The first and most important thing that you need to determine when starting your eCommerce business is determining your niche / product / design component. After all, as you can imagine, if you don’t have a product, then none of the other pieces will matter at all.
This is where most people fail. They fail to think about this topic, or they fail to come up with a good idea. It doesn’t matter what your product is, if it is digital or physical, dropship or inventory, inexpensive or very pricey. You don’t have to start a store with hundreds or even dozens of products, especially if you’re launching your own brand of something. Hell, maybe you only have one product in your store. As long as it meets certain criteria, you will get a green light to move on to the next step.
What criteria is that, exactly? Well… you probably already know if you think about it, but I’ll list them anyway. But before I do, ask yourself this question… what criteria would a product have to meet in order for you to buy it? It’s not really any different when determining your own products to sell.
Are you selling a product that many other people are also selling (a commodity)?
Does the product solve a problem or provide perceived value in some way?
Is there appeal to the product that makes it different to other competitive products that exist in the market?
Can you source this product or manufacture the product yourself?
At what price would selling this product allow you to operate profitably?
Is there a market for your product at the price that you’ve selected?
You need answers to all of these questions, and you need to answer yes to questions 2, 3, 4 and 6. Otherwise, you need to start over with your product selection. We’ll dig a little deeper into each of these items to help ensure that you are making good product decisions before getting too deep into each, as well as offering some advice along the way.
First of all, are you selling a product that other people are selling? If so, be prepared for an entirely different set of obstacles that you will face in your eCommerce business.
If anything, know this – competition is fierce in eCommerce. Unless you are buying large quantities and carrying that inventory (and risk), there is a very good chance that others out there are able to get the same products that you are selling at a lower price than you are paying. If you are trying to sell products that you found on a dropshipping site, know that there are dozens of other people trying to do the same thing.
And even if you are getting the products at the same price, know that there are some people out there who are likely willing to sell those products to customers for less than you might be willing to sell them. It may sound strange, but there are stores out there who are willing to sell their products for a tiny margin, or in some cases at a loss. One example is Chewy.com, who sells a lot of pet products for less than they buy them for, as part of their customer acquisition strategy, and they often times will sell products at such a low price that pet retailers buy those products from them instead of from their own suppliers because the pricing is better than they can get at cost. Chewy.com was recently sold for something like a billion dollars, and is not profitable. So be prepared to have competitors who don’t have the same goals that you might. Even individuals selling items using a dropshipper won’t try to make a profit doing so. They may work to just break even, so they can get decent sales and pitch solid revenue numbers in an attempt to sell the site. Revenue means nothing if there is no profit behind it, but not everyone realizes that. Just remember, not everyone is in eCommerce for the same reason you are. Yet that is your competition.
However, if you have your own brand or product that others don’t sell and can’t sell, you will have a lot more flexibility with your pricing, margins, and a much easier time in convincing customers of your value proposition. It is much easier to tell the story of why your product is better than a competitor’s product than it is to convince a customer to buy a product from you when they can get that same exact item shipped to them for free in two days using Amazon Prime at a price much lower than you’re offering.
The second question that you need to have a yes answer to is “Does your product provide value to a customer”?
This can be a tough question to answer, especially if you are starting your own brand, but a little market research can go a long way to help understand perceived value. I don’t want to cause confusion by adding the word “perceived” in there, as you should always strive to offer quality products at a fair price, which meets the value component. It is important that your price is in line with what customers would pay. If you’re selling something that other people are selling, it is important to know that most consumers have little to no retailer loyalty nowadays (nor should they). If you are going to buy something available in multiple places, you are most likely going to buy it where you pay the least. If you’re going to pay more, there needs to be some value related reason to do so (better shipping option, unique design, trustworthy retailer, positive ratings / reviews, etc).
But I did mention perceived value in my original question. Perceived value is a little different in that customers are often willing to pay a premium for something that has a bit higher perceived value than it really has. For example, I recently left a company that sold a lot of t-shirts. Most tees cost about the same amount of money, with basic cheap tees costing around $3 to make and more premium quality tees costing around $7. Most of the ones that we sold were somewhere in the middle, and we sold them for $24 each. But we had one line that we said were “limited edition” and that there were only 500 of them available. Therefore, we charged about $4 more per shirt for these shirts compared to our other tees, even though they cost us exactly the same to make as the others (sometimes less, as they were usually one-color print designs, which costs less to make). And in reality, we usually made (and sold) less than 500 of the other tees. But we never disclosed how many we sold, and we kept open the option to print more of the others if they happened to be big sellers, so there was no scarcity model in place for them. Simply putting a “limited edition” tag on something, and using the scarcity model to drive demand, customers were willing to pay more for those shirts than the other shirts in the store. We’ll talk more about the scarcity model in a later article.
For question number three, I would ask if there is some appeal to the product that makes it different to other competitive products that exist in the market?
