Demystifying Net Pure Product Margin (Net PPM)

Paul Sonneveld 
I'm your host, Paul Sonneveld, and today we're going to uncover Net PPM and how it can help you grow your Amazon channel. Now, to help us do this, I have again invited Asha to come and share her expertise with us. Asha is the founder of Etopia Consultancy, a results-driven Amazon strategy consultancy, offering e-commerce expertise to a variety of global brands. She's worked at Amazon and now she manages the marketplace from the other side of the table. Due to this distinctive position, she has the ability to strategically navigate Amazon for consumer brands since she loves dissecting Amazon as a sales and marketing platform, or highlighting what that truly means for a business.
Thanks again for being on the show today, Asha. 

Asha Bhalsod  
Hi, Paul. Thank you for having us. 

Paul Sonneveld  
You are most welcome. We love tapping into your expertise. I know you spent a lot of time on the, shall I say, dark side or on the other side. You know, one of us. But I know you there's a wealth of information here, and today we're focusing on a very, I guess, granular but specific topic when it comes to Amazon vendors, which is called Net PPM.

It's a bit of a tongue twister. I think it stands for Net Pure Profit Margin. Could have got that wrong. You can correct me later if you want. But, you know, very, very important. But before we even start to dissect it, what I want to do first, Asha, is to understand, Net PPM, we always hear about it, but in the shoes of an Amazon vendor manager. So on the other side, what is the role of Net PPM in their daily life? 

Asha Bhalsod  
So, I want to answer this question in quite a recent conversation I've been having about Amazon as a retailer and the journey that they've been on. And as consultants, we work with vendors that are always coming to us and say that their Net PPM is a challenge for Amazon. What do they do about that? So we need to first understand Amazon's life cycle as a retailer to then understand the importance of Net PPM. 

So if we take it right back, many, many years ago. When I was at Amazon, Amazon as a retailer was in this stage of expanding into different categories. And so, therefore, it was all about selection. Therefore, profitability wasn't a huge concern to them. We then entered what I call like a middle phase of Amazon as the retailer. And that's when we had introductions to things like brand stores, and Amazon Advertising. And so Amazon as a retailer were empowered by opening up their platform as a huge marketing platform.

We are now in this very different way of trading with Amazon and their focus is all on profitability. And that is where the introduction to Net PPM really comes in. These vendor managers, well, these brands all had to care about at that time, was to drive selection on Amazon and market it really well. And now the laser focus from Amazon is, How does Amazon also make money? How do you find a win-win business model? And so when we hear about the amount of redundancies that Amazon are about to through again, and the drive and focus to increase profitability on this business. 

When you look at it from a retail side of it, vendor managers do have targets to ensure that the Net PPM in their category is at the highest. Now a question that we get asked is, what is that percentage? And the truth is every category has different percentages, but rough and tough. We're talking anywhere between 30 and 40%. And a vendor manager is KPI into ensuring that his or her vendors are bringing 30-40% Net PPM to that category.

Paul Sonneveld  
So, and given the focus on profitability, like the increasing focus for versus where Amazon has been is, I mean, it might be hard to answer, but, so is there an expectation if I were to ask an Amazon vendor right now to increase that with the year on year, so are they looking for, I don't know, 100, 200 sort of basis point expansion year on year? Is that the game this year? 

Asha Bhalsod  
Let's separate trading terms and increasing basis points from Net PPM. If your products, if your brand is not delivering Amazon a return and Amazon is not making a profit from it, I ask you a question, why should they continue to support and sell your products and brand? What's in it for Amazon? So I want to separate terms, trading terms and an increase in trading terms is what the vendor manager, without a doubt is focused on trading terms. But there is an overarching goal to ensure that Net PPM is as best as it possibly can be. And  Amazon are generating a profit from selling your products.

Paul Sonneveld  
Yep. Makes sense. I mean, in many ways I've spent many years in retail and a lot of this is actually just good retail disciplines, right? And which are so important now, now that all the other kinds of phases are over. So I've mentioned the word Net PPM probably five or six times. But I couldn't give you a clear definition of what it actually is. And I was going to ask you, can you give me, can you give us and the rest of the audience a great definition and particularly I'd love to just understand you mentioned trading terms as well there, you know, what's in that number? What's out of that number?

