If you have a passion or a product already in mind, this will help you decide whether the market you go into will be profitable or not. Also, the following content will help you avoid spending months or years building a business in a market that's not going to be profitable.
In addition, this article will share tips for choosing the right e-commerce market for you. Remember that there is no perfect answer; every business is different, and you may have to experiment to find the right fit. But these tips should help you get started on the right foot.
Market Research
Why is research so important? Because if you sell in an over-saturated and hyper-competitive market, you will be fighting an uphill battle. So how do you determine which market is right for you?Start by asking questions about your product ideas concerning the target customer. What are their needs and wants? How do your products meet their needs? Are there existing products meeting these needs? If so, where does your product stand regarding value and differentiation in the marketplace?
To help you understand these concepts better, I’ll created a scenario and I’ll walk through each step in this thought experiment.
Case Study
Keeping it consistent with the salt and pepper grinder set concept from the first chapter (Strategy), let's say I want to introduce a new set of pepper grinders for the Amazon marketplace. First, I go to Amazon.com and punch in the search term most relevant to my product idea, and a list of existing products will populate the screen.
Now let’s get into the competitive analysis part. Are there existing products meeting these needs? Yes, with abundance. From a glance without any data analytics, I can tell 1) there are entrenched product offerings due to the review counts on some of the listings. From the review ratings, I see 2) many products satisfy grinding salt and pepper needs. 3) It is a highly elastic market (price sensitive) since many offers are on sale, with coupons, or on limited-time deals. I noticed well-known brands have difficulty ranking, so 4) brand equity (how well known your brand is vs a generic brand) does not provide as much value in this product category as others.
This means people don't mind paying less for a generic brand than for a more expensive, well-known one. I can provide a few more observations, but needless to say, it's evident to steer clear of this product idea from our initial discovery.
However, being the narcissist we entrepreneurs are, let's take this further and assume my unique grinder design will have a place in the marketplace, and potential consumers will find value in it. Let's answer the last question, where does your product stand in terms of value and differentiation in the marketplace?
I'll start by addressing my observations before arriving to my answer:
1) There are entrenched product offerings due to the review counts on some of the listings.
The first-page average review count per listing is 3,924 reviews, with an average review velocity (number of reviews gained per month) of 97.7, and a sales to review ratio of 2.26 units per 1 review.
Since having a high positive review count establishes your product in the marketplace and drives organic sales, this will be the most critical aspect of your Amazon business. First, let's calculate how many units we'll need to sell to get to the average review count of 3,924. I first calculate the reviews / unit sold ratio, which the category has a 7% review rate per unit sold. So to get to 3,924 reviews, I'll need to sell 56,057 units.
But wait, that's if there is no review velocity of 97.7 reviews added to the average review count monthly! To keep it simple, let's say I want to reach the average review count within one year on the market. I'll add 1,172.4 (97.7*12) to the current average review count of 3,924, which equals to an estimated 5096.4, thus giving me a final sum of 72,805 units will need to be sold in the first year to achieve the goal of my listing having the average review count.
2) There are many products satisfying the needs of grinding salt and pepper.
This situation is the Red Ocean scenario, but the grinder will have differentiation due to its aesthetic design. Under this assumption, my unique design will contribute to the value gap in price point differentiation by 10% of the sale price. I'll discuss this in further detail later.
3) It is a highly elastic market (price sensitive)
As expected for any market with a commoditized product, the salt and pepper grinder market on Amazon is extremely price competitive. I found a grinder set selling for 8.99; that's a meager net revenue of $2.24, and that’s before cost of goods, freight, PPC ads, and misc. variable expenses like returns and spoilage.
Nevertheless, this indicates that, worst case, I can move my inventory at this 8.99 price point since this seller's offering, with minimal reviews and below-average rating, can move his inventory at this price point. Therefore, this will be my worst-case scenario if my assumptions regarding the value add of my design are off.
4) Brand equity does not provide much value in this product category
I came to this assumption from my observation that OXO, and other few well-known brands are ranked lower than generic brands. This shows me that consumers are purchasing more on product design and price than brand recognition. However, as a new entrant to the market, this is welcoming news.
Now, circling back to the question, "how do I sell 72,805 units in one year?" Just glancing at the sales data provided by Helium10, it's an impossible task. However, I'll continue and project a forecast to see what sales figures I can expect. Let's lay down some assumptions first.
- I expect to average 4.5 stars on all reviews
- I expect my product substitutes' price range between 13.99 to 16.99
- I expect my pending design patent to discourage another seller from outright copying my design (thus commoditizing my product and eroding my design's value add)
- My launch advertising campaign will receive the impressions as expected
- Cost of goods is not a consideration
The launch phase of an Amazon product is key to the success of your listing, and the more competitive the category, the less margin of error you have. The goal of a launch campaign is to throw money at the PPC machine to artificially boost traffic to the listing and convert some of that traffic into buyers through discounted prices. This will build reviews fast, contributing to organic sales as the count grows, and promoting stability in sales.
What's an appropriate discounted price point? Usually, it's about 25% less than a comparative substitute's price point. However, this is just a starting point, and you should keep a close eye on your conversion rate until you hit your goal.
I then research the average bid for keywords relevant to my product on the Amazon ads portal and found the average CPC is 1.75.
I can now conclude that at my conversion rate goal of say… 20%; it will on average, cost me 8.75 of ad spend to sell one salt and pepper grinder set. From this information, I can derive the following assumption: $1000 of ad spend will sell 114 units, and generate 8 reviews.
Ouch, this is why we avoid red ocean products, but this is only for paid search sales. If you can get the product launch into the first page, you have an opportunity to get at least 62,500 impressions (Helium10 data indicates 62,500 units were sold, so there were at least 62,500 impressions). If we assume there is a decent click-through rate of 10%, at the 20% conversion rate, you should get up to 1250 units of sales per month! Nevertheless, these assumptions are only valid if I can underprice my product enough to enjoy a 20% conversion rate. However, my margins would likely not allow me to do so without losing money.
So, where does my imaginary salt and pepper grinder set stand regarding the value and differentiation in the marketplace? Very low. Even if my design does bring some value to the table, I don't see this item turning a profit for some time since the launch campaign would be such a large investment. As shown in the table above, the gap between established products in the category is so far ahead that it would take years of ad spending to prop my product up while continuously cutting prices to keep conversion rates up.
With all this information available, let's put a projection together based on our assumptions. After inputting my data, the year one total sales would be roughly 3509 units. This product would require heavy ads subsidy to keep visibility artificially higher. The numbers are not enticing, but if I insisted on entering the category at this advertising budget and 25% less than the average price point, this would be the expected results.
I understand there is a lot of subjectivity in the content above, but projections are estimates. They are calculations based on assumptions. There will be a margin of error regardless of how experienced and knowledgeable you are. Regardless, I hope this better prepares you to evaluate your category's market and understand how the characteristics of the market affect whether you can be profitable to enter the market with your product.
Once you understand the market environment, you can start narrowing down your product options based on the profitability and the cost of entry to its respective markets. Take your time and do your due diligence—choosing the right product in the appropriate market is crucial to the success of your business.
