94. Amazon’s $7 Per Line-Item, Wake-Up Call

AmazonBusiness, Cost-to-Serve Math, Distribution Industry Sales, Distribution Strategy, Index, Profit Analytics, WayPoint Analytics

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:

  1. The “click to ship” elapsed time is 15 minutes and dropping.
  2. The average human time input for each order is one minute which includes 15 seconds to pack.
  3. 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:

  1. Request suppliers to bundle items. You can’t buy one, but rather 2 or more.
  2. Raise prices charging more per unit than a local discount store.
  3. 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:

  1. 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?
  2. Will the $7 hurdle spur suppliers to bundle more items?
  3. 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.

CONCLUSION

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:  bruce@merrifield.com