Asha Bhalsod  
Yeah, so look, Net PPM stands for, Net Pure Product Margin. You said profit, it's product. Just to add to that. And it can be tracked at two different levels. One's at the ASIN level, and one's at the Account level. And at the ASIN level, it is calculating your average selling price minus the cost price, plus vendor-negotiated terms divided by the average selling price. It's a bit of a formula to it. 

And at an Account Level, you're looking at ship revenue minus product cost of goods sold, add any terms minus any sales discount. So there are some formulas in it. Now, the good news is you don't need to remember the formulas. In Vendor Central, there is the ability to run your own Net PPM analysis. Now, that is actually the most important element. It is about a) understanding the importance of Net PPM, and the second is then tracking it. And this historically has not been done. So now when we talk about the type of era that we are in with Amazon and Amazon vendor managers are talking to you about Net PPM. 

This isn't a conversation that you're only going to have at trading terms with your vendor manager. This is ongoing conversation you'll have if you're lucky to have it for the manager or with your AVS. And or if you have got challenges with receiving purchase orders that is where the first place I would or do a bit of a deep dive on is, let's look at your Net PPM and have you been tracking it, what historically has been your Net PPM margin, and have there been any challenges to that?

Now a good business needs to remain really, really close to the analytics side of tracking and measuring. And like I said before, this isn't just something that you do once a year. My strong advice is that this is a calculation that should be happening quarterly and a quarterly deep dive, but a monthly tracking process should be in place for Net PPM. And as an Amazon account lead, you should be able to identify what are the SKUs or ranges that are challenging the Amazon Net PPM and almost finding root outcomes and, what you can do to make sure that this isn't challenging Amazon.

Paul Sonneveld  
Before we get into I guess pitfalls and solutions. I don't want to go back to the definition a little bit there. Just, you mentioned a couple of different terms and it'd be great just to get a few examples of those. For those of them who are not sort of managing that relationship with Amazon, you know, brought bread and butter. This is particularly around, I think you mentioned the kind of trading terms and the other term that you use. I think it was, sell discounts or promotional discounts or, do you mind just elaborating on that, I mean conceptually? I think we understand what that means. Can you make it real for us in the context of an Amazon vendor? 

Asha Bhalsod 
Sure. Your trading terms is the investment that you are putting into driving your business forward at Amazon. And that could be through co-ops, payment terms. You might have damage allowances in there. These are regular terms with Amazon. And the cost of if you have an AVS will be in there. This is trading terms that you have standardized, trading terms of Amazon. Sales discounts is any discounts that you offer on top of the cost price, your COGS to Amazon. And that could be, promotions could be taken into consideration. It might be sales-out allowances that you might add on to, for a period of time. 

Paul Sonneveld  
Understand. So this is the funding part of when Amazon discounts, what portion of that discount is the vendor actually funding in that sense? That's it. Yeah. And just to be really clear, I think I know the answer, but just in case others are wondering, any advertising spend is completely outside of this right?

Asha Bhalsod  
Separate P&Ls and you know, I've sat in lengthy meetings with Amazon where I have one part of investment and that part of investment also takes into consideration Amazon advertising and promotions and any onsite marketing spend that I want to do. And I sit with my vendor manager and I say to them, I only got one part of the money. Tell me how to distribute it. The reality is Amazon advertising is a complete separate part of the business, and therefore it doesn't go towards their Net PPM. It doesn't go part of their total P&L. And so therefore businesses do need to treat Amazon advertising as a complete separate area as well. 

Paul Sonneveld  
Very interesting, and I imagine some of the vendor managers are trying to get very creative to tap into some of those marketing budgets to try and get them as co-op payments, in return for some other sort of exposure on the platform.
Trying to tap into that. 

Asha Bhalsod  
That's another topic I'm sure we could unpack as well.

