Most online merchants begin with an idea to sell certain products or services. Yet, many others want to sell online but have little idea as to what they want to sell. In either case, deciding what to sell is the first, important step to planning for eCommerce success.
Even if you already sell online, it’s worth taking a step back and reviewing whether or not you’re maximizing your potential by selecting the products that will ultimately give you the most profitability and build real value for your online brand.
Carving a Niche
For small to medium sized merchants — which we generally label those selling less than $10 million annually online — the best approach to building a product selection is to focus on a narrow and related selection of products for which you can demonstrate real expertise. We call this “niche marketing.” By initially focusing on a narrow product range (you can always expand later), you create several important advantages:
- You’re not overwhelmed by your product management tasks (which we’ll go over a bit later in this article).
- You can easily demonstrate product expertise which is very attractive to customers.
- You can better negotiate pricing and terms with your suppliers who are usually warmer to merchants who can focus on the supplier’s products.
- Marketing is easier and less expensive. You can zero in on customers with very select interests.
- You can build brand identity as the online shopping destination for your products.
All of these help build real value in your brand and, ultimately, the value of your business when you decide to sell it in the future.
To give you a real example, in 2005 we built an eCommerce store focused on selling high-end digital dictation equipment. We didn’t sell analog tapes or other office equipment as we felt it would dilute our brand as the “Digital Dictation and Transcription Experts.” With less than 200 SKUs (stock keeping units, or individual products), we could really learn the products, create demonstration videos and add in-depth product presentations to our store.
We were able to convince some rather stubborn manufacturers that we wanted to professionally represent their products by demonstrating our commitment to our niche. And it worked. Within a few months, we rose quickly to the top 5% of online retailers (there were about 150 authorized dealers in the USA at the time). We held that position for 5 years, earning several sales awards and the respect of others in the industry. We sold the business at that point for a healthy multiple of our net profit.
We ran this business which netted a good six figures each year from our home office. We attended industry conferences (tax write-offs) and were invited to new product announcements and distributor meetings in Austria and the Bahamas.
The point here is that by committing to a select niche, we were able to not only earn a respectable income, we lead the industry. It was a full-on niche focus. Despite some of our distributors begging us to sell non-digital equipment, we held to our guns and that focus kept us from diluting our brand.
Identifying a Profitable Niche
First, let’s take “profitable” out of that title for now. It is our contention that if you fully commit to a niche and work it thoroughly, you can create a profitable online business. It takes dedicated effort — and a smart plan — but the rewards can be very satisfying.
There are many ways to identify a niche on which to focus:
- Choose a niche in which you have experience or a passion. It might be a hobby or other personal interest. If you do ceramics, consider building a store to sell ceramic supplies. Likewise if you’re into quilting, photography, etc. Tired Iron Tractor Parts was created when the owner, a restorer of vintage farm machines, decided to apply his experience to selling parts to other restorers.
- Focus on a niche within a product group. For example, Big Mans Land focuses primarily on selling casual wear in larger, less available sizes.
- Obtain exclusive licensing rights for a well-known brand applied to new products. Aroma Living Styles is a licensee of the Whirlpool® name to use for home air purifiers.
- Manufacture mass market products targeted toward a niche market segment. Gum Drop Cases creates rugged smartphone and tablet cases, and focuses much of their marketing efforts toward the educational market.
- Produce OEM products for a select segment. Hill Country Custom Cycles produces custom handlebar rigs for motorcycles.
- Create and market content aimed at a niche industry. Acres USA sells books, publishes magazines and produces events for hobby and organic farmers.
- Add your take on a widely popular trend. By creating their own unique emoji designs, My Emoji Wear sells print-on-demand apparel and gifts.
- Sell to a select demographic. Everett Stunz is a high-end home design retailer located in La Jolla, California. Their buyers are affluent consumers who appreciate quality linens and bedding.
The key to identifying an ideal niche is to be able to answer “yes” to each of these questions:
- Do I have or am I willing to obtain the knowledge necessary to be an “expert” on the products I sell?
- Do I know initially from where I can source the products?
- Can I narrow the focus to a manageable number of products?
- Are the barriers to entry within my means?
