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 downstream terms, 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 cosmetics or jewelry, for example. 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:
- Purchase price from vendor (Front Margin)
- Downstream terms (Backend Terms)
- Overstock Exclusion
- Damage Allowance
- Automated Marketing
- Subscribe and Save
Amazon's Downstream Terms in Detail
Downstream terms are specific conditions negotiated between Amazon and the vendor. They represent a significant portion of a product's total costs and therefore significantly influence NetPPM.
Overstock Exclusion:
This term 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 return, 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 term is agreed upon, damaged products are not sent back to the vendor. As compensation, Amazon also deducts a predetermined percentage of the purchase price from the vendor.
Automated Marketing:
Under this term, the vendor commits to paying a fee to use Amazon's automated marketing services. These services may include 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 option 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 term, Amazon deducts a fixed percentage of the purchase price from the vendor.
Calculating NetPPM with an Example
For better understanding, let's look at the NetPPM calculation using a fictional example:
Suppose Amazon sells a product on average for €100 (net) to its end customers.
The vendor's purchase price (Front Margin) is €60 (net)
The following downstream terms have been agreed:
- Overstock Exclusion: 5%
- Damage Allowance: 5%
- Automated Marketing: 5%
This would mean that after the €60 purchase price, a total of 15% downstream terms are deducted = €9
The price after downstream terms for Amazon would therefore be: €60 - €9 = €51
In this case, Amazon's NetPPM would be 51%.
Amazon typically 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 campaigns or deals can repeatedly cause fluctuations in Amazon's target margin.
Final Thoughts
Navigating and understanding downstream terms and the NetPPM target can be a challenge for Amazon Vendors. It makes sense to understand what goal Amazon is pursuing and which products generate high or rather low profitability for Amazon. If the margin of a specific product from a vendor is too low for Amazon, this can lead to various actions by Amazon:
Price negotiations: Amazon could try to increase the margin by renegotiating the purchase price with the vendor. This can lead to a reduction in the purchase price for Amazon.
Renegotiation of terms: Amazon can also try to reduce costs by renegotiating downstream terms, for example through a higher "Overstock Exclusion" or "Damage Allowance".
Discontinuation of sales: In extreme cases, Amazon could 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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