What minimum payout should you accept when selling books? When is a book not worth enough money to sell? A guide to setting minimum profits when selling books on Amazon.
Video: Understanding The Amazon “Rule of Threes”
You must have minimum profit standards as an Amazon seller
I’m about to give you a simple formula that settles an important question:
“What is the minimum profit you should expect from any item you sell on Amazon?”
- How do you decide what your minimum payout should be?
- How do you know when to avoid listing something for sale because the profits are too low?
- What are some simple rules you can follow so you never have to think about this again?
One thing that’s certain: You don’t want to have to answer this question ever time you’re assessing an item to resell. You want a solid formula and fixed rules so you can put the “profit analysis” part of your inventory sourcing on autopilot.
That’s what this article is about.
Two reasons you need to have profit standards
You don’t have to use the rules I’m about to lay out for you – but you must have rules. Here’s why:
#1: You make your money when you buy
Having a minimum profit standard guarantees you’ll never lose money
If you analyze inventory intelligently upfront (before you acquire it), you make it almost impossible to lose money. That means profit is almost a foregone conclusion when you make a purchasing decision.
You don’t always make money on every item you sell on Amazon. But if you have firm standards, you will insure that you never lose money at the end of the week. In total, you’ll always be turning a profit.
You make your money when you buy – not when you get a sale.
#2: You eliminate lots of guesswork (and increase inventory sourcing speed)
Imagine if you’re selling books. And imagine for every book you look up, you have to look at your app and make a decision: “Is this an acceptable minimum profit for this book?”
That’s an insane amount of work. No one should introduce that much friction to the inventory sourcing process.
You want to set your standards one time, and go on autopilot. This will increase your sourcing speed dramatically, and free up your mental processing power for more important things.
What’s the lowest profit book you should buy?
This formula will make the decision as to whether you buy inventory, or whether you pass on it, extremely simple.
I call this formula “The Rule of 3’s.” I’ve used this for years, and have never felt the need to update it (even if inflation means my minimum payout doesn’t go as far as it used to).
The “Rule of Three”s goes like this:
You should only list something for sale on Amazon if you’ll get a minimum of 3x what you paid for it, and your payout is at least $3.”
- Minimum ROI: 3x.
- Minimum payout: $3.
Does a book cost $2? Then you shouldn’t buy it unless the payout is at least $6. Is the book 50 cents? You shouldn’t buy it unless the payout is a minimum of $3. And so on.
Extremely simple, and extremely effective at protecting your profits.
Part One, Explained: Why your payout should be 3x the item cost
When I say “minimum of 3x what you paid for it,” that’s a longer way to say “300% ROI.” (The acronym “ROI” stands for “Return on Investment.”)
That means for every $1 you put in, you should expect to get $3 back when it sells.
It doesn’t always work out that way, but that’s the point: Setting a standard of 300% ROI creates a large buffer than makes it very unlikely you will lose money on that item. The payout might be less than three times what you paid, but that’s okay. The reason you set such a large margin in the first place is to insure you (almost) never lose money.
Prices can drop. Amazon fees might even go up before you sell. But even if things go terribly wrong, you’re rarely going to do worse than doubling your money. And any business where doubling your money is considered a negative and unlikely outcome is a great business to be in.
Part Two, Explained: Why your payout should be a minimum of $3
A minimum payout of $3 is a good lower boundary of what any Amazon seller should accept.
This means having a firm minimum payout (the amount Amazon deposits into your bank when the item sells) of $3.
I consider this more subjective than then the 3x ROI rule, and is very much about your personal tastes and what you consider your time worth. Some will be comfortable with a minimum $2 payout. Others will need to see $4 (or more) before they will purchase an item.
The thing to keep in mind is that the higher the minimum payout you set, the more money you’re leaving on the table. I pass on lots of $2 books because my minimum is $3. Sellers whose minimum is $4 are leaving behind a lot of $3 books. Understand what you’re sacrificing.
If you choose to reject the $3 rule and go higher or lower, the questions to ask yourself are:
- “What is my time worth?”
