As discussed above the metrics you will look for when doing product research will vary greatly depending on where/how you will be selling your product. I’m going to tailor this discussion with the assumption that you are going to start with selling products on your own website (as I mentioned above, I think this is the best approach for most new business owners).
If you want to start with Amazon, or hear what I look for when doing product research for Amazon, I will include this is an Amazon specific section further down the book. But for now we will focus on the selling on your own website approach.
When selling on your own site, there are again 2 different methods you can choose to drive new customers to your site: paid or organic. Paid refers to purchasing advertising space on platforms such as Facebook, Instagram and Google to promote your website. Or, paying influencers to promote your product and website for you. These paid methods will drive awareness, traffic, and hopefully sales to your site. Organic acquistion refers to the practice of ranking your site organically in search for certain keywords (whether that’s Google, Bing, Yahoo, etc). To do this you would create content on your website that is optimized for a certain keywords, with the hopes of ranking within the top 10 search results for that keyword. Then, when someone googles that keyword, they would see your site in the search results, click it, and hopefully buy something.
I wanted to make this distinction between paid and organic methods clear before talking about product metrics to look for, because, depending on your traffic strategy, you will have different flexibility in how you price your offer.
If your customer acquisition strategy is focused on driving paid traffic to your website (paid acquisition strategy), then generally speaking you need larger margins built into your product retail price so you can afford to spend money on ads or influencers, while still leaving profits for your business. I say ‘generally speaking’ because organic methods can also cost a lot of money to implement, depending on your strategy. If you do the SEO work yourself, like keyword research, writing blog posts, etc, then you can do it for free (it will just take a lot of work on your part). If you choose to hire third party agencies to do all of your SEO work then it’s easy to spend a lot of money on this method as well.
Assuming you are okay putting in the long hours to learn SEO and rank your website high in organic search by yourself, then you will essentially be getting free traffic from people finding your page organically. In that case you do not have to factor in the cost of advertising in your sales price, so you can generally operate with lower gross margins on your products.
But in this section I want to focus on winning product metrics, based on a paid customer acquisition strategy. I feel this scenario is more common, has more potential for new owners, and is often more misunderstood. It’s very common for new business owners to not give themselves enough margin to dedicate to paid advertising when selecting and pricing their product. This is just setting yourself up for failure out of the gate.
So let’s talk about what a healthy price point and gross margin looks like for a paid customer acquisition strategy:
- If your product is a one-time purchase (in other words, it’s not a consumable that people will keep coming back and buying again and again), then I recommend a product price of no less than $50 USD. If you are going to be running Facebook/Instagram, or other online ads with the goal to be profitable as fast as possible, then I recommend keeping your price below $150. Above $150 is certainly possible to make work, but it starts to leave the realm of an impulse purchase, which means longer sales cycles and worse for cash flow. If you game plan is to convert cold traffic (people who have never seen you before and a served an ad) profitably, then I would look for products you can sell in the range of $50-$150. Side note: Converting cold traffic into profitable customers is commonly known as Direct Response Advertising or Performance Advertising. It’s advertising with the goal to make a profitable sale on customers who may have only seen your ad once and never heard of you before that.
- Assuming your product is a one-time purchase item in the range of $50-$150, then I recommend a 3x markup on your landed cost. Landed cost is the total cost it will be to manufacture, and ship your product to your customers doorstep. This includes manufacturing cost, logistics cost to send it to your warehouse, and shipping costs to send from your warehouse to your customers home. If that landed cost is $20, then you should aim to sell your product for ~3 times that amount, so $60. That leaves $40 gross margin for you to play with, at least half of which will realistically go to advertising. Let’s say that your average customer acquisition cost is $30 for this example, so that would leave you $10 net profit per sale. Of course, your ability to acquire customers for $30 is still a big question mark, and one you will not know the answer to until you launch the product.
- If your product is a consumable, then you need to estimate how many times the average customer will come back to purchase the product again. In other words, you need to figure out the Average Lifetime Value of your customer. You need to know this number because it will change how much you can afford to pay to acquire a customer. Most brands that sell consumables actually lose money on their customer acquisition, because they know that customer will come back and they will make money over the long term. For example, if you sell a supplement for $40, and your landed cost is $20, that only leaves you $20 gross margin per sale. Now let’s say your customer acquisition cost is also $40. That means that the customer you acquire for $40 must make 2 purchases from you for you to break even on that customer acquisition, and any customer that purchases more than twice is where you will profit. If the average customer purchased 3 times over their lifetime in this example, each custom acqusition would net you $20 profit per sale on average. Of course, it will take longer for you to receive that $20 into your bank account, which is why consumable based brands typically struggle with cashflow more than one-time purchase brands. It’s always better to be profitable from day 1 if possible. It’s also very difficult to estimate what your average customer lifetime value will be without having data, which can add an extra level of risk for these types of business models.
