022 – Compound Optimization: How Little Improvements Add Up to Big Profits

In this week’s podcast episode we’re going to look at a hypothetical case study that will demonstrate the power of compound optimization.

This will show you how seemingly small changes can add up to made a huge difference in your profits on Amazon.

Brands that are just starting on Amazon know they have lots of work and big improvements to make.

But we often see brands who are already experiencing success on Amazon mistakenly think their success means they have nothing to gain by working to further improve their Amazon presence.

Brands in this situation often have no idea how much profit they’re missing out on by not continuing to improve on Amazon.

I’m going to show you the possibilities, though! After listening to this podcast episode, you won’t fall into the same trap.

Compound Interest and Compound Optimization

You’ve heard about the power of compound interest. If you invest $10,000 at an annual rate of return of 10%, and you keep reinvesting all your earnings without pulling any money out, then after 40 years your initial $10,000 investment has grown to $452,593. That’s the power of compound interest.

Compound optimization is similar. It involves stacking little improvements, just a few percent here and there, on top of each other over time until they add up to made a big impact.

Case Study – The Power of Compound Optimization

Here is a hypothetical case study, some of whose details are very similar to those of brands we’ve worked on.

It’s admittedly overly simplified, but it will serve to demonstrate the potential of incrementally improving your brand’s presence on Amazon and sticking with it over time.

So here you go:

The Starting Point

You have a product that sells on Amazon at a $50 price point. Net Amazon payout per unit sold is $35. You are the manufacturer, and your product cost is $10, so your net profit per unit sold is $25.

You are currently selling 300 units per month. So monthly sales are $15,000, and monthly profit is $7,500.

The Optimization

You decide that you want to increase your sales by optimizing your product detail page.

You improve your images and your bullet points, and you add Enhanced Brand Content to your product description.

The effect this work has is increasing your conversion rate on the page from 8% to 10%. That means you sell an additional 75 units per month. So you added an additional $1,875/mo profit to your bottom line, and your monthly profit is now up to $9,375.

You do some keyword research and discover that you’re not being indexed for a phrase that gets 2,000 searches per month. You add that keyword to your listing and get ranked in the 5th position on the first page of search results for that keyword.

According to this study the 5th position gets an average of 7% of the clicks, so you just added 140 clicks per month. At a 10% conversion rate you start making an additional 14 sales per month, meaning an extra $350/mo in profit.

Your monthly profit is now $9,725.

You start spending $500 a month on Sponsored Products Ads with a 10% ACoS. So that ad spend is making you $5,000/mo in gross sales, which is 100 units. That’s $2,500 in profit, $2,000 after subtracting the product cost.

So now you’re making $11,725 per month.

Up until now, your average position on Amazon search result pages has been 5th in organic search results.

Because of the optimization you’ve done, you’re now selling an additional 189 units per month. That is enough to move you from the 5th position in search results to the 3rd position.

The 3rd position gets almost 12% of clicks, whereas the 5th position only gets 7%. So you just increased traffic to your product detail page by 70% and grew your sales and profits by 35% (to be conservative). Now your monthly profit is $15,829 per month.

You’ve added over $8,300/mo profit to your bottom line, but we’re not done yet.

You decide you want to grow some more, so for 3 months you invest $5,000/mo in a Facebook ad campaign to drive additional sales. You pay a 3rd party agency $2,000/mo to run the campaign, and you dedicate $3,000/mo to Facebook ad spend.

You use this Facebook campaign to concentrate a significant volume of sales of your product on a chosen week each week for 3 months. Amazon loves sales you bring them from traffic outside Amazon.

The result of the Facebook campaign is to push you from an average position of 3rd in Amazon search results to 1st. The first position is worth 35% of clicks as compared to 12% for the 3rd position, so you just almost tripled your traffic.

Even though your traffic increased by 200%, we’re going to be conservative here and say that the effect this has is “only” to increase your sales by 50%. That means your monthly profit has now grown to $23,744.

You now start consistently spending $3,000/mo on Sponsored Products Ads. Your ACoS on the new $2,500 you’ve added to your ad spend is only 25%, but that means it still brings you an additional $10,000/mo in sales, which is an extra $5,000/mo profit, subtract the $2,500 ad spend and you’re left with an extra $2,500/mo.

That pushes your monthly profit to $26,244.

All this time you have been using a well-crafted email follow-up campaign to engage customers, show them how to get the most out of your product, and troubleshoot issues before they arise.

This has resulted in a few less negative reviews left for your product and a higher number of positive reviews. The shift moved your review score from 4.1 to 4.3, meaning your listing now shows 4.5 stars instead of 4 stars.

The social proof of the higher review score, plus being the #1 search result (and having Sponsored Products Ads above that), plus gaining the Amazon’s Choice badge, means that an additional 1 out of 100 people who visit your product detail page decide to buy.

Your conversion rate climbs another 1% from 10% to 11%, meaning that your sales and profits grow another 10%.

This brings your monthly profit to $28,864.

Now the holidays are coming. During two months around the holidays, your monthly profit doubles compared to the rest of the year.

So last year you made $7,500/mo for 10 months, and then $15,000/mo for 2 months. This one product made you $105,000 on Amazon during the year, which isn’t bad.

This year, after all the optimization you did, you made $404,152…an extra $300k by leveraging the power of compound optimization!!

As it turns out, you’re in a market that is growing, and Amazon is growing also. This means that next year your sales increase another 15% before you even lift a finger.

Oh, and did we mention that this product we’ve been working on is just 1 of 5 products in your brand?

That is the power of compound optimization.

We’re Offering the First Half Hour of Consulting for Free

Would you like to explore your brand’s situation some more? Get some insight on how you can grow your sales? Or troubleshoot issues like unauthorized sellers and MAP violators?

We’re offering the first half hour of consulting free of charge! To book a 30-minute phone call (your time to talk about whatever you want), click here and pick the time that works best for you.