- “What payout will keep my excited about this business?”
For a lot of sellers, looking at their account and seeing a bunch of $2 payouts would be demoralizing. Sure, they get the $2. But it will come at the cost of enthusiasm about their business. Do you feel the same way about $3? Then you should set a higher minimum payout standard.
While a $3 minimum payout has served me well personally, feel free to adjust this to your standards.
Examples of the “Rule of Threes” in action
Here’s a few examples to illustrate the “Rule Of Threes.”
Book Example #1
- Product: Book
- Cost: 50 cents.
- Selling price: $10
- Payout: $2.05
- Buy or pass? Pass.
The payout for this book is $2.05. Even though that’s quadruple our investment, it’s still less than a $3 payout. If you follow the Rule Of Threes, you would pass on this book.
Book Example #2
- Product: Book
- Cost: $5
- Selling price: $20
- Payout: $9.10
- Buy or pass? Pass.
At $5, this is a rather expensive used book. And while it’s selling for a healthy $20, the payout is only $9.10. That’s less than three times our investment. Therefore, according to the Rule Of Threes, we would not sell this book.
Book Example #3
- Product: Book
- Cost: $1
- Selling price: $12
- Payout: $3.10
- Buy or pass? Buy.
This book comes in just under the wire for both elements of the Rule Of Threes. It’s barely a 3x return on our investment, and barely a $3 payout. But it meets the threshold, so I we’re going to buy this book.
Book Example #4
- Product: Book
- Cost: $4
- Selling price: $20
- Payout: $12.50
- Buy or pass? Buy.
Another example of a book coming in just under the wire. We’re going to net just over 3x our investment, so this will be a “buy.”
When it’s okay to go below your profit standards
There is one situation where I will break the “Rule of Threes” and accept lower payouts and ROIs.
I will accept lower profits if I belief an item will sell fast and the expected payout is imminent.
That means if the Sales Rank for an item is very strong (the item is in high demand), and the $2 payout I’m expecting is all but guaranteed, then I may choose to go below the Rule of Threes.
Let’s take an example:
- Product category: Book
- Sales Rank: 10,000
- Purchase price: $1
- Listing price: $11.75
- Payout: $2.10
At a rank of 10,000, this book is going to sell fast. And because it’s going ot sell fast, there is little risk of me getting below a $2 payout. Since that $2 is virtually guaranteed, I may decide to acquire that book and get the quick $2.
When you should raise your profit standards
There is also a time when the “Rule of Threes” is too lax. Specifically, when the demand for an inventory item is low.
I will always increase my profit standards when the Amazon Sales Rank (aka BSR) indicates an item is not selling very often.
When you should apply stricter profit standards: Example #1
- Product category: Book
- Sales Rank: 4 million
- Purchase price: $1
- Listing price: $12
- Payout: $3.57
I would pass on this book. While the payout is more than $3, the risk is higher because the Sales Rank is worse. And I need to be compensated for my risk. I would be looking for a payout of $10+ for a book with this rank.
When you should apply stricter profit standards: Example #2
- Product category: Book
- Sales Rank: 6 million
- Purchase price: $1
- Listing price:$49.99
- Payout: $33.91
Even though the rank is worse, I would absolutely buy this book. The payout is $33, which means I’m being adequately compensated for my risk.
Once you get into Amazon Sales Rank’s in the millions, I don’t have a rigid set of criteria that I follow. It is, honestly, arbitrary and based on non-scientific factors such as my general mood that day. But here’s a sample framework you can use (again, I don’t always follow this exactly myself):
Sales Rank 2 to 4 million
- Minimum $10 payout
Sales Rank 4 to 6 million
- Minimum $15 payout
Sales Rank 6 million and beyond
- Minimum $20 payout
The “Rule Of Threes” Is Your Savior
The Rule Of Threes has been invaluable for me personally.
Having clear profit standards for majority of buying decisions you make will save you time, stress, and make it very hard to lose money on Amazon.
-Peter Valley
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