This post is an excerpt from my 55-page eBook ‘Profitable eCommerce: A Guide to Market Research, Suppliers & Niche Analysis‘, which can be downloaded here for free.
Picking a niche is usually the biggest hurdle most people face when starting an online business. It’s possible to spend weeks — even months — on the issue without coming to a decision, which can be an incredibly frustrating and de-motivating experience. I know, because I’ve struggled with the process myself.
I wrote this guide to help take the confusion and stress out of the selection and research process, and to help increase the chances of picking a viable, profitable niche. If you keep these attributes in mind, you’ll have a significantly higher chance being successful with a new eCommerce business. With that said, let’s dive in!
This is the MOST important criterion when selecting a niche, and you’ll be hard-pressed to succeed online without meeting this guideline. You’ll soon realize that all products, including physical goods, are really information products at heart.
If you’re selling a physical good that someone else has manufactured, you’re really selling a commodity. In terms of the product, a customer can likely buy it at hundreds — if not thousands — of other locations. So if I’m able to order Product X from Amazon at an incredibly low price, you’d better have a compelling reason I should order it from you instead — or you’ll lose most sales. And if you try to compete with Amazon (or anyone!) on price, I’d recommend you quit right now. You will almost certainly be doomed to failure.
So how can we profitably sell a commodity online? The best way is to solve our customer’s pre-purchase problems by educating them with outstanding content. That’s a bit of a mouthful, so let me give an example.
A few years ago, I wanted to install an in-wall stereo system in the new home my wife and I were building. I wasn’t one of those kids in high school with an ear-deafening, earth-shaking sub in my car, so I know next to nothing about stereo equipment.
I started searching online but was really struggling to understand what I should get. Despite being someone who prides himself on being able to bootstrap and self-learn most topics, figuring out what equipment I needed was a pretty large challenge.
It’s crucial to note that my problem WAS NOT:
Instead, my problem was:
The vast majority of online retailers only addressed my first problem. They had equipment, many with guaranteed low prices, but most had terrible descriptions, poor pictures and no guides or information on what worked together.
Then I came across Crutchfield, a well-respected audio/visual retailer with one of the most educational websites online. They have an entire research section of their website dedicated to educating customers on new equipment, DIY installs and more. As you can guess, their product listings feature in-depth descriptions, pictures and loads of review.
After going through numerous videos, guides and a few live chats, I had a much better idea about what I needed. And while I didn’t end up buying from them at that point in time (they didn’t have all the items I wanted), they made a huge impression on me. As a novice stereo guy, I’ll return there if I ever need anything in the future and will recommend their site to friends. Heck, I’m raving about them right now in this eBook!
So here’s the point to the story: By really understanding the problems their customers face — and by providing great resources to help solve these problems — Crutchfield is able to charge a premium. They’re currently selling a receiver for $494 that’s listed on Amazon for $405 — a $90 difference! Despite charging $90 more than Amazon, they’ll still be able to sell tons of these receivers.
Will there be people that utilize all of Crutchfield’s great online resources and then go order the product on Amazon for $90 less? Absolutely. But several people, many of whom may even know the product is cheaper elsewhere, will still order from Crutchfield.
By providing value to your customers and solving their problems, you’ll bank up a lot of goodwill. People WANT to repay those who helped them with an issue or problem. Apart from that, by offering tons of informative content, you establish yourself as an expert in the field — and people like buying from experts. Why? Because if something goes wrong, customers can get expert help from someone who knows the product. (Good luck getting Amazon to answer any questions when installing a new receiver you purchased from them!)
To be able to charge a premium for your product, you need to offer SOMETHING of value to your customers. Because everyone is often selling the same product, that something needs to be the expertise, clarity and product information you provide to your customers to help them make an informed decision.
Since the ability to add value is so crucial to finding a profitable niche, it’s important to consider how easily we can do this. It will, for example, be much easier to add value selling stereo receivers than socks, although it’s possible to do so with both. To maximize the value we can add, we want to look for niches that:
Are Confusing: The more complicated a product is, the more room there is to educate your customers and answer any questions they have. When you remove the mystery from a product — and educate customers so they know your product will work exactly for their needs — they are MUCH more likely to buy, especially at a premium price. Examples of confusing niches might be home security equipment, commercial water purifier systems or home stereo equipment.