The final question is: can I buy the products or services at a price that affords me a commensurate profit? We’ll discuss suppliers later in this installment. But, for now, let’s explore how to calculate profitability.
Calculating Niche Profitability
There’s no doubt that competition from Amazon et al puts pressure on retail prices. Depending on your wholesale costs, low, competitive pricing can make it difficult to turn a profit. Even for B2B businesses, online competition among wholesalers can affect your bottom line.
So, how do we begin to assess what products within our chosen niche will be worth selling? As with any retail business, some products will yield higher percentage margins than others. Remember, though, that retail stores will often sell “loss leaders” designed to bring in shoppers who, in addition to buying a product with little or no profit, will also buy other items with higher margins. You have to look at the overall numbers of your business.
First, let’s list the costs you’ll incur in operating an online business as general percentage targets. These are percentages of your sales, and can vary widely. If you’re new to online selling, though, the numbers presented here can be a helpful starting point.
- Marketing. Any retailer will tell you that they spend between 5-15% of sales in advertising.
- Operations. This really does vary by business. Start by making a list of expenses directly related to your online business. If you’re an individual starting out, you may not have many.
- Technology. In the final installment of this series, we will help you build a technology plan. For now, you should target your technology expense at a conservative of 2-3% of your sales. This can vary, of course, depending on your fulfillment requirements and special customizations.
In many SMB online businesses, it’s not uncommon to see the total overhead to equal 10-25% of sales. For now, let’s work with a target of 15%, with 10% toward marketing, 2% for operations and 3% for technology. Understand that in the beginning of a new online business, your expenses will be much more than 10% as you don’t yet have any sales! So, let’s focus on the profit you wish to make and work back from there.
If you’re starting a new online business, you should create a target annualized profit to hit by the end of the first year. That means that if you want to be earning $200,000 in profit, by the twelfth month, you should be earning $16,667 in before tax profit each month ($200,000 / 12). For ease of numbers, let’s round that down to $15,000. If you were to start a home-based online business today that created a monthly profit of $15,000 would that be a good thing? To many, it would. For even established brick-and-mortar stores, adding an additional $15,000 in profit is an acceptable goal (not to mention the increase to in-store traffic that may be created by having a quality on-line presence).
Now, let’s look at your products. What kind of margin can you get — the difference between what you pay for the product and the amount for which you sell it? Is it 20%? 35%? 50%? Obviously, the higher the margin, the fewer sales it will take to reach your goals.
In more competitive niches, you might only see a 15% margin. Just remember that you don’t always have to be the cheapest price! Say what? There are many consumers who are willing to pay more for a product if they feel they’re buying from someone who really knows the product, provides excellent customer service, and whose brand projects one of quality and professionalism. If you’re selling products many others are selling at bargain prices, you’ll have more difficulty, of course. However, the more select your niche and the more brand value you add to the equation, the more opportunity you have to sell at a higher price.
Take Apple, for example. Not their Apple branded products, but the hundreds of other products they sell online and in Apple stores. These products are not discounted. In fact, you can usually find them cheaper on other sites. However, many consumers (and I’m included here) would prefer to buy from Apple because they (I) trust they will stand behind the sale. I believe in their ability to vet products that work well with Apple iPhones, iPads and Macs. Who knows what kind of service I will get if I buy from someone else? And is that risk worth saving a couple of dollars? Not to me, it’s not.
You do not have to sell to everyone, either. You only need to sell to a very small percentage of online shoppers in order to be successful. And there are enough out there who want to shop with a reputable merchant, even if the price is slightly more.
Let’s get back to our calculations. If you can get a 20% gross margin on your wholesale purchases and allocate 15% for overhead costs, your profit is 5% of sales. Doesn’t sound like much, eh? However, just look at how low your risk and investment is to earn that margin. Using the knowledge you’ll gain in this series, you can start an online business with a small investment, which means your risk is low. If you invest $100,000 in a franchise, are you assured of a profit? Of course not. And while online selling is not a sure thing, you’re likely to suffer no greater risk than any other investment. Especially if you do it right!
