What is the difference between the Net PPM vs. Contribution Margin?

Let’s recapitulate for a moment. What is the Net Pure Profit Margin (NetPPM) saying? The NetPPM is Amazon’s primary metric for assessing a vendor’s profitability. It focuses on the direct financial relationship between Amazon and your vendor business. Yet it is excluding Amazon’s internal operational costs.

The formula for the NetPPM is:
Net PPM (%) = [(Shipped Revenue – Shipped COGS + Vendor Terms – Sales Discounts) / Shipped Revenue] × 100

• Shipped Revenue: Total revenue from product sales.
• Shipped COGS: Cost of goods sold, i.e., the price Amazon pays the vendor.
• Vendor Terms: Financial agreements like co-op funds or accruals that offset costs for Amazon.
• Sales Discounts: Customer-facing discounts, including coupons and promotions.

This metric provides a clear picture of the profit Amazon earns from selling your products in a 1P constellation. Yet it excludes fulfillment and operational expenses. So, you need to keep in mind that those costs come on top here.

Contribution Margin (CM) offers you as a 1p seller a broader perspective on your profitability on Amazon. Because it is incorporating Amazon’s internal costs associated with selling a product.

Problem is you are only getting an estimated value on your Contribution Margin because you are not able to calculated as the NetPPM. Amazon doesn’t publicly disclose the exact formula but the CM generally includes:

• Shipped Revenue
• Shipped COGS
• Vendor Terms (Co-Op, Freight Accural, Damage Allowance, plus individual T&C with AMZ)
• Marketing Costs (Sponsored Ads, Demand Side Platform Ads, Vendor funded Deals, Promotions, and Coupons)
• Amazon’s Operational Costs (Fulfillment, shipping, storage, customer service, and return handling)

With this in mind, you can estimate the CM on ASIN level. The calculation is simple.
Wholesale price – all the other factors = CM

In the table down below you will find the main key differences between the NetPPM and the Contribution Margin.

When Amazon shifts the conversation from Net PPM to Contribution Margin, it’s often a signal that, while the product may be profitable on paper, the costs associated with selling it are too high. This shift indicates that Amazon is concerned about the overall cost-to-serve, not just the direct financials.

Customers who know me will roll their eyes when I say that a path to better profits can be tough and disruptive. But it is what it is so, here are a couple disruptiv but effective ways on how to address CM concerns and optimize them in your daily business:

1. Optimize Packaging: Implement Frustration-Free Packaging (FFP) or Ships in Own Container (SIOC) to reduce fulfillment costs.
2. Improve Fulfillment Methods: Explore options like Direct Fulfillment or pallet ordering to streamline operations.
3. Analyze Return Rates: High return rates can significantly impact profitability. Investigate and address the root causes.
4. Check your wholesalers: Adjust pricing over your potential wholesalers (for more details read my blogpost on that one)
5. Collaborate with Amazon: Engage in discussions to understand specific cost concerns and work collaboratively on solutions.

Understanding the distinction between Net PPM and Contribution Margin empowers you as a vendor to navigate Amazon negotiations more effectively. By focusing on operational efficiencies and cost-to-serve improvements, vendors can address Amazon’s profitability concerns without compromising on trade terms. Understanding your data and using it to build a strong case is the first step in signaling Amazon that you want to partner with them and that you want to put your head in the game. Still, I am not here to gaslight you, it is a lot of work!