Free cash flow is the lifeblood of a business. The more cash available, the more flexibility a business has. In bookselling, you can preserve free cash flow by keeping the Cost of Goods as low as possible. If a book is expensive, there is a lot to take into consideration before you buy. As a general rule for beginners, keeping costs under 3 dollars per book is a safe way to start. Anything above that can add up quickly or put the business at risk.
We aim for a 1 to 10 investment/profit ratio - or as close as possible. 1 to 10 means if you can buy a book for $1 aim to make sure the profit will be at least $10. A $2 book, in this case, should return close to $20 and so on. This will help you to maximize potential profit and keep costs low. As you gain more experience you can adjust these criteria to suit your needs.
Here is an example of how using the 1/10 ratio criteria works. The numbers are simplified to illustrate how spending less and diversifying risk are a good strategy in the bookselling business.
Scenario A: Let’s imagine you only had $10 to invest in inventory. You’ve found a book with a potential profit of $50 and a price tag of $10. This seems like a great find but it depends. By purchasing this book to resell, you now have spent all of your available cash flow on one book and are unable to continue buying inventory. Once the book has been processed and sent to Amazon, it sits in inventory for 3 weeks. Over that time the price has dropped by $10. The book then sells and you have now profited $40. The final calculation is $40 gross profit minus $10 COGS giving you a final net profit of $30. The profit ratio here is 1 to 3. You received your $10 investment back after 3 weeks and have $40 to spend.
Scenario B: With the $10 you decided to skip the high-cost book and buy only books with a 1/10 investment/profit ratio. You found books that met that criteria. The total potential profit for all ten books is $130. Now you’ve sent the books to Amazon. In the first 3 weeks, 6 books sold for an average of $10 profit ($60 total gross profit). It takes another 2 months for the other 4 books to sell. After the price drops, the gross profit for the remaining books is $30. With a total gross profit of $90 minus COGS ($10) your final net profit is $80. The final profit ratio is 1 to 8. You received your initial investment of $10 plus an additional $50 by week 3. In Scenario B, you have $60 in cash flow by week 3 to invest in inventory.
In scenario B, you diversified your risk by spending less on books and as a result, made more of a return in the same amount of time. In Scenario A you have $40 to reinvest by week 3 and in scenario B $60. Accumulating sales on Amazon is a snowball process. The more inventory you send, the more likely you will make sales. In Scenario B, the extra $20 in cash by week 3 goes a long way. You have an option to buy 20 more books that meet the same criteria and continue the process.
We typically buy expensive books only if we can anticipate they will sell for the targeted price quickly. That is if they sell on a regular basis (every day or so) and the price is relatively stable.
Many people shy away from selling high ranked books. When I first began selling books I heard somewhere not to sell books with a rank above 1 million. I followed that rule for a while but realized months later that I could sell books with ranks of 2,3,4 or 5 million. I had been skipping many books that had very good potential to sell for profit. The trick with these books is that you need to identify why they do not sell often. We know that a book's rank represents just one snapshot in time. Rank indicates roughly how long it has been since the book last sold. Every time a book sells, it's rank drops. For every day the book doesn't sell, the rank increases by 100,000. If a book has a rank of 2 million, you can make a general assumption that the book sold around 20 days ago. You need to check Keepa data to verify this. Rank on its own is not a reliable metric. The rank itself, unfortunately, does not determine if you should buy a book to sell. What truly matters is how often the book sells, and if there is a good chance the book will sell again. If the book is likely to sell again, use Keepa to estimate what that book will sell for. Looking at the Keepa data is the best way to estimate the general market price.
When I see a book with a rank of 3 Million, I don't automatically skip it. One of the first indicators that spark interest is the current market price. I use triggers in Scoutly (formerly FBA Scan) that tell me to "investigate this book" (buy signal) and then I do an in-depth analysis. I check Keepa to look at sales volume and determine if there is a likelihood 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, usually, the 'lowest used offer price' graph line provides a good idea of the price the book sold for last. (This is the point on the graph where the downward spike intersects the low used offer price).
If there is a suitable profit margin and the book is likely to sell again, it might be worth it. The next step is to price the book competitively and match what the book last sold for. With some aggressive automated repricing, this book should stay competitive and have a better chance of selling.
Once you buy a book, the clock starts ticking. At this point, you have committed to processing and shipping the book. This requires time (cleaning, labeling, listing, packing, shipping, and pricing). Every step in the process requires time - and time is money. It is not just a matter of how much you spent to buy the book. Your time spent processing books has a monetary value. There is an opportunity cost associated. Every minute you spend processing books is a minute you are not working on other parts of your business.
We’ve found that books have operational costs that are often overlooked. In addition to the acquisition price, a book also has an added cost of $2-2.70 by the time it has been in storage for 6 months. These costs include time spent sourcing (calculated at $15 per hour), cleaning, listing, packing, shipping, gas, and supplies and storage fees. After 6 months, a book that costs you $1 to buy has a total cost of $3-3.70. In essence, you should aim for a higher potential profit for books that take longer to sell. As of November 2018, we look to make at least $5 per unit on books that sell frequently. The target profit increases as rank increases. At 1 Million in rank, we look for a $10 profit.
Disclaimer* We choose to sell books that others might not sell. If we can get these books for a good price and the Keepa data looks promising we base our approach on the likelihood that the book will sell. This approach has allowed us to gather a lot of data about the "gray areas" of the book market. We're attempting to find the true line between a Buy or a Reject. The interesting thing is that we end up selling quite a few books that are a bit surprising. The downside is that we do have to dispose of a small percentage of our books to avoid excessive long-term storage fees. Some people might consider our criteria liberal, but this is the business model we are using as we gather data for this course.
For more information on production optimization and management, we recommend a book called High Output Management. It was written by Andy Grove, a former CEO of Intel. It is a highly recommended book among CEOs in Silicon Valley and the inspiration for many of the methods we use to manage our business.
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.
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:
Your strategy should be to sell a book before 12 months have passed. After 12 months, you will be charged Long Term Storage Fees (LTSF) of approximately 15 cents per book each month. At this point, you should re-examine if those books should remain in your inventory. If not, you have two options:
If you have books disposed of, this is considered a cost associated with doing business and may be tax-deductible. If you have the book returned, one way to make up for the loss is to sell some of these books on eBay.