With a 5% profit margin, to earn $15,000 in monthly profit (before taxes), you’ll need to sell $300,000 worth of goods. That means that by hitting this goal, you now have a $3.6 million/year online business! That also means that if you were to sell your business for a 3X multiple of net profit (we’ve seen multiple as high as 6-8X), you could reap $540,000 (3 times $15,000/month times 12 months). If you initially invested $25,000 toward launching your business, you’ve just made a 2,100% return!
But, getting to $300,000 in monthly sales is not simple or easy. It takes a careful plan, dogged determination and ongoing work. We work with SMB merchants week by week to constantly improve their online profitability. Most clients are surprised just how much it takes to succeed online. However, they all learn to enjoy the fruits of their labors.
In the installment on Marketing, we’ll dive more into the calculations pertaining to sales and market penetration. In the Customers installment, we’ll do the math on Cost of Acquisition, too. The math is not over yet!
For now, let’s calculate just how many sales you’ll need to make each month to reach your goal. If your goal, as in the example above, is $300,000 and you estimate the average order to be $500, then you’ll need to get 600 sales, or roughly 20 each day. From our experience, that is entirely obtainable, but it does depend on what you are selling, the size of the potential market, and your ability to reach the desired customers. And if you set up your store correctly — using the right operational and technology tools — it shouldn’t take much of your time to process and support 20 sales each day.
Competition Breeds Success
Yes, competition is a good thing. If you’re not the competitive type, online commerce may not be for you. Twenty-two years ago, when we built our first client websites, we didn’t even have much competition. As the cost of entry into eCommerce came down over the past 10 years with the advent of low-cost platforms like Shopify and the growth of marketplaces like Etsy and eBay, lots of people like you decided to sell online. Competition has increased.
Competition makes us all do better work. As an eCommerce agency, we have lots of competition, too. We work hard to differentiate ourselves from our competitors, just as you’ll work to be the best merchant in your niche. Like you will in your new store, we offer outstanding support, a high level of expertise, and great outcomes for our clients. Despite the temptation to be more competitive with our rates, we’re actually considering raising our rates, as the demand for our services is continually outpacing our resources. Simple supply and demand.
If you strive to be the best in your niche, you’ll beat your competition. Just as we did with our eCommerce business selling digital dictation equipment, you can add real value to your brand, which translates to more sales and more referrals from satisfied customers. Nothing gives us more pleasure than to have a new client contact us because some other merchant recommended us. Today’s social media (which we’ll discuss in the Marketing installment) can magnify this effect, as well.
Know your competition. Analyze their strengths and weaknesses. Use tools like SimilarWeb to see how strong your online competitors are in terms of popularity and reach. Glean intelligence from your suppliers; they know who the “players” are. List what you think makes the leaders successful. Note their customer service features, policies, pricing and shipping. If most of your competitors offer free shipping, then you should seriously consider it, as well, which means you now have an additional cost to add to your calculations.
Find the Best Suppliers
If you’re making your own products to sell, you are the supplier, of course. For many, however, sourcing products can be a challenging exercise. New online merchants will have the most to overcome, while established brick-and-mortar merchants usually have existing suppliers.
So, if you’re new to selling online, what’s the best way to find suppliers? The key is to find suppliers with whom you can build a level of trust and support, and who will work to give you the pricing you need to be profitable.
For those of you who will be purchasing products to resell on your website — whether you’re selling to consumers, other resellers or businesses — suppliers fall into two basic categories: wholesalers and dropshippers. Which one you use will depend on whether you wish to buy and warehouse your products or forward orders to a distributor to ship directly to your customer. Some will do both.
You’ll generally find that you will get better wholesale pricing and terms if you buy and warehouse your own products. Of course, there’s risk in doing so, as you might end up with a garage full of products that no one wants to buy. However, if you do your homework carefully, you should do just fine. My advice is for you to start small, then work up your inventory as your sales grow and as you learn what your customers want.
To find wholesale distributors, start by contacting the manufacturer or searching for “authorized wholesaler” online. Some manufacturers — particularly in fashion and home furnishings — will sell to you direct. However, for electronics, consumables and other products, you’ll most likely buy from a distributor.
