In the dynamic world of e-commerce, Amazon Vendors are an integral part of the online giant's business model. They sell their products directly to Amazon, which then takes responsibility for selling to end customers. To make this relationship profitable, Amazon places great emphasis on achieving an appropriate margin per product sale. This is referred to as Net Pure Product Margin (NetPPM). Combined with deferred allowances, NetPPM forms the framework for Amazon's profitability calculations.
Target NetPPM
NetPPM stands for Net Pure Product Margin. It is a target margin per product sale defined by Amazon. The level of this target margin depends on the category. Typically, target margins for electronics are significantly lower than, for example, cosmetics or jewelry. It is calculated from the difference between the average selling price of a product and its average cost per unit. Amazon's costs are defined by the following points:
- Wholesale Price from Vendor (Front Margin)
- Deferred Allowances (Backend Allowances)
- Overstock Exclusion
- Damage Allowance
- Automated Marketing
- Subscribe and Save
Amazon's Deferred Allowances in Detail
Deferred allowances are specific conditions negotiated between Amazon and the vendor. They represent a significant portion of the total cost of a product and thus significantly influence NetPPM.
Overstock Exclusion:
This allowance protects Amazon from costs that could arise from excess inventory. With an "Overstock Exclusion" agreement, Amazon retains unsold units in case of overstock and does not return them to the vendor. In compensation, Amazon deducts a predetermined percentage of the purchase price from the vendor.
Damage Allowance:
The "Damage Allowance" clause concerns damage to products during transport or storage. If this allowance is agreed upon, the vendor does not receive damaged products back. In compensation, Amazon also deducts a predetermined percentage of the purchase price from the vendor.
Automated Marketing:
Under this allowance, the vendor commits to paying a fee to utilize Amazon's automated marketing services. These services may include, for example, sending email newsletters or highlighting products in the "Customers also bought" or "Customers also viewed" sections on the Amazon website.
Subscribe and Save:
The "Subscribe and Save" program offers customers the opportunity to have products automatically delivered at regular intervals, receiving a discount for this subscription. Typically, the vendor also bears these costs. With the Subscribe and Save allowance, Amazon also deducts a fixed percentage of the purchase price from the vendor.
Calculating NetPPM with an Example
For better understanding, let's consider the calculation of NetPPM using a fictional example:
Suppose Amazon sells a product on average for €100 (net) to its end customers.
The vendor's wholesale price (Front Margin) is €60 (net)
The following deferred allowances were agreed upon:
- Overstock Exclusion: 5%
- Damage Allowance: 5%
- Automated Marketing: 5%
This would mean that after the €60 wholesale price, a total of 15% deferred allowances are deducted = €9
The price after deferred allowances for Amazon would therefore be: €60 - €9 = €51
In this case, Amazon's NetPPM would be 51%.
Typically, Amazon sets a target NetPPM for each vendor. This is the desired profit margin per vendor account across all products. Achieving this goal means the vendor generates sufficient profit to meet Amazon's requirements.
Certain price reductions and discount promotions or deals can repeatedly cause fluctuations in Amazon's target margin.
Final Thoughts
Navigating and understanding deferred allowances and target NetPPM can be a challenge for Amazon Vendors. It makes sense to understand Amazon's goals and which products generate high or rather low profitability for Amazon. If a vendor's margin on a specific product is too low for Amazon, this can lead to various actions by Amazon:
Price Negotiations: Amazon might try to increase the margin by renegotiating the purchase price with the vendor. This can lead to a reduction in the wholesale price for Amazon.
Renegotiation of Allowances: Amazon can also try to reduce costs by renegotiating deferred allowances, for example through a higher "Overstock Exclusion" or "Damage Allowance".
Discontinuation of Sales: In extreme cases, Amazon might decide to remove the product from the assortment entirely if it remains unprofitable despite all measures.
It is therefore in the vendor's interest to find a balanced relationship between the product's costs and the selling price to ensure an appropriate margin for Amazon.
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