Idiot Cost Index is the ratio between the ‘Finished Product Cost’ and the ‘Raw Material Cost of the Product’. If this ratio is too high, it indicates that the process and product require significant improvements.

For instance, let’s consider a product that costs $20 before being sold on Amazon, with a potential profit of $5. However, to sell it on Amazon, we incur various expenses such as a 15% Referral Fee, FBA Fee, Refund Commissions, Platform Fee+ Operational Costs+ Amazon Process Time Cost+ and others. I call it ‘Cost Spots’

After accounting for all these expenses, the final cost of the product, along with profitability, becomes $60. Thus, the idiot cost index ($60/$20) is approximately ‘3’. This indicates that due to these additional costs, the index has increased.

To identify the idiot costs ask:

Which are the costs that can be eliminated without affecting the product’s delivery to the customer

Then analyze the costs one by one, such as:

There is a ‘shipping cost from the manufacturer to the prep center to Amazon’. Then, you realize that the product is fine, and there’s no need to send it to the prep center. You can negotiate with the manufacturer to ship directly to Amazon, which will save you money on idiot cost and time idiot cost.

By addressing and minimizing these costs, we aim to reduce the idiot cost index, making the business more profitable.

Tip: How to Spot Idiot Costs: To identify idiot costs, ask “WHY” 3-5 times to understand why you have to incur them. By doing so, you can determine whether these costs truly impact your end product or if they are simply “IDIOT” costs.

Conclusion:

By addressing and minimizing these costs, we aim to reduce the idiot cost index, making the business more profitable.