To locate potential dropshippers, search Google. Yes, there are so-called dropshipper directories, but we have found many to have out-of-date information or aggregators that appear to connect you with dropshippers, but, in fact, add on a percentage to the items you buy. As with wholesalers, you can also contact manufacturers. In fact, many wholesalers also have dropshipping programs. Just know that some manufacturers will not allow dropshipping. Since there is no “skin in the game” for the reseller — you — customers are often left unsatisfied by merchants who don’t provide great customer service. I know that’s not you, of course.
Many online merchants are flocking to AliExpress, too, for sourcing products made and shipped from China. I’ve been doing a bit of research on this, and I’m finding it very challenging to source products at wholesale prices that make sense. I’m still evaluating this source, though, so look for future posts summarizing my findings. Doba and others like it have spotty reputations, particularly in terms of prices.
My best advice is to find authorized wholesalers who have a dropshipping program. It takes more work, but the results are much better.
One last resource. Although this is not common, if you’re going to sell products you normally purchase for your own use from a local brick-and-mortar store, find out if they sell online. If not, see if they will work with you to allow you to sell their products on your store. A local retailer already has inventory, and as they’re local, you could establish a strong working relationship that could benefit you both!
Analyze Potential Suppliers
As strange as it may seem, there are many manufacturers and distributors who do little or nothing to help online retailers. There’s a mistaken belief that by supporting qualified eCommerce merchants, a supplier’s brick-and-mortar resellers will be cannibalized. And nothing could be further from the truth!
However, you’re not going to change their minds about this any time soon. (I’ll have more to say on this outside of this series; let’s stick to the practical for now.)
As you research possible supply sources, record your impressions for each of the following criteria:
- Can they sell to you at a price that gives you sufficient margin at reasonably competitive prices? Remember, you don’t have to always be the lowest price, but you can’t always be the highest, either.
- Does the manufacturer enforce MAP pricing? MAP stands for Minimum Advertised Price. If a manufacturer requires all resellers to publicize the same price for an item, then you have the ability to compete on service and presentation — two things of which you have control. Plus, your gross margins will be protected against price erosion.
- Will the supplier drop ship to your customers? If not, what are the minimum wholesale purchase requires? If they do drop ship, do they charge additional handling and processing fees for each order?
- By what means will they communicate product information and availability to you? Do they have integrated tools that you can use to automatically pull availability into your store?
- Will the supplier provide high-definition product photos and supporting collateral? While, as we discuss later in this installment, you should compose your own product descriptions (and do your own photography, if possible), you need to have as much information about the products as possible in order to truly be an expert on what you sell.
- And, finally, what is the returns and warranty policies should you or your customers receive damaged goods? Are there any re-stocking fees?
How to Approach Suppliers
Once you’ve identified potential suppliers, it’s time to approach them and gain their approval for your business model. If you don’t already have an online storefront, it’s more difficult to be sure. Without a supplier understanding your brand position and the quality of how you’ll be selling their products, many will balk, especially if they have to get a manufacturer’s approval to sell to you (this is more common than you might imagine, but well worth getting).
I would suggest you construct a brief, but professional business overview document — preferably a PDF you can email or print. In a few pages, include the following sections:
- Your selling objectives and goals. Be specific, too. If you intend to grow to $1 million in annualized sales with one year, state that. Don’t overreach, of course, but show the supplier that you have a goal.
- Your brand. Define what you will represent to customers. Explain your domain or company name, and how you will build value and trust with customers.
- Your marketing plan. Give a high level overview of how you intend to sell. Don’t be too specific, as you don’t want to disclose all your ideas! However, demonstrate that you have a budget to spend, and that you’re going to work to build loyal customers.
- Your fulfillment plan. Outline how you will be processing orders and making sure customers get their products on time. If you’re approaching a dropshipping distributor, state your expectations.
- Your technology. Once you complete this series, you’ll be able to summarize your technology “stack” as it’s called. Build confidence in your supplier that you have embraced the best-of-breed solutions.
- Your team. Finally, include bios on yourself and other key members of your team. If you’re engaging an agency, such as novusweb, include their information. Distributors want to know that they’re working with professionals who are approaching eCommerce with expertise and commitment.
