There’s a lot of information out there about how to choose a profitable market. The simplest explanation I’ve found from a resource I trust is a 15-point checklist from ecommerce marketing expert Ezra Firestone. I’ve excerpted parts of it here with his permission.
Keep these tips in mind when you are thinking about your ecommerce business in relation to profit margin, risk, and income potential:
1. Average order value $75 to $200?
You want your average order value to be between $75 and $200. This is different from the average profit per order. You don’t really know yet what your margins or profit per order are going to be, but you can be pretty sure if the average order value is $75 to $200, you’re not going to be making less than $20 in profit on each order. As a general rule of thumb, you never want to earn less than $20 in profit per order because you can’t make enough money to build a successful business on less than that.
2. Gross margin 20 percent or more?
You don’t always know the margins upfront on products, but if you’re considering two niches and they both have the same average order value, you should go with the one that has the higher profit margins.
3. Fragmented market?
A quick and easy way to evaluate this is to type the top 15 or 20 content page keywords into Google. If it’s always the same 10 companies that populate the first page of Google, it’s not a fragmented market and instead has a handful of entities dominating the market share.
But competition is not a huge deal — you can break in no matter how competitive the market is. But it is something you want to look at because a fragmented market is better because it’s easier to break in.
4. Lends itself to return customers?
Do you have the opportunity to resell to your past customers, or is it one and done? An electric fireplace is kind of a one-and-done sale. It’s a high-dollar sale, but people aren’t going to come back and buy another electric fireplace from you. With gift baskets, on the other hand, you have the opportunity to sell to those people every single holiday.
5. Lends itself to multiple-item orders?
This one’s pretty self-explanatory. Multiple-item orders are fantastic. Take a niche like dance costumes. Most of the time, when people are purchasing dance costumes, they’re buying them for an entire dance team and purchase something like 15 at a time. It’s a huge benefit when people order more than one item at a time. Again, if your product line has a bunch of accessories, this is fantastic because you’ll sell the main product and a bunch of accessories as well.
6. Can you add value to the market?
This is where you really stand out. You’re going to want to choose a product line you can add value to — something you’re willing to learn and talk about. The days of ecommerce stores just being stores where there’s no face, there’s no person, there’s no name behind it are going away in our hypersocial society. It’s becoming more about connecting with your customers and creating a community. There are a lot of ways to add value to a marketplace. Educational content is a fantastic one. So are buyer’s guides: stuff that solves the purchaser’s problem.
7. Products difficult to buy locally?
If you don’t live in, say, New York City, can you buy it down the street? Fire pits are a good example. Walgreens, Costco, and Home Depot might have one or two fire pits, but they don’t really have a large selection. The only place you can find a really good selection of fire pits is online.
8. Seasonal business?
Most markets are somewhat seasonal. But seasonal product lines — toys, Halloween costumes, Valentine’s gifts — are great because people don’t think twice about purchasing something when they’re buying a gift for someone or when they need a costume for their kid.
9. Google Trends U.S. dominated?
You can use Google Trends to find out all kinds of valuable information. Google Trends is a tool that analyzes how often certain keywords are searched for, who’s searching for them, and when. It’s great for highlighting trends in your market that could be beneficial for you to align your marketing strategy with. For instance, is your product seasonal? Are most people searching for your products in the United States? You can use Google Trends to find out.
10. Noncommoditized products?
Never sell a commodity — you don’t want to be competing against Walgreens. In economics, a commodity is a generic term for any marketable item produced to satisfy wants or needs. For example, if you open an ecommerce store selling Toms shoes, people will shop purely on price. They’ll scour the internet for other people selling the exact same shoes for a lower price. That’s a position you hope to never be in. That’s a simplified explanation, but really, commoditization occurs when goods or services lose their differentiation across the supply base. Basically, what that means is that anyone can produce it. It doesn’t cost a lot. It doesn’t require a lot of capital to produce it efficiently. You just don’t want to sell anything that’s readily available that anyone can produce anywhere.
11. At least 70 SKUs?
SKU (stock keeping unit) is a fancy term for a company’s catalog system. Books all have SKU codes on them, for example. Does your ecommerce store have at least 70 different items? The reason you want at least 70 is because when you have a store that sells 50 items or fewer, it’s pretty hard to grow that business up to six and seven figures. You just don’t have enough products to sell unless you’re building a brand. But when you’re doing a drop-ship store, you want to have a larger fishnet. Firestone’s best stores have between 500 and 1,000 SKUs, which is a really good number of products to shoot for.
12. Is there competition?
Take your top five keywords and type them into Google. You should see a full page of ads for each one. But if there’s no one buying ads on your keywords in the market you’re evaluating, no one’s making money on those keywords. So make sure there are people actually paying for advertising in your market.
13. Average product weight under ten pounds?
If you have heavy products, it just makes things more complicated. Shipping hassles can be a big nightmare, though it’s not a deal breaker. But if you can find lighter products, that’s better for the most part.
14. Top three keywords have combined 15K exact match searches?
Do your top three keywords have at least 15,000 exact match searches per month on the Google AdWords Keyword Planner? If you’re new to this topic, exact match means when someone types in that exact phrase. Most people freak out about keyword volume. They just go nuts on this subject. It’s not a huge deal, to be honest. Most markets you’ll find have a bigger long tail. You’ll make more money from your long tail than just about anything else. Most markets have a huge long tail if you know where to look.
15. Target market is women?
Firestone really likes to sell to women. He thinks they’re just better buyers. They’re usually more willing to engage and comment on the products and talk to you about them. And you’d be surprised what women are buying — they’re buying the furniture for the house. They’re buying the costumes for the kids. They’re ordering gifts more often. If you think about it, a lot of markets are female-oriented.
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Article and image originally posted on Entrepreneur.com – June 1, 2016