*(Both laughs)*

Paul Sonneveld  
Yeah, no, that's the dynamics there. Look, you mentioned a lot about tracking Net PPM at an account level and ASIN level. Of course, that's now possible inside retail analytics inside the vendor platform if you have sufficient access, I should say. And of course also MerchantSpring, but I won't plug our platform too much. But let’s get into kind of solutions and pitfalls. Let's talk about the negative first. So, I'm a vendor. I'm not managing my Net PPM, it's declining. I'm below category average. What are the downsides? What am I facing here? 

Asha Bhalsod  
Immediately, A product level. Your products could be crapped out and I'm sure many of you have heard that's this term before. CRAP means can't retain a profit or, realize a profit. I think it's what it truly stands for. And that is when Amazon just delist your product from the catalogue. And so you won't receive purchase orders from it. 

Another huge impact is by not ensuring that Amazon's Net PPM is healthy. Amazon doesn't have the ability to compete in the buy box area. So your products could lose at Amazon retail level. They would lose the buy box. Now that could also then trigger the Amazon algorithms, to lower your organic page ranking, which of course has, a huge impact on the visibility of your products.  And there are also other areas like Amazon advertising. If you're not tracking Net PPM and you are then investing in huge levels of Amazon advertising, what you are in danger of doing is almost wasting money in products that are then going to be de-listed by Amazon or are in danger of being de-listed by Amazon. So you're wasting your money. 

Paul Sonneveld  
So you're really swimming against the current if you are below the category average in going south. Not a great place to be. Which gets us onto, 

Asha Bhalsod  
Sorry, Paul. Just one more thing onto that and that is 

Paul Sonneveld
Yeah. 

Asha Bhalsod
Understanding and managing your Net PPM without a shadow of a doubt has a direct impact on your products and your brands, but it's also about your relationship and your partnership with Amazon that is an important aspect to address here. 

When vendor managers are working with brands, they're not just looking at the relevance of your products and brands in the market segment. They're also looking to see if are you being accountable for the Net PPM that you're delivering for Amazon and almost are you an easy business to work with. And if you are, look, there is no easy triggers to say that you can almost guarantee Amazon, 35% Net PPM. It's almost ludicrous to say that as a statement. So I'm not sitting here being gospel to say that that's what you have to do. What I'm saying almost here is it's important that you as a business are understanding the importance of this and the dangers of what could happen if you're not managing this effectively.

Paul Sonneveld  
And just in terms of that management and I appreciate a lot of vendors. I mean, there's a big discussion going on LinkedIn around, you know, who still has a vendor manager and sort of managing things algorithmically, But, let's say you still have access to a vendor manager, What does the dialogue around Net PPM look like in terms of frequency? Is it part of quarterly business reviews? In practice, what does it look like Asha? 

Asha Bhalsod  
Yeah. It's an internal and there's an external conversation to be had here. Internally, I, as an old Amazon account lead, what I would be doing is working with an analyst of some sort, to be tracking Net PPM on a monthly basis and having at least quarterly deep dives into this. If you have the luxury of an AVS, I would be having internal quarterly reviews on the Net PPM to understand from an Amazon's perspective, what are the products that are specifically driving lower Net PPM for my brand.

Paul Sonneveld  
Makes sense. So let's talk about initiatives. Let's talk about what vendors, what is in the remit and in the control of the vendor in order to manage the Net PPM. What does the toolkit look like here as a vendor? 

Asha Bhalsod  
So, what I would say is you've got access to vendor central and reporting, but at a line level, product level, you know, your own COGS, you should know what your terms are. You should know this. And to be able to compile regular reporting to be able to allow you to track it is really important. The average selling price is something I'd also take into consideration, which is data that is available through vendor as well.

Paul Sonneveld  
Sorry let me kind of rephrase the question and talk about, I guess more of the actions, which is, let's say my vendor manager is challenging me to get to a 35% Net PPM at a total Vendor Account level. I'm sitting at 33 or 31 hypothetically speaking.

Asha Bhalsod
That's good. By the way, I wouldn't be worried so much.

Paul Sonneveld
Okay. Let's say 25, let's say 25, 19. Let's do 19 electronics, 5%. 

*(Both laughs)*

Paul Sonneveld
Like how can I build a plan as a vendor? You know, what options do I have? 