- If your product is a one-time purchase over $150, then you will have more flexibility to price lower than 3x your landed cost. I would still recommend at least 2x your landed cost for any brand, but between 2-3 for higher ticket products seems to be the sweet spot. I have less experience with high ticket products personally, as I’ve always stayed within the impulse buy area. But If I were selling a high ticket product for between $150-$1000 I would stick to around 2-2.5x the landed cost. That seems about the right spot from my perspective. It should leave enough profit margins for your to advertise your products, which will be expensive by the way, because it’s unlikely customers will purchase on first touch point. You will have to keep re-marketing to them over and over with paid ads to eventually get them to cave and purchase. Which also makes this harder from a cashflow perspective, in the sense you need to invest more money into customer acquisition before you finally land the sale.
So those are my opinions on price points and gross margins for product research. Keeping these price points in the back of your mind during product research will be very helpful. Because finding an exciting, problem solving product is important, but if that product does not have the margins to support your customer acquisition strategy it will not work, no matter how great the product is.
As you look at new products you should constantly ask yourself: how much money will it cost to land this product to the customer, and can I realistically charge 3x the cost for this product? This is the first criteria you should screen new potential products against.
Of course, finding a winning product is not just about having healthy margins, it’s also about the product itself. Here are the things you should look for when trying to find a product you can sell via direct response marketing on Facebook, Instagram, Google, etc.:
- Does the product solve a problem or improve quality of life? Problems that solve a common problem always lend themselves well to a direct response marketing approach. Ideally it will solve an immediate problem or pain point for your target market. For example, selling a posture corrector to people with back pain is solving an immediate problem that they are currently experiencing. Contrast this with selling an emergency hurricane kit that will only be useful if and when the next hurricane strikes. This emergency kit is still solving a problem, but it’s not an immediate/current problem, and therefore would be harder to convince people to impulse buy on first touch point.
- Does the product have a high perceived value? In other words, can you realistically sell the product for 3x the cost it costs you to land it to your customer. As talked about above, this is important.
- Does the product have a large target market? The wider the target market and the less niched down the better when it comes to paid advertising. You will find you pay less to advertise to broader audiences, and your business potential to scale is also much greater if your product has a broad mass appeal.
- Is the product easy to ship? You have to consider your entire supply chain when looking at potential products to sell. If you are sourcing in China, which most brands do, then you have to consider if you will warehouse and ship your product direct from China to your customers, or warehouse locally. Warehousing and shipping directly from China is actually a very do-able strategy today, as there are many professional 3PLs in China that can offer competitive shipping rates with fast and reliable service. But, from my experience, this strategy only really makes sense if your product is less than about 2 pounds in shipping weight. If you have a heavy product, then warehousing domestically may be the only way. Warehousing domestically comes with a lot of challenges cashflow wise, because now you have to wait weeks or months for your product to arrive to your local warehouse before you can start selling it. Cashflow can be one of the hardest things for a boot-strapped ecommerce business, so it’s definitely important to factory these supply chain decisions in when trying to pick your product.
- Is the product unique, new, or hard to find in traditional stores? These types of products that people have not seen before always lend themselves better to a direct response style marketing approach. The reason is that they grab attention and make people stop scrolling to check out what the product is. Grabbing attention is the name of the game for social media advertising. If you have a boring product that people saw a 100 times before, it will not work for you.
- Are there competitors doing well with the product? If you are drop shipping or private labeling an existing product than finding competitors already selling the product and examining how they are doing is a great way to validate a new product idea. You can look at things like their social media following, or even get website traffic reports using tools like SimilarWeb. Even if you are launching a brand new product, chances are there are similar products already out there, so evaluating your competitors is a great way to validate market demand.
- Is the product ever green? This means, does it go through natural sales cycles, or is demand more or less consistent over time, and will it remain consistent for the foreseeable future. A good example of a non-ever green product are pool inflatables. Demand may be high in the summer, but drop off suddenly come fall/winter. So this is something to keep in mind as well during product research.
Your product does not have to tick all of the above boxes, however the more you can tick the more likely it should be to succeed via a direct response/paid marketing approach.
There is also something to be said about creating barriers to entry. If the product you select is one you can easily source on AliExpress after 2 minutes of work, that means your competitors can also source your product quickly and easily. These types of products tend to become saturated quickly once they catch on in popularity. If your goal is to build a brand that will last for many years, I’d recommend thinking about barriers you can set up to keep people out of your market. This may not necessarily be a patent (which is what often comes to mind). It be something like setting up a unique or cost effective supply chain for a heavy product. Or finding a unique product outside of the typical drop shipping sourcing websites like Aliexpress. Or creating a unique aspect of your product, like a digital PDF that goes with it, to help differentiate it from other competitors. Think of this as setting up moats outside your castle to keep people out. These are also things you should think about during product research.