Last time, we described how we were able to increase the number of views on our Amazon listings by doubling the bid in the US ahead of Thanksgiving. Now, we can take a look at where we are with respect to profitability after the increase in advertising spend. The good news is that we are finally beginning to see some positive revenue coming from Amazon to our bank account after cost of goods, Amazon fees, and Amazon advertising charges, so the money machine in principle works. Next, we need to tune and scale it to cover our salary costs and profit. Let’s take a deeper dive.
The graph shows our daily revenue from Amazon.com (USA) broken down to fixed cost elements, variable advertising cost, and the surplus available for spending on our own operating costs such as salaries and taxes in Finland. We could draw similar graphs with different numbers from other marketplaces, but let us now focus on this one marketplace with tangible dollar figures.
Fixed costs are the number of units sold times the unit costs of our card game, which remain constant regardless of how many we sell or advertise or how we choose to price the product. These costs include production costs with shipping from the manufacturing location to the Amazon warehouse in Joliet, Illinois. They also include Amazon fees for warehousing, fulfillment, as well as their referral fee, when the product is discovered from Amazon.com. In this graph, we also included an average 8% sales tax into the fixed costs, though in practice this varies by the state of the buyer. Fixed costs before the sales tax were 50% until we increased the price and 40% after the price increase. Note, that production costs have actually already been paid for the full production order, so in reality they are a sunk cost, but we are showing their daily impact here for the sake of understanding the business case for the card sales on Amazon.com. So, nearly half of the gross revenue is spent already on fixed costs and sales taxes.
Advertising costs and product pricing are the two levers we can experiment with, once the production order has been paid and shipped to Amazon.com. As discussed earlier, we doubled our ad bid just before Thanksgiving in order to jump start the LUPO-on-Amazon.com engine, which had been stalling earlier. This worked, and we were happy to report top line sales growing on a daily basis. We didn’t yet have visibility to profitability during Slush the week after Thanksgiving, when we had several investor meetings, so we told them that we are currently investing all of our revenue back to advertising to drive sales growth and brand recognition. We had a feeling that LUPO isn’t very price sensitive, as it is a new product and pretty unique in its value proposition as a cooperative game that unleashes your creativity with enormous replay value. This proved to be the case.
Right after Cyber Monday, we increased LUPO price to $25, which is the same price as the bestseller Cards Against Humanity on Amazon.com. There was a short-lived dip in sales, probably due to the Amazon consumer hangover after Cyber Monday, but sales soon picked up again and they have been on the growth track ever since. Only this time, thanks to the higher price, we actually started generating a surplus on a daily basis, which will show in our bank account after Amazon finally makes its payment. Amazon holds funds for 7 days after latest estimated delivery date, which is two weeks after the order date, so with the international money transfer delays there is an approximate three-to-four-week delay before we see the Amazon surplus on our bank account. Luckily, Amazon does provide some nearly real-time reporting services, which enable us to estimate profitability earlier, as we have done here.
Encouraged by the signs of profitability, we started adjusting also advertising spend. We first lowered the bid by 10%, and a bit later by another 10%. Then we shifted the split slightly from automatic to manual keyword targeting, which in principle has higher conversion. Our advertising cost of sales (ACoS) dropped and margin increased, while top line sales still continue to increase. We are learning how to tune the money machine!
Based on the sales and margins of the last week, LUPO sales on Amazon.com (USA) alone are at an annual run rate of $365 thousand and the surplus at a run rate of $52 thousand. To put this into perspective, our annual personnel cost not counting stock incentives is about €36 thousand, so with the current exchange rates and current run rate, Amazon.com is on the path to pay the salaries of 1.45 employees. At a rate of double of our current sales run rate, all cost percentages remaining the same, the Amazon.com (USA) sales can cover the costs of our core team of three. That is clearly doable with the current trend. We believe we can also increase the margin on each sale, as the product becomes better known with more reviews as well as word-of-mouth from current users. And obviously we have learned a lot from this first print run, so we can make a better follow-up product with more customer value and a higher margin thanks to bigger order volume. 2018 is looking promising, once we get over the approaching cash-flow challenges discussed earlier.
Christmas is approaching and it is time for everyone to spend quality time with family and friends, so I probably won’t write another money blog entry until January. Until then, peace!
Author: Nouri Mikko Werdi