AMAZON’S SMALL-DOLLAR-ITEMS: Math and Solutions
Amazon knows warehouse activity costs to the penny. Their 9th generation warehouses may have the lowest, cost-per-pick on the planet. Some stats:
- The “click to ship” elapsed time is 15 minutes and dropping.
- The average human time input for each order is one minute which includes 15 seconds to pack.
- The cost per pick – in the narrowest sense – is 44 cents for a human and 20 cents for a robot.
But, they still lose money on small-dollar-picks! To reduce losses, they have three policies:
- Request suppliers to bundle items. You can’t buy one, but rather 2 or more.
- Raise prices charging more per unit than a local discount store.
- Make small picks “add-ons”. Buy $25 of other stuff, then add-on items too.
AMZ announced recently (3-20-18) that they will expand the “add-on” policy to most items that cost $7 or less. Questions:
- A $7 sale price yields $1.50 to 3.00 in gross margin dollars. Not enough to cover the total fulfillment costs per line in the most efficient warehouse?
- Will the $7 hurdle spur suppliers to bundle more items?
- How big is your small-dollar-pick “opportunity”?
QUESTIONS FOR LEGACY CHANNEL PLAYERS
Do you have a Cost-To-Serve (CTS) model to know the net-profit or loss on small-dollar-SKU picks?
How many losing, small-dollar-SKUs and picks do you currently have?
If AMZ’s threshold is $7, what is yours with a presumably less efficient warehouse?
What super-profitable (cream) SKUs pay for both small-pick losses and operating profit?
Big secret: focusing on margin-percentage per line is misleading. Consider a warehouse with margins ranging from: 20% on big, price-sensitive commodities to 40% on small, service items. But, order-size ranges from $2000+ to $1. 20% on a $2000 pick is $400 in GP to cover CTS with a profit. 40% on a $1 pick will be a loser. Raise the price 15% to get 55% on a $1 pick, and it’s still a loser. Bundling and “add-on” policies are also needed. What if you are “too busy” (or timid) to cure small, losing picks?
Then, when your super-profitable SKUs appear on AMZ for less, you can’t lower prices to be competitive and settle for just OK profits. You still will have a sea of small-dollar, losing picks to finance.
Subscribe to a Line-Item-Profit Analytics cloud service to fix your SKU cross-subsidies before AMZ skims your cream items with lower prices. Be in touch for a virtual tutorial: firstname.lastname@example.org