Finally, ask for a telephone conference call with those at the wholesaler who will make the final determination. Insist on it. Let them know that you’re not “fishing” for approvals, but that you’re also interviewing potential suppliers to make sure the fit is mutual. Include your eCommerce agency or consultants on the call, as well, to let the supplier know you mean business!
Price to Sell
Pricing is perhaps one of the most challenging aspects of managing your products. As I’ve said before, you want to be competitive, but you want to make a profit, too.
If the manufacturer of your products has a MAP policy, your pricing worries are considerably reduced. If the maker of the widget you’re selling says that everyone must advertise it for $99.99, then you know you can’t be undercut by your competition. However, you do have to be vigilant, as manufacturers don’t always enforce MAP pricing equally — or at all. In some cases, you’ll find that while everyone must advertise the widget for $99, some crafty resellers will add on cheap accessories so it appears that the customer is getting more value by paying $99 with your competitor.
Just on Amazon yesterday, I was looking at the new Mavic Pro Platinum drone. The prices for the drone were all within a few dollars of each other, but some resellers loaded up the package with extra batteries, carrying cases, and other items not manufactured by DJI, but which cost the reseller very little. This doesn’t impress me as a buyer. If you carefully read the reviews (and you have to dig through them to find the legit ones), you’ll find that most buyers weren’t impressed by the add-ons. If I’m going to spend $1,400 for a drone, I want a seller who is making enough on the purchase to provide great support should I need it.
Of course, if you’re buying a $10 pack of AAA batteries, the buying decision is different.
Is Price the Most Important Consideration?
One of the best articles I’ve read online regarding how much consumers value price over all other matters is one from Inc. magazine. Not only does this article show research that consumers value brand as much as price, it references some great advice by Ted Ammon of Hubspot. It’s all about building trust:
- Be transparent. Let your customer know all about you. Your contact information, your policies, your shipping costs — everything. Make it clear and upfront. Don’t let anyone be surprised at checkout, or they’ll leave in a hurry.
- Don’t always be closing. Teach your customers how to select and use your products. I needed to buy a trailer hitch for our SUV a few years ago. While etrailer.com is not the prettiest site on the Internet, what impressed me enough to buy from them was that they had installation videos for just about any make and model of vehicle! I was able to see just how easy (or difficult) it might be for me to install the hitch myself. After buying, I also got a very nice email from their CEO thanking me for the purchase and inviting me to contact her anytime. This was in addition to the emailed invoice receipt.
- Discuss competitors. Don’t be afraid to compare your products and your company to your competitors. “Won’t that give your customers ideas on where else to shop?” Google already does that for you. You can’t hide your competitors from your customers. Instead, point out the differences. You might even show up in higher Google results when people search for your competitors!
- Request reviews and ask for questions. Later in this series we’ll discuss the value and process of gathering reviews, but you should never be shy about aggressively asking for reviews. Even if you have to provide some incentive, reviews — good or bad — help you! Even bad reviews are good. Yes, that’s right, bad reviews can be good. You’ll never satisfy everyone all the time. But, you’ll gain real brand value if you quickly address any bad reviews and make it right for the customer. Add the actions you took to your response to the review and new customers will see that even if things go wrong, you’re there to help. Incredibly valuable!
- Show your understanding. Create your content — your product descriptions, blogs and help pages — for your specific audience. If you’re selling to high-end audiophiles, a speaker description that reads “Sounds great when playing music” isn’t going to cut it. “These speakers have excellent reproduction of sound above 10,000 Hz, with less than a 0.1 dB distortion” speaks more to the kind of customers who would appreciate spending $1,000 or more for a speaker.
- Establish yourself as an expert. I’ve covered this before, and it’s worth saying again: you be the online expert on the products you sell. Demonstrate in everything you do that you know more about your products than any other online merchant. Regularly post blog reviews — honest reviews — of your products. Point out the good and the bad. Experts don’t shy away from honest appraisals, and neither should you.