Require Multiple Components: Anytime a product requires the purchase of various components, customers (especially those new to the field) will have no idea if the components will be compatible with each other. If you can clearly let customers know which components work together and which don’t, you’ll be able to add a lot of value.
This works even for industries with universal compatibility, sometimes even more effectively if your competition doesn’t realize this is a confusion point. For example, unless a customer for underground sprinkler equipment researches the subject extensively, he likely doesn’t know that all sprinkler heads are universal and will fit all piping on the market. Telling him this up front and guaranteeing all equipment ordered from you is compatible will make him more likely to buy.
Require Complex Installations: Complex products that are usually installed by the purchaser are RIPE for adding value. Unless your customer base is full of DIY Tim Allen- style handymen, they’ll likely be intimidated by complicated installations. Offering an exclusive step-by-step illustrated installation guide (available only with purchase, of course) is an incredible way to add value and justify charging a premium.
We spent a lot of time on this one criterion, because it’s the most crucial one to get right. If you’re selling an existing product online, you can’t compete on price. You may get tons of orders, but you almost certainly won’t make much in profit. To charge a premium — and to get customers to pay it — you MUST offer something else of value to your customer. Premium pricing, a topic we’ll cover in the profitability section, is crucial to success and is rooted in providing value.
All customers are NOT created equal. Being deliberate with the audience you’re selling to can make a huge difference. A few things you’ll want to think about when considering your target customers:
Passionate Hobbyists: It’s incredible how much people will do and/or spend on things they’re passionate about. Off- roaders can easily spend more than $50,000 customizing their vehicles. Fishermen will drop tens of thousands of dollars outfitting a new bass boat. As a seller, you’ll quickly learn that enthusiasts will invest an impressive amount of time and money in their hobbies.
If you can find a customer base that’s passionate about a hobby, and then offer products and value to those enthusiasts, you’ve got a great chance for success. You’ll likely have an upper hand marketing your business, as it’s easy to target hobbyists’ online hangouts and forums.
Those With a Problem: One of the first things I ever bought online was an eBook called “Desperate Buyers Only,” a guide on how to sell information products to “desperate” customers. While I decided not to follow that model, the premise is solid: If you can target customers who have a serious, pressing problem and offer a solution, you’ll be able to make money.
Disclosure: Selling to those with a “passion or problem” is a tactic I’ve heard mentioned by Sterling & Jay. This is a lesson drawn from my own experience, but wanted to credit them as well.
Business or Government Clients: Business and government customers can be some of the BEST customers you can find. They often order in larger quantities and, depending on the nature of your product, are much more likely to reorder on an ongoing basis.
Government and business clients are also IDEAL customers when it comes to a strong value/premium price model. Often, the individuals making the purchasing decisions aren’t paying for the items out of their own pockets, so they aren’t as price- sensitive. If you’re able to offer value in a way that makes it EASIEST for them to configure/purchase/install your product, they’ll be very likely to choose you over your cheaper competition.
Demographics (Sex, Age & Location): All three of these are important to consider and can have a dramatic impact on your business.
Sex: Men and women have very different online shopping habits, detailed by this great Infograph. Women make the majority of online transactions, but men are more comfortable making larger purchases online, spending 32% more on average per transaction. So, if you’re thinking of selling high-ticket items to a female market, you may want to reconsider.
Personally, I think eCommerce stores geared toward women are a huge opportunity right now. The majority of entrepreneurs are men, even more so online, and I believe they often overlook women-focused niche sites.
Age: Age is important to consider in terms of dollars spent and customer support issues. If you’re planning on selling jewelry to young adults, I have some bad news for you: The 18 to 24 age bracket spends the LEAST of any demographic online.