Asha Bhalsod  
Right. Root cause analysis, I would unpack this. So let's do some root cause analysis into what's driving a reduction on Amazon's Net PPM. And by the way, it's okay if as a business you investigate some of these challenges and decide that you can't do anything about it. And just want to say that, you know, there is always a balanced view to this. 

I would start looking at Amazon's pricing policy. So, we know Amazon are the greatest press watches in the market segment and does not lead on price. I would try to start unpacking and understanding. Who are their price matching in the market segment? Because if you were to look at your own COGS plus Amazon's term, Amazon's Margin Plus terms, you'd be able to rough and tough say that, you know, what should the Net PPM be? Something's driving it lower. What is driving it lower? 

You know, there is plenty full of great softwares that you can look into. Look at managing tracking, buy box percentages and I would highly recommend looking at buy boxes. Looking at this, is that third-party marketplace a problem for you? So channel management, who are you selling to? What is the prices that are being sold to? and have you got a channel management policy in place? and or a strategy actually to see where Amazon is price matching because that's probably one of the biggest reasons.

The other thing I would do is look at specific products that are driving the Net PPM lower. And is this low ASP items because it's having a big impact on your entire portfolio? Is it specific products that are causing the Net PPM to be driven lower? If this is the case, there needs to be a strategy that can be put into place. Is it you need to move them over to a hybrid model? Is it, there is a bigger channel management PO strategy that needs to be implemented. Root cause analytics is the big message that I want to deliver here. You know, it's really easy to, for Amazon to say our Net PPM is challenged. Let's first go and do a bit of digging to understand what is driving that and how can you go about fixing it.

Paul Sonneveld  
It's, portfolio management, I guess is what you're saying. And it just strikes me that the average pricing as well, I mean, it makes a lot of sense. We get a lot of questions around, we want to be able to track the average price that a product is sold for, for a particular ASIN and over time inside the vendor central. That makes sense because you want to see to what extent is Amazon actually discounting your product and obviously that's going to take a really big chunk out of the Net PPM.

I thought, perhaps what's even more interesting is how you bundle that with advertising. Because you may be creating some really healthy profit and optimizing for that through your PPC software in the backend. Whereas, you're kind of driving your Net PPM down, between you and Amazon, which is a really interesting, interesting dynamic. Wow, that's crazy. Sorry, go ahead. 

Asha Bhalsod  
Oh, I was just going to say that. You know, it might sound as if we're all pro-Amazon, Net PPM. But in there is a real context piece here, and the context piece is, do you value Amazon as a retailer of your products and brands? And if you value Amazon as a as retailer for your products and brands, we are in this new realm of trading with Amazon which is driven out of profitability. And you are in danger of your products being crapped out. You do have to look at this. 

Now, there is no magic answer here. So, you know, understanding the importance of it, if we are really summarizing some of these aspects. Tracking, managing, reporting. So don't, let's not bury our heads in the sand. We know it's important. You know, how do you use the tools that are available to you to track, manage, and report on it on a regular basis, and understand the ASIN and level and account level? What are the challenges that are causing it? Also, then understand what the impact is. If you don't do anything about it. 

Now, there are then I'd say solutions there are temporary levers and long-term levers. And if you might be in a situation where products are being discounted in the market segment due to challenges that you've had at the distribution level, and therefore there's nothing you can do about it. And Amazon is price matching. Which is having a direct 24 impact on the Net PPM, do you have a look at potentially giving them some additional funding to stop their Net PPM being depleted even further whilst you go and try and fix some of the distribution problems that you've got? That could be a temporary lever. Or do you look at long-term solutions where you then look at removing certain ASINs from that product mix entirely and moving them over to a hybrid model potentially? 

Paul Sonneveld  
Yeah. Yeah. Makes sense. Well, the very big, big topic here. Really the heartbeat of, I guess the relationship between the Amazon vendor and, and Amazon itself. Very insightful. Now, I do want to tell the audience that we actually got some time for Q&A. And actually part of the reason I'm looking distracted, I'm looking at the questions flooding in on the right-hand side of my screen here.

Asha Bhalsod
Yes.