In general, you need to identify your value proposition for your product or brand. What exactly makes you unique or is going to make your business successful? Are you trying to have the best quality product and sell it for a premium? Are you able to operate with less overhead and lower margins, and offer the best prices on common products? Do you have your own brand and / or a unique product that would allow you to completely set the standard for pricing because customers demand the product and can’t get it anywhere else? Whatever your answer is, make sure that you can identify something that will make you different than somebody else. If you’re planning on pulling in a bunch of drop-shippable products from AliExpress or Oberlo, put them on some basic out of the box Shopify theme and try to sell them at the same prices as other people, I would probably tell you to not waste your time or money. The only exception to that would be if you are an expert marketer with enough money to market your site incredibly well. And if you are, then you’d be much better off with a different model for your business. I’ll be covering the pros and cons of drop-shipping in a later article.
The fourth question is one that you absolutely must have figured out before you can do anything else. Can you source this product or manufacture the product yourself?
Once you’ve decided on a product to sell, you need to figure out where you are going to get the actual products to sell. Is this a DIY home craft that you make yourself in your spare bedroom, and if so, is that scalable if your business takes off and you need more product than you can make? Do you need to find a manufacturer who can take your design and make the product? If you find that manufacturer and they are overseas, how do you ensure quality is what you expected. What is the minimum number of products that you can order from this factory (MOQ)? How many products do you realistically expect to sell? What is the cost per unit? How will you ship the products to yourself? How long does it take for the products to arrive? How do you deal with customs? These are all important questions that you may need answers. Really, unless you are trying to have your factory dropship the item directly to your customers, these are things that you absolutely must figure out before you can be open for business.
Side note – you can rely on us to help with these things if you have questions. We’ve dealt with many factories of our own for many years, and we know everything there is to know about manufacturing and importing of products. If you need assistance, drop a note in the forum and we’ll be happy to help.
Fifth question for you to answer… at what price would selling this product allow you to operate profitably?
This isn’t a question with an easy answer. You really need to know what your business expenses are, and cost of goods sold (COGS) so that you can determine your target profit margin per product. Then you need to do some market analysis to determine what price range your competitors are charging for a similar product. Don’t drop your price to match a competitor if doing so will take you below the profit margin that you need to reach. If you aren’t able to drop your price, then rather look to reduce your costs. This might mean ordering in larger quantities to get a lower per unit cost (while increasing risk in case you aren’t able to sell that extra inventory).
You need to make sure that you’re properly forecasting your total expenses, however. If you’re using Shopify, you need to account for the cost of your monthly plan. You should account for your payment processing fees of 2.x% + $.30 per order. If you’re using something like Quickbooks to manage your bookkeeping expenses, make sure that you’re accounting for that. And don’t forget about domain fees, hosting fees, Shopify apps, other tools, as well as trademarks, other legal expenses, utilities, etc. And of course, from a product perspective, you will probably need to pay for product samples, inventory and shipping of the product to you (unless you’re dropshipping, which will be covered in more detail later). If you have a staff or team of people, you will need to account for their wages and other costs.
And of course you need to allocate a certain amount of money to marketing expenses. One good way to do this is to determine what you think a fair amount to pay per conversion, and then track this closely with your ad tracking using whatever analytics tool you are using. If you allow $5 per conversion, then it is very important that you monitor your ad spend to make sure that you are getting on average one conversion (sale) for every $5 you are spending in advertising. Track this per place you spend (Facebook, Google, etc) and eliminate any ads that aren’t performing to this metric. We’ll talk more about marketing in one of our upcoming posts, but for now it is important to set your budget and forecast what you think are reasonable sales. Sitting back and hoping for sales is the best way to ensure failure. You need a rock-solid plan if you want to be successful.
Finally, the last question that you need to answer with a yes – is there a market for your product at the price that you’ve selected?
If you’ve done all of your planning, and you’ve landed on selling a $100 t-shirt with no real justification for someone to buy a $100 t-shirt, then you don’t have a market for your product and you should find something else to sell. While that may be an extreme example, if you aren’t able to sell items for a price that makes sense to customers, and aren’t able to give customers a reason why your product is worth the price you’ve set, then you will fail. People ask me all the time about why their product gets views but no conversions, and what can they do to improve their conversion rate. Most of the time I tell them that their product is overpriced, or not a good product at all. There may be no market for the item at any price, and if that’s the case then there is definitely not a market at the price they are selling it at. The #1 reason for a bad conversion rate is price being too high. There are lots of reasons, but the world’s greatest checkout flow wouldn’t help you convert a bad product at a high price.
So these are a few of the things that you will need to ask yourself if you’re serious about starting an eCommerce business. Of course, it’s impossible to answer every question you might have in an article like this. In those cases, leave a question in the comments here, or better yet, here in the eCommerce forums that we’re starting out, where others who likely have the same question can benefit from the conversation.
And as always, we’d love for you to join the private community and receive full access to Launch Commerce, where you can talk with other eCommerce professionals and lean on an eCommerce professional with 20 years of experience for advice (me).
[optin-cat id=13228]Tags: Beginner Research