not having them up to date, not having them accurate is just a deal breaker. Now in that case that you might sign an LOI, someone’s gonna buy it for some fantastic number and the business will fail in due diligence and the sale won’t go through. So you’ve gotta have your finances just set of accounts, balance sheet, profit loss, all up to date. In terms of what they’re looking for and what they really like, they’re looking for a continually increasing business across all your SKUs.
Arnold:
So where we’ve seen now for clients who have sold their businesses, the ones that have sold are the ones that have their products are just increasing every year. They’ve got a plan. That’s something we’re seeing a lot more of. The aggregators are actually asking, what’s your plan for the next two years? And some of these people just say, I don’t know. You gotta have a plan in there just, okay, how do we grow this for the next couple of years? The next thing that are turning people off is when there is a decline along the way. So you might be able to say, oh, the decline’s there, but it’s seasonal. It happens every year. We ended up with a lot that ended up with a Covid boost and then post-Covid it things just weren’t as good. Still great, but just if they looked at those trends, it seems as though they were going down and no one wants to buy a declining business.
Kevin King:
So from your clients that have expanded, like beyond the US maybe they’ve gone to Europe or Singapore or Australia, wherever. Where do you see that a lot of ’em pull back from? They’re like, ah, let’s give this one a shot and France just didn’t work. Or where do you see that? Or do you see that? Do you see any patterns there where people try to expand and then they shrink back up because they can’t just make it work in certain marketplaces?
Arnold:
Yeah, we see that a lot. We see that a lot when people expand to those marketplaces when they shouldn’t. Okay, they’re in their first couple of years. Don’t just stick with the US or stick with Europe. If you’re just gonna do, you might go, I’m just gonna do uk, we’ll stick with the UK and do that properly, UK and Europe and, but don’t go into the US as well or just go into the US and don’t worry about any of these other markets. What happens when you go into these other markets is you end up splitting your stock. So you’ve got a whole minimum stock quantity at each of those places, which just costs you more and more money. So you’re better off just going, okay, I’m just gonna do USA stick with USA until you’ve really pushed the line on where that I can’t grow anymore in here and you’ve got extra cash thinking, what am I gonna do with it? Then you can go, okay, let’s target Europe and move to that market. Well, we see that a lot. I was talking to someone the other day, he was selling everywhere. I said, okay, you’re gonna stop selling in all those other places and just do the USA cuz it’s just silly.
Kevin King:
I agree. I think like the US I mean, I don’t think there’s too much you’re selling in the US it’s kind of easy to sell into Canada and doesn’t take too much extra, but I wouldn’t go beyond that really. What about going to Shopify or to Walmart or any of these other platforms? Are you the same thing, you’re spreading yourself too thin, different stock, or is it just not worth the effort in most cases or some people will say it is actually, but what do you sense you get from your clients on that?
Arnold:
Okay, in terms of Walmart from my clients it’s been difficult to sell on Walmart anyway in Australia you need to have a social security number or a resident, a place of residence in the US to sell on Walmart. So we haven’t really seen too much of that, but it’s again the same for Shopify. It’s just like, okay, it’s a diversion, it’s a taking your eye off the prize, which is us. So we don’t usually suggest that people don’t even think about going into Shopify for at least a couple of years til they’ve built up some products and then all they’re going to do at that point is to learn to build up the traffic. Organic track moving into Shopify rather than, you know, going, spending money on Facebook ads to push money to your Shopify site via three products. It’s just not worth it. So that, again, Shopify sits at, and we’ve only just recently opened up our Shopify store and we do a couple of million.
Kevin King:
Yeah, I always tell people if you want to have a Shopify, that there’s no harm really in setting it up just for legitimacy. Just if someone wants to, you know, type in and you’ve got a few sales, maybe let Amazon fulfill ’em for you, now with the buy with prime or something like that, but don’t put a lot of effort in or money into driving traffic there. Not for a few years like you said, but it’s no harm, and paying probably $30 a month just to have that presence, that legitimizer in case you need it. But other than that, it’s not really worth the effort.