Paul Sonneveld
But, if you do want to ask a question, please pop it in the LinkedIn comments chat we've got about five minutes left, so we're going to try and, and see how many we can get through. So if you don't mind, Asha, I'm going to pick a question to start off with and go from there.
The first one actually is really easy. Thanks for your insights. Asha, are you recording this? Yes, we are. And we'll send out the recording, shortly. So, yes, it will be available, both here on LinkedIn, YouTube, and on our on-demand page as well. So that was an easy one. We got that one out of the way. 

Alright, let's go to Anne Warner. Thanks for submitting a question. Anne asks, you mentioned 30-40% Net PPM category average. Does that vary by category? And do you have any resources to determine by category? I guess what she means is, you know, what are the different category targets as such? Yeah. I think you mentioned this briefly at the start, but it'd be great to elaborate.

Asha Bhalsod  
Yeah. So, every category will have its range of Net PPM that it's, it's focusing on rough and tough it varies between 30 and 40%, and it very much depends on hard lines and soft lines as well. If you look at electronics, you, you know, I know you made a tongue-in-cheek comment, they're poor, but I do not expect any electronic category to be wanted 30-40% Net PPM, it'll be ludicrous. And I'd be very rich and wouldn't go and trade in electronics if I was able to do that. 

So, you know, I think there are certain categories that are quite obvious that Amazon's expectations of Net PPM will be a lot lower. However, there will be less mature categories where I'm sure they even have higher expectations on Net PPM.
I am racking my brain and I'm sure I'll come up with a category in a moment, that I'll be able to give you an example for, but rough and tough is anywhere between 30 and 40%. 

Paul Sonneveld  
Yeah,  I would've thought some of the apparel, and fashion categories would be closer to sort of the 50 to 60. 

Asha Bhalsod
Yeah. Good job.

Paul Sonneveld
Certainly from a broader retail point of view. Actually, there's a question here from Debbie, thank you for submitting your question, Debbie. Which actually relates, just wondering how you determine the Net PPM per category. So it's really about, you know, how do we get visibility of this as a vendor manager. Of course, there's a great plug here for MerchantSpring to do that. But for those that are not MerchantSpring users, How can you get to this?

Asha Bhalsod 
I would ask your vendor manager the question. And I also appreciate that you might not have a vendor manager, but at terms negotiations, if you have somebody in any of these various programs that you may be linked with, like the Stellar program or something like that. Ask the question, what is the category average Net PPM that you are trying to get to Amazon and they'll give you that. Rough as a rule of thumb, anywhere between 30 and 40. Sounds about right. 

Paul Sonneveld 
Awesome. Okay. I think we've maybe a quick time for two more. There's a big one here from Alice. Let me read it out. Trying to retain positive margins for clients and Amazon at the same time is very challenging. Yes, absolutely. Would you prioritize pushing ASINs with Healthy Net PPM, or push ASINs that are best sellers based on order revenue to support the sell-in? The latter means clients are happy, as Amazon keeps raising purchase orders each week, but Amazon most likely won't be as happy. 

Asha Bhalsod  
This is a loaded question. And I'm sure I'd love another consultant with me to answer this question simply because I think it's a question based on opinions more so than anything else. Look, in my opinion, I would probably push products that have a healthier Net PPM for Amazon. And I would probably be very creative with what I do with my best sellers. For example, I would use peaks and troughs to make sure that they are still sold through vendors. And it doesn't almost matter if there is a reduction in Net PPM. Because don't forget it's a blended mix or margin that is delivering over a period of time. And potentially have the product, those best sellers selling through the hybrid model to almost turn on and off where appropriate.

So, just some tactics on this is there is, this is no you know, clear cut answer and, and I'm sure there are plenty of other hands and consultants on that would answer this maybe differently. But knowing the state of retail and where we're at in the relationships and the space of Amazon at the moment, if you have a long-term vision and a long-term strategic partnership with Amazon, The short answer is to focus on driving healthy Net PPM for Amazon. There are some long-term benefits to that. 