- Address their pain points. In other words, solve their problems. Is your customer looking for wiper blades? Instead of just listing several brands — of which the buyer is most likely going to pick the least expensive — provide content to help them understand the differences between the brands. Ask them the kind of weather conditions and driving habits they may encounter and propose the right blade to meet their needs. Suggest reasonable add-ons, such as rain-repellent windshield washer fluid or wind deflectors. You’ll see the payoff as your average order values increase.
Do online coupons or discounts work?
That’s an excellent question, but the answer is that it really depends on your products and your shoppers. Unfortunately, we see time after time well-meaning merchants trying to leverage discounts in all the wrong ways.
Have you ever gone to a site that immediately asks for your email address in order to receive a discount on your first purchase? How annoying is that? I’m not going to give up my personal email address until I know a bit more about the merchant. If you had a physical store, how would your customers appreciate being accosted before they even walked in the door and asked to give up their phone number or email address? I suspect many would turn around and get back into their cars.
Discount codes can be an important tool, but in my opinion they should be used to reward certain behaviors:
- Give a discount to previous customers who have not returned to your store in the past 6 months.
- Reward shoppers who submit a review.
- Provide a discount for sharing their purchase on their Facebook page.
- Use a discount to encourage someone who abandoned the checkout process to return and complete their order.
Otherwise, if you’re willing to provide a discount code to anyone who visits your online store, then discount your prices! Show the red slash through the list price, with the new, lower price in large type. Use countdown timers and other promotions to encourage sales, but don’t rely on customers to remember a discount code when they check out. If they’ve lost the email or can’t remember the code, they’ll feel cheated and they will leave.
If you want to provide a discount to a first-time customer, there are nifty, inexpensive promotion tools, such as OptinMonster, that can display banners on your site to first-time visitors letting them know they can get a discount. By having this banner throughout your store, you’re more likely to get the sale then if you hit them with an immediate pop-up that, once dismissed, they’ll never see again.
Really Sell Your Products
Once you’ve sourced your products, you really, really have to invest time and, perhaps, money in product presentation. High-definition photography, video demonstrations, creative copy and more will all contribute tangibly to your selling success.
Let me put it another way: you can never provide too much quality information to your shoppers. Think of it this way: if you go into a store to buy an item — let’s say a new HD television — you expect the store personnel to be incredibly knowledgeable about the product if you have any questions. You’d like intelligent comparisons of the models offered. You want to be able to not only see how great the picture looks, but, if you’re like me, you want to see the back side, to see the various connections. You may need advice on how to hang the unit on your living room wall, too. And, even if you don’t ask all the questions or need all the help, you, as a shopper, certainly appreciate having it available.
For a moment, I’m going to get on my soap box here. Traditional retailers are constantly lamenting the decline of in-store sales in the press. Long-time stalwarts, such as JCPenney’s and Sears are struggling. Why? Because a couple of decades ago they decided to phase out commissioned sales people and hire hourly floor workers. In the old days, a salesperson “owned” their department. They knew everything about every product in their section. Doing so helped improve their sales and, in turn, their income. Today’s department stores have centralized cashiers and minimum wage employees simply stocking shelves and providing unenthusiastic help when asked. And if you’ve recently asked any detailed questions, you were most likely underwhelmed by the answer.
This is where you, as an online retailer, have an advantage. You can provide incredible service and information to your customers. You can answer their questions. You can be the resident expert on the products you sell.
You just have to be committed to doing so.
As you begin to prepare for presenting you products, I suggest the following:
- Create a shared disk, such as Google Drive or DropBox, to store your product images and content. Create folders for each product so you can easily find the information you need.
- Setup a photography area in your home or office to create your own product photographs. There are many low-cost “lightboxes” you can buy for smaller items. These provide excellent lighting. Shoot on a white background, particularly if you’re going to sell on Amazon, as they require this.
- Learn your products. Know how to use them. And in the process, create demonstration videos. These can be shot with your smartphone and uploaded to YouTube. By creating a YouTube channel for your business, you can also attract customers who are looking for “how-to” videos.
- Add How-To content to your site. Where appropriate, create content explaining how to select and use the products you sell. Educate your buyer and they’ll become better buyers.
This is the second of our Series. If you’d like to receive updates as future installments are released, subscribe now.