Alternatively, you don’t want a clientele that’s too old if you’re planning on running an efficient eCommerce business. One of the benefits of eCommerce is that it’s scalable; online ordering and well-designed automated systems can minimize the personal attention required for many common tasks. However, if you’re selling a product to an elderly customer who isn’t comfortable using his credit card online and will ONLY order via phone, it’s going to be much more expensive to provide support and to scale.
Location: This is a topic we’ll cover more in the “Demand” section, but it’s worth noting here. As we’ll need to ship our products to customers, it’s important that the majority of our customers are domestic. Though international shipping has become somewhat easier in recent years, it’s still MUCH more expensive and involved than domestic shipments, especially for larger items. Make sure there’s ample demand for your product within your own country. The best way to do this is to use “Google Insights”.
When it comes to selling products online, certain characteristics will increase your chances of success. Let’s discuss a few:
Disclosure: My recommendation for a $100 to $200 price point comes from personal experience selling items at all prices. However, I want to acknowledge that Tim Ferriss recommended a similar pricing “sweet spot” in his book, “The 4-Hour Work Week” LONG before I did.
I own eCommerce stores that sell everything from basic $5 cables to expensive $1,500 GPS-powered electronics. If I could pick my “perfect” price point for a product — all else being equal — it would be in the $100 to $200 range. There are many reasons why:
Scalability and Support: The $100 to $200 price range is large enough to make a reasonable profit per order (assuming your margins are good and you provide value) without having to provide extensive personal phone service. Most people won’t balk at placing an order for a $150 item over the internet. This helps you invest up front in high-quality content and mostly automate the ordering process online, allowing you to scale easily and without significant support and sale expenses.
When you get into higher price ranges, the number of people willing to order without speaking to a real person decreases, so you’d need to invest more in customer service. You also need to offer significantly higher after-the-sale support for expensive items. The level of support expected for a $1,000 product will be significantly higher than what it would be for a $100 item.
Please don’t misunderstand me here; I’m not advocating providing poor post-sale support to save money. Quality customer support is CRITICAL to maintaining and growing a happy customer base, which is vital for online success. But while someone who spent $99 on an item might be satisfied with a quality online troubleshooting guide, the customer whose $800 product isn’t working properly will likely expect your company to bend over backwards to fix it — and will be disgruntled if he or she doesn’t get that level of support.
Sales Volume and Margins: In most cases, you’ll move significantly more $100 to $200 products than higher-priced items. As the price of an item goes up, the conversion rate often decreases, as people are more hesitant when it comes to large-ticket items. This isn’t always the case, but it’s what I’ve seen in my experience.
Now, this isn’t necessarily a bad thing IF you make up in profit what you lose in volume. However, as items increase in price, the profit margin on them typically decreases. While you may make 20% on a $150 coffee machine ($30 profit), the margin on a $1,000 coffee machine will likely be much lower, possibly in the 10% range ($100 profit).
This is especially true for items that can be drop shipped from wholesale warehouses. As the retailer/drop shipper doesn’t have to buy the item up front (the warehouse owns it), they simply look at the dollar value per sale, which significantly drives down the profit margin on higher-ticket items.
Also, the profit we indicated before is misleading, as it doesn’t take into account the proportionally higher expense of credit card fees on expensive items. If we assume a reasonable 2.5% credit card fee on every transaction we process, the cheaper coffee maker would incur a $3.75 fee, while the expensive item would cost $25 to process! When we factor in these fees, our profit is now $26.25 for the basic model and $75 for the expensive one, a profit difference of almost 3x. So, in order for this to make sense from a profit standpoint, we need to sell three times as many basic models as we do expensive models.
I’m not sure what type of circles you run in, but I personally don’t know many folks ready to drop $1,000 on a coffee maker! In a market like this, I would guess the base model would sell 1o times the quantity of the high-end model. So, our ACTUAL profits per items sold would look like:
10 basic units @ $26.25 profit = $262.50 profit
1 expensive unit @ $75 profit = $75.00 profit
Difference in profit: $187.50, or 150%
Now, I need to emphasize that this is NOT a real example. I didn’t do research on this market and don’t sell any coffee makers online. I also don’t factor in the increased marginal cost in processing 10 orders versus one, and I leave out the very real possibility that a coffee shop can sell both models! There are all sorts of technical holes I’m sure you can point out.