Arnold:
Yeah, absolutely. I mean it’s just, I mean, if you can build the traffic to it, I mean that’s, that’s why Amazon’s so good. It’s got the traffic. The trouble is Shopify, you’ve, you’ve gotta spend a lot of money to get the traffic there. So if you’ve got a Shopify store, your object really is that just, okay, how do we drive traffic? It’s the same with Instagram, Facebook, and Pinterest. It’s just like, okay, all those things are just about how do you learn to drive traffic to them and if you can’t drive traffic on them, well they’re useless.
Kevin King:
That’s why Google is probably the best one right now if you’re gonna drive outside traffic cuz Google already has the traffic coming to it and in advertising there with the 10% kickback that Amazon will get you in some cases you can make, make that work and actually but you’re not having to drum it up like you do on Pinterest or some of the other places. Yeah,
Arnold:
Yeah, we’ve been running Amazon attribution from our, basically, we are not the is not get a sale on our Shopify site. The Shopify site has a button on it by at Amazon that has Amazon attribution on it and just sends them straight there. It’s so much easier. Yeah. Get 10% free traffic.
Kevin King:
Well, I really appreciate you taking some time today and sharing with us. This has been fun. If someone wants to get their hands on like one of these spreadsheets other than Freedom Ticket or one of these other things that you have or to learn more about you or follow you or reach out to you if maybe they want to get some services if you’re taking new clients or something, how would they do that?
Arnold:
The best place to go is to our website, which is dolmanbateman.com.au. So dolmanbateman.com.au or just search Arnold Shields and you’ll probably find me along the way and if you go to dolmanbateman.com.au/ampm, I’ll put a link to a whole bunch of spreadsheets that we’ve got there. We’ve got a really good one. It’s a massive spreadsheet, but I use it religiously. It’s a 52-week cash flow and inventory projection spreadsheet. So basically we do it a couple of times a year. We work through this spreadsheet and just basically say, okay, this is where our sales are gonna be, this is when we have to order stock, this is what our cash flow is gonna be. Can we afford to grow this fast? Can we afford to order that order, that stock at that time? Basically, I go through that with most of my clients as well. And it’s a big spreadsheet but it just, it’s just vital in terms of understanding where you’re gonna be and it actually gives you, once you’ve done it, it gives you a lot of peace of mind cuz you know, well that’s my direction for the next year. All I have to do is make sure the sales happen and order the stock at this time. I should be okay,
Kevin King:
So that’s dolmanbateman.com.au/ampm.
Arnold:
Absolutely
Kevin King:
Awesome. Well, Arnold, I’m looking forward to hopefully seeing you at the next Billion Dollar Seller Summit in Puerto Rico. Hopefully, by then those airfares will come down and you got a little bit of time you can come to have some good fun with us because as you know, the Billion Dollar Seller Summits a lot of fun, a lot of good information, a lot of good networking. So hope to see you there next year.
Arnold:
Okay. Absolutely. Thank you very much, Kevin.
Kevin King:
Awesome. Thank you. Appreciate it, man. Knowing your numbers when it comes to selling on Amazon is one of the most crucial things you have to get a handle on, and it’s gonna be one of the biggest factors in your success or your failure or your frustrations when doing e-commerce. If you wanna see more, remember Arnolds told you to go to dolmanbateman.com.au/ampm and grab that spreadsheet. It’s a fabulous spreadsheet, so make sure you go there and grab that spreadsheet. It’s totally free. Also, he’s in the Freedom Ticket. So if you’re a Helium 10 member at any level, you have free access to the Freedom ticket. Just go log into your Helium 10 account and you’ll see a little button up at the top it says Freedom Ticket. Thanks again for joining me this week. We’ll be back again next week with another episode of the AM/PM Podcast. I’ll be talking to the winner of the best hack at the billion-dollar Seller Summits, someone that just started his own podcast, A big-time seller, a really smart guy. You’re gonna really enjoy it. So be sure to check in next week for episode 31 8. Before we go today, I just wanna leave you with these words of wisdom. Success is getting what you want. Fulfillment is giving what you’re made for. Success is getting what you want. Fulfillment is giving what you’re made for. We’ll see you next week.
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