Cash flow is crucial to the health of any business. The more cash the company has, the more flexibility it has. In bookselling, cash flow is preserved by keeping the cost of goods low as possible. If a book is expensive, there are many factors to consider before purchasing. In general, for beginners, keeping costs under three dollars per book is a safe way to start. Any more can add up rapidly and put the business at risk.
We aim to have an investment/profit ratio of 1 to 10, or as close as possible. This means that if you can purchase a book for $1 then you should aim to receive a profit of at least $10. A $2 book, in this case, should return close to $20. This will help you optimize potential profit and keep costs down. As you gain more experience, you can change these criteria to fit your needs.
The following example will illustrate how to use the ratio criteria of 1/10. The numbers show how spending less and diversifying risk is a good strategy in the bookselling business.
Suppose you only had $10 to invest in inventory. You found a book with a potential profit of $50 and a price of $10. Is this a great find or not? Having invested all your cash flow on this book, you are no longer able to purchase inventory. Once the book is processed and sent to Amazon, it sits in inventory for three weeks. Since then the price has dropped by $10. The book is then sold and you make $40. The gross profit will amount to $40 minus the cost of goods sold which results in a net profit of $30. The profit ratio is 1 to 3. After 3 weeks you received back your investment of $10 and have $40 to spend.
Using the $10, you bought only the books with 1/10 investment/profit ratios, thus skipping the high-cost book. You found books that met those criteria. The total potential profit from the ten books is $130. Now that the books have been sent to Amazon. In the first 3 weeks, 6 books sold for a profit of $10 ($60 gross profit on 6 books). The other four books take another 2 months to sell. The gross profit after the price drop is $30 for the remaining books. With total sales of $90 minus COGS of $10, your net profit is $80. The final profit ratio was 1 to 8. Your investment of $10 and an additional $50 was received in week 3. In Scenario B, you will have $60 to invest in inventory by week 3. In scenario B, you spent less on books and, as a result, got more profit in the same amount of time. In Scenario A, it is $40, and in scenario B, it is $60.
The process of accumulating sales on Amazon starts with one sale, and then it snowballs from there. The more inventory you send, the more likely you are to make sales. In Scenario B, $20 extra in cash by week three makes a big difference. You can purchase 20 more books that meet the same criteria and continue the process. In general, we only purchase expensive books if we anticipate that they will sell quickly for the targeted price. That is if they sell on a regular basis (every day or so) and the price is relatively stable.
Many people hesitate to sell high-rank books. When I first started selling books I remember hearing somewhere that I shouldn't sell books with ranks above 1 million. I followed that rule for a while before realizing that I could sell books with ranks up to 5 million. I had avoided many books with very good profit potential. The trick with these books is identifying why they do not sell often. We know that a book's rank represents just a snapshot in time. The rank indicates approximately when the book was last sold. Every time a book sells, its rank drops and for every day the book doesn't sell, the rank decreases by 100,000. If a book is ranked 2 million, you can estimate it sold around 20 days ago. Verify the Keepa data as rankings on their own are not a reliable metric. Rank alone does not determine if you should buy a book to sell. What really matters is how frequently the book sells, and whether it has a good chance of selling again. Keepa can be used to predict the amount the book will sell for if it is likely to sell again. Using the Keepa data will enable you to estimate the general market price.
I don't automatically skip a book with a rank of 3 Million. The market price is one of the first indicators. When a book triggers a buy signal, I investigate it in-depth. I check Keepa to see if the book can sell in 3-6 months. If so, then I try to estimate what the price was the last time it sold. With books that have high ranks, the lowest used offer price is usually a good indicator of the last sale price. (On the graph, that is where the downward spike meets the low used offer price).
If there is a good margin and the book is likely to sell again, it may be worth it. The next step is to price the book competitively based on what it last sold for. With an aggressive automated repricing strategy, the book will remain competitive and have a better chance of selling.
The longer you hold Inventory the more it costs
Once you buy a book, a timer begins to tick. At this time, you have committed to processing the book. It will take time (to clean, label, list, pack, ship, and price). Every step of the process takes time, and time is valuable. It is more than just a matter of how much you paid for the book. Your effort in processing books has a monetary value. And there's an opportunity cost involved. Each minute you spend processing books is a minute you are not spending elsewhere.
Tracking sourcing data will reveal a lot about the places and sales you visit. For this reason, we've provided a simple sourcing tracking spreadsheet for you to use. Tracking this information can help you to identify the best local sources, when they are stocked, and when to expect competition. Here are a few statistics that are useful to document every time you source.
Cost of Goods (How much you spend)
Amount of Books Sourced
Time and day location was visited
If there were other booksellers there
Having quick access to this information is worth the effort. After a few weeks, you'll have a clear picture of how much you are spending, the best places to visit and when to go.
Other things to track: (Optional)
Look at your Amazon Orders and ask yourself:
Did it sell for what you expected?
How far did the price drop?
Was your price below your expectation when it sold?
Which competitors did you beat and why?
How much did the condition of the book influence the sale?
Your strategy should be to sell a book in less than a year. After 12 months, you will need to pay Long Term Storage Fees (LTSF). At this point, you should re-examine whether or not these books belong in your inventory. If not, you have two options. One, have Amazon dispose of the book. Two, have the book returned. If you have to dispose of books, this is considered a business expense that may be tax-deductible. If the book has been returned, you might be able to recoup some of the costs by selling a few of these on eBay.
Is the Market Oversaturated?