This wasn’t intended to be a 100% accurate case study. I simply wanted to use this as an example, to walk through some rough numbers on why it’s harder to sell really expensive items and make money. Again, I’ve done both and recommend sticking to items in the $100 to $200 range. It’s usually easier to make money.
As with all things in life, there are a few exceptions. There are a few instances when it MAY make sense or be viable to sell items at a higher price point. They are:
If the manufacturer maintains strict pricing: Manufacturers understand how margin erosion can affect retailers and some will maintain strict Minimum Retail Prices (MRP), effectively creating a floor on how low prices can go. If they’re effective at enforcing this pricing policy (by cutting off retailers that break it), it’s possible to sell higher-priced items with healthy margins and possibly make up for the reduction in volume with reasonable profit levels.
If you have a unique price advantage: The advantage that most readily comes to mind is not having to charge sales tax. If you’re selling big-ticket items, and most of your competition are major retailers, you may be able to use the current tax laws to your advantage.
Currently, the only time an online retailer has to charge sales tax is if your customer is in the same state as you. If most of your competitors are large brick-and-mortar stores that are also online — and have stores in many states — they will likely be required to charge sales tax on many customers.
An 8% sales tax is a nuisance when you’re paying for dinner. It becomes a major, potentially decision-making cost when you’re selling a $1,500 item, as it represents a $120 difference in cost to the customer!
Sales tax is a sticky issue, and it’s not something you want to build your business around. Laws change, and the sales tax holiday many online retailers have been enjoying is under close scrutiny by lawmakers. And if you’re depending solely on your tax-advantage status, you’re likely offering little value to your customer other than price, which we’ve discussed is a dangerous model. While I wouldn’t build a business around it, it’s something to thing to keep in mind if you venture into higher-priced goods.
Marketing & Customer Numbers: Apart from adding value, the ability to market your eCommerce site is the most crucial factor in determining success. And one of the best marketing strategies available, especially online, is a sterling reputation.
There’s no marketing tool as effective as a loyal, happy — and vocal — customer base. Word-of-mouth referrals are the most powerful form of marketing. Think about it: How much more likely are you to try a product and/or business if a trusted friend recommends it? In today’s world of hyper-connectivity and social media, a happy customer base is powerful.
But if you’re selling really expensive items, you’ll likely have few sales. Fewer sales means fewer customer interactions, which results in fewer recommendations and brand fans.
Fewer customer interactions, especially early on, mean it will take longer to REALLY get to know your market and the problems/issues your customers face, and thus longer to reposition your business and products to best serve your niche. Fewer customers and orders also dampen your motivation. Regardless of the financial impact, I GUARANTEE that 10 orders for $100 is more motivational than one order for $1,000. In the early days, staying motivated can be a huge issue, and steady order volume can be amazingly helpful.
With a lower-priced product, you’ll have more customers, which translates to more fans (if you do things right!), more repeat customers, more recommendations, more niche insights and more motivational orders.
Content Creation: Generating unique, customer-created content is also much easier with a large customer base. Generating customer product reviews is one of the pillars of creating a value-packed, information-rich website. With fewer customers, it’s much more difficult to generate a significant number of reviews.
Testimonials are also important, especially for new businesses that are trying to gain trust and build a reputation. By now, I think you know where I’m going with this: fewer customers, fewer testimonials. If you do sell high-end products, you’d better get some incredible “You changed my life!” testimonials to make up for the difficulty in getting a decent number of them.
It’s a common misconception that retailers make piles of money off expensive items. They don’t. If you go to Best Buy and purchase a $600 television, they’re likely making 10% (probably less) on the item, and this is before they pay 2.5% to process your Visa payment. Large-ticket items, especially electronics, tend to have much smaller margins.
