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I want to start an eCommerce business but I don’t what to sell. A far to common problem.

As an eCommerce site owner and consultant, one of my primary job functions is to evaluate products for their earning potential and deciding which products to sell and which to avoid. As part of running a very lean eCommerce business I often have to decide weather or not a product can be profitable based on a minimum amount of information and as part or using an MVP (minimum viable product) business model, I’m bound by a number of constraints, mainly:

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  • I don’t want to invest a lot of money to test the viability and earning potential of a product
  • I can’t risk ordering large quantities without first having product validation.
  • I want to be sure that there’s enough demand for the product before I order it and that the market is not over saturated with suppliers.

Here are the 5 five factors I use to evaluate the earning potential for a product based on the MVP business model:

#1- Cost to acquire product

As part of building an eCommerce business using the MVP model,  my goal is to keep expenses to a bare minimum. I don’t want to make any large or risky investments and I’m only interested in selling products that I can purchase from suppliers inexpensively and in small quantities.  I’ll only consider products that cost less than $100/unit to acquire.  Anything in excess of that and I ‘ll need approval from the board of directors (i.e. my wife and kids).

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In addition, I only want a product that will yield me a 50% return on investment (ROI) meaning if it costs me $50 to purchase, I need to be able to sell the prodcuct for at least $75 (more on this later).

#2- Demand

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There’e more to evaluating demand than just reading the numbers. Cell phones, T-Shirts and Electronics are products that are in very high demand but they’re also in a very saturated market which inevitably makes them difficult to sell.

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I find that the best (and easiest) products to sell are the ones that have a very targeted audience (i.e. a niche). Niche products tend to have less demand but also far less competition making them easier and more profitable to sell. Generally speaking, I target products that have between 1,500 to 5,000 searches a month. 

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To do a quick product demand analysis I use KWfinder which is similar to Google’s Key Word Planner.

Here’s exactly what I do:

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For the purposes of this example, I’m considering selling Yoga Pants.

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Using KWfinder, I generate a report for yoga pants and find that on average 368,000 people search for that term every month. That doesn’t mean that everyone who searches for Yoga pants is a potential customer but it does give me an idea as to the popularity of the category.

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Next I try to identify a niche category within the search query.  Immediately a couple of products stick out, maternity and plus size yoga pants. Each have an approximate search volume of around 3,000.

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Keyword research on KW finder

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Ok, I may have something here. At the very least, these products merit further investigation.

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  • 3,000 monthly searches fits my criteria for monthly search volume
  • Cost of acquisition should be very low (Suppliers on Alibaba are selling yoga pants for less than $5/pc)
  • Yoga pants aren’t a niche product, but Maternity and plus size yoga pants are.
  • I can probably find a deeper niche if I sell maternity yoga pants made with organic materials!

#3- Size

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If it doesn’t fit in a shoe box, I don’t want to sell it. Why? Simply put, shipping is a pain!

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I need to know exactly how much it’ll cost me to ship the product. That’s not easy to figure out if I don’t have it in front of me. Also, shipping costs vary depending on a number of factors including, size, weight and distance the package is traveling. In addition, I don’t have to have to buy special packaging and I don’t want to have to worry about storage space.

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What I want is a product that’s really easy to send at a flat rate. That way I know exactly how much I’m paying for shipping and I can incorporate it in to my selling price.

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USPS (United States Postal Service) offers flat rate priority mail shipping for around $12-$15 as long as the items fit in their box (the box is free).

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USPS shipping options

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USPS also offers first class shipping which is their most basic and economical service. If the package weights less than 12 oz, they’ll ship it at a discounted rate; so a package that would cost $12 to send by priority mail will only cost $4 to send by first class mail.

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Knowing the shipping costs ahead of time will save me a lot of time and headaches so  I always make sure that whatever I’m selling in an MVP business is able to be shipped quickly and efficiently. Most products that fit in a shoe box will fall under this category.

 

#4- Customer Acquisition Cost (CAC) and ROI

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At the beginning of this post I said that I only want to sell a product that yields a 50% Return on investment (ROI).  ROI is calculated as the ratio of profits to expenses.

ROI = Profits / Expenses

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and profits are calculated as the selling price less the sum of all expenses.

Profits = Selling Price – ∑Expenses

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In a perfect world I’ll buy a product for $50 and sell it for a $100 to give me a $50 profit or 100% ROI. In reality, it’s not that simple. Without a large following or an established brand, I know I’ll have to spend a little bit of money on advertising to promote my products and get traffic to my site.

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Advertising is an expense and it takes away from my profit margin.  How much I spend to acquire a customer through advertising or any other method is called the customer acquisition cost or CAC.

CAC = ∑expenses to acquire a customer

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For example, if I buy a product for $50 and sell it for a $100 BUT I also spend $20 on pay per click advertising and I offer a $5 discount code, then my CAC is $20 + $5 = $25. And now my profit is:

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Profit = $100 – ($50 + $25) = $25

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It’s really important for me to have an idea as to the expected CAC costs BEFORE I invest in a product because the last thing I want is a product that can generate a ton of revenue but very little profit. That’s why electronics are such terrible products to sell.

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Continuing my investigation of maternity yoga pants, I’ve already established that cost to acquire the product is very low, around $5/pc. And there’s enough demand and I can ship it for under $5 using first class USPS mail.

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On the surface everything is looking good BUT now I need to know how much I’ll have to spend on advertising to bring customers to my site.  Using the KW finder tool, I see that the CPC (cost per click) for “maternity yoga pants” is $1.50. Now that’s a very broad keyword and it’s safe to say I’ll be able to lower my CPC by finding some long tail key words and optimizing my landing page.  So I’ll assume that I’ll only pay $1 per click.

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KW Finder Search Results

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Since I’m an experienced Google AdWords user, I’ll target a 4% conversion rate meaning I expect one sale for every 25 visits to my site from my ads.  From this I can calculate my expected CAC, Profits and ROI.

*Based on a quick competitor analysis, I feel $45 is a reasonable selling price.

Expected CAC = $1 x 25 = $25

Profit = $45 – ($5 + $25) = $15

ROI = $15/$30 = 50%

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Hey look at that, even with advertising, my ROI is still 50%. Maternity Yoga pants are looking promising!

#5- Content

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Even though paid advertisements are a quick and efficient way to get qualified sales leads, my long term goal is to minimize CAC by reducing my ad-spend and focusing on getting sales through organic search, social media and content marketing. In order to that I need to be able to create content that people will want to read, watch and share.

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Good content isn’t about self promotion. No one wants to read about the benefits of my product or about my up coming sale. Good content is about giving the reader value. If I’m going to sell Maternity Yoga pants then there are number ways I can create valuable content. I can offer tips on doing yoga while pregnant. I can interview a teacher, write a review on a yoga studio, create a cool graphic, partner with a YouTube star. I can create a Facebook community and share product pictures on Instagram and Pinterest.

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I can do all this, because it’s pretty easy to create content about Yoga. But other product categories may not be as accessible to fresh and unique content. I mean how much can you talk about shoe racks or hubcaps?