Paul Sonneveld  
Great answer, Asha. I was just going to add my little bit around and only from what I observe in terms of what we see through our own platform, that in some instances Amazon does have a choice in terms of where it sources its products and how it fulfills orders, right? So particularly if there is a distributor there, it's in play that fulfills the same product, or Amazon is sourcing inventory from another country at a lower cost, you can obviously push Amazon in that direction. If there is a, is a higher Net PPM opportunity for them, you know, you, they'll be acting as a rational being.

Asha Bhalsod  
I would. The only thing I'd add to that is it'll be interesting to see how that unpacks over the next 12-18 months with their new policy with distributors. So, you know, not all is lost here for you as a vendor because Amazon is cutting out distributors too. So sometimes they're not going to have that portfolio and wealth of prices to almost pick from. But I hear what you're trying to say here, Paul and I agree. 

Paul Sonneveld 
Let's go to the last question. It's submitted by Greg, and I think it's a great way to finish off the session today. I've previously experienced a vendor manager undermining the accuracy of the Net PPM reporting within Vendor Central. Very good question. Are vendors and vendor managers looking at the same set of numbers? Great question, Greg. Thank you for that.

Asha Bhalsod  
It's a really good question, Greg. And the answer to that is no. No vendor central data is as accurate versus what your vendor manager gives you. And the bases are always different. So, when you think you've got your numbers completely accurate, 
you go into a meeting, it's wrong. So, I don't have the magic bullet or the magic answer to that, Greg, other than trust the data that your vendor manager's given you and use that as the benchmark and basis and work from that. 

Paul Sonneveld  
The only thing I would add, and this might just be pure spiel, but one of the rationales that Amazon used for rolling out is new retail analytics is the argument to say everyone's looking now at the same numbers, both your vendors and the vendor managers. I don’t know to what extent there's be true and many of you don't have a vendor manager, so it becomes kind of an irrelevant topic. 

Asha Bhalsod  
But I have also experienced pulling Net PPM reporting in vendor Central and it being different to my own reporting. So, Greg, I feel your pain. I don't have an answer to that. Let's work to rough and tough numbers between 30 and 40% and 10% is a big gap, right? But, you know, understanding what is that number and if you can show through your data that you think rough and tough. The Net PPM is rough and tough there. Shouldn't really have a problem. 

And that actually might be a great way to almost leave this as a kind of goodbye comment, but Net PPM isn't needed to be measured and managed to its complete percentage accuracy. This is understanding the importance of Net PPM and a rough and tough, benchmark between to stay within. And if you can see that your brand and your portfolio of products are as low as 25%, you have a problem and you need to address that. 

Paul Sonneveld  
That's a great way to finish, Asha. Let's wrap it up there. We've gone well over 30 minutes. I appreciate it's lunchtime for some of you and I want to make sure I'm conscious of the limited window here. Thank you so much for sharing all your insights. I've certainly learned a lot. I now know what Net PPM actually stands for. More importantly, I know what CRAP stands for. I keep seeing it on LinkedIn all the time. And it feels like I'm the only person who doesn't know what it actually means, so I do know now. So, thank you so much. But more importantly, there may be people, listening now or watching this after that are keen to get in touch with you, particularly as there are very few vendor managers around these days, what's the best way for them to get in touch, Asha?

Asha Bhalsod  
So, you know, our company website is, www.etopiaconsultancy.com. And my personal email address for anybody that would want to chat Net PPM, I'm always interested in having these conversations. It's Asha, A-S-H-A@etopia consultancy.com. Nicely done on the screen there.

Paul Sonneveld  
Yeah, I think I still had it there actually, so, yeah, get in touch. Especially for those of you without vendor managers. So, I've just flooded your inbox for the next, next couple of weeks. So, apologies upfront. Okay. That is great. Well, thank you so much for taking the time. Asha. Thank you so much for sharing your expertise. Thank you to our audience for all your great questions. And my sincere apologies to those of you whose questions we didn't get to answer. We'll try and do our best through the LinkedIn comments after. Until the next episode, this is a wrap. Have a wonderful week and we'll see you next time.

Paul Sonneveld and Asha Bhalsod
Thank you!

Paul Sonneveld
And Goodbye!