I just had a conversation with a top 1,000 Amazon Marketplace seller.
Our original strategy was to list as many products as possible to Amazon. We were just throwing as many SKUs as we could at the wall to see what worked and our catalog reached 850,000 active SKUs. We were suspended multiple times due to ASIN mismatches, product data issues, and fulfillment delays. We trimmed down our catalog to 10,000 SKUs that we fulfill from our own warehouse and our sales are twice what they were at the peak of our previous high-SKU business model. If I had to guess, our profits are 5 times higher.
Why did that work? A smaller catalog relative to your annual online revenue allows you to focus on product data quality. High product data quality contributes to accurate, optimized listings. With a focused product catalog, you'll have lower order defect rates which contributes to increased seller rating, increased Buy Box ownership and increased customer feedback. Further, lower order defect rates contribute to lower customer service and inventory management overhead.
And let's not forget that smaller inventory catalogs result in increased order profitability because you can receive volume discounts for bulk purchases. This increased profitability gives you further volume discounts and the ability to compete more effectively on price and reinvest in your growth. This is the famous flywheel model ("virtuous cycle") that Jeff Bezos used to build Amazon.
Revenue per SKU and Profit per SKU
Revenue per SKU (RPS) is your total annual online revenue divided by your number of active SKUs. Revenue per SKU is an important metric we recommend all sellers focus on. Your revenue per SKU should be at least $1,000.
Total annual online revenue / Active SKU Count = Revenue per SKU
Let’s look at a couple examples:
- Company A has 10,000 SKUs and generates $15 million in online revenue. Their RPS is $1,500 per year. Their margin (net of product cost, marketplace commission and shipping) is 20%. Their profit per SKU is $300 per year. With disciplined merchandising, each incremental SKU added to their catalog will represent, on average, $1,500 in incremental revenue and $300 in incremental profit.
- Company B has 50,000 SKUs and generates $2.5 million in online revenue. Their RPS is $50 per SKU. Since Company B dropships 90% of their catalog, their margin is 5% or $2.5 in profit per SKU per year.
Which is a better business? Which company is able to profitably operate and invest in continued growth?
Which business is at greater risk of suspension by Amazon for product data issues and fulfillment performance?
As your revenues rise, you’ll have the ability to hire merchandisers who can identify new suppliers and product lines that complement your existing, focused catalog. As your revenues rise, so too can your catalog size.
Catalog size is relative
If you’re a $1 million retailer your catalog should not be larger than 1,000 SKUs.
If you’re a $10 million retailer, selling 100,000 SKUs ($100/SKU) probably doesn’t make much sense because your RPS is $100 and it’s unlikely you are operating profitably enough to manage and grow your business. However, if you’re a $100 million retailer selling 100,000 SKUs ($1,000/SKU), you’re probably running a profitable, manageable business.
If you’re a $4 billion retailer selling 1,000,000 SKUs ($4,000/SKU), many would consider that to be a small catalog.
Revenue per SKU is a fantastic key performance indicator that every multichannel business should be focused on. If your revenue per SKU is less than $1,000, you can either trim down the size of your catalog or leverage technology to help you ensure that optimal product data is being sent to each of your channels.
What's your revenue per SKU?
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