Accessories, on the other hand, enjoy HUGE markups. Say you need to buy a new HDMI cable to go with that massive flatscreen you just bought, which you’d likely pay $30 for in store. You’re probably not even thinking about the cost of the cable; what’s another $30 on top of the $600 you just spent? Well, think again. That cable likely cost Best Buy $5, which translates into a 500% markup.
With just two or three cable sales, Best Buy likely makes JUST as much money as they do on a $600 big-screen sale! How crazy is that! And I guarantee they move a lot more cables than big-ticket TVs.
So, your two choices are:
Can you see the advantage of having an accessory-heavy sales approach with your niche?
People tend to be price-sensitive the more expensive an item is but rarely focus on the markup. Let’s take the $600 TV from Best Buy. Many people in the market for a new TV, especially if they know the model the want, will spend HOURS searching for the store with the lowest price on the item. They reason,
“This is a BIG purchase, and I want to save as much money as possible! I’m going to do my research.”
They ultimately pick the retailer with the lowest price on the primary item they’re looking for. But what percentage of people do you think compare prices on accessories they’ll need for it — the HDMI cables, wall mount, etc.? Not many. Most will simply buy these items where they buy the big-ticket item. Comparison shopping for four to five accessories and determining the lowest price for the bundle is much more of a hassle than simply looking for the single price of the main item. So most consumers don’t bother.
And this is why selling products that require lots of accessories is so attractive. Customers are much less price- sensitive when it comes to a large number of lower-priced accessories, which enables you to easily charge a premium on these, especially if you’re offering value in other ways, too. Selling accessory-rich items not only allows you to sell items with higher margins, but will likely increase the number of items you’ll be able to sell per order, too, further increasing your profit.
Accessory-rich niches are a GREAT way to make money. Combined with a high-value website, they can be a key strategic element in building a profitable eCommerce site.
We’ve already discussed how adding value to your products is crucial for a successful eCommerce site, which involves product listings with detailed descriptions, reviews and great pictures. This all takes time, but it’s a great long-term investment … unless 50% of your products are discontinued or replaced each year. If this happens, you’ll barely have time to get a new product up on your site and marketed before it’s no longer available for sale!
When looking for a niche market, we want to pick a product line that’s fairly consistent and stable from year to year. ALL markets will have models discontinued and introduced every year, but we want this number to be fairly low, so we can invest time in creating great product listings that we know will be useful for years to come.
This can be tricky, especially when you know nothing about a market, but you want to pick a niche that has at least one (preferably more) well-known manufacturer with excellent, quality products. Well-known manufactures usually create or have:
If you’re seriously considering a market, do some digging on the manufacturers behind the products. Check out their websites. Chat with sales reps at other retailers and wholesalers to get an idea of what brands are most respected. Hopefully you’ll be able to identify a few major players in the space.
If you have problems finding major players, or if you come across lots of small players with really poor websites, be wary. There’s likely less of a market than you think, and it would be harder to learn about/market/add value to the products you’d be selling.
All things equal, I’d much rather sell small physical products than large ones due to all the shipping costs involved. Smaller products cost less to ship, so it’s easier to offer free shipping to your customers, and it reduces the cost for returns.
If/when you decide to move from a drop-shipping model to purchasing your own goods, it’s cheaper to do so with smaller items for two reasons: It costs less to ship items to your fulfillment house, and you pay lower storage fees.
Finally, small items allow you to offer expedited delivery much more easily. Selling watches or necklaces? Overnight delivery is a bit more, but not prohibitively expensive for your customers. But if you’re selling 8-foot rowing paddles, your customers are going to be shocked when they realize it’s $140 to get them overnighted.
If you needed to buy candles for a special evening with your significant other, where would you go? Serious romantics might head to Bed, Bath & Beyond or a Hallmark store. The more pragmatic and cost-minded folks (myself included) might be more inclined to simply visit Wal-Mart.
But say you wanted to buy a medieval sword replica or a home brewing kit. Your local big-box stores likely won’t stock those. And while you might be lucky and have a speciality medieval or home brew shop in your community, chances are just as good you don’t. So where would you turn next? Probably the internet.
Picking a niche product that’s difficult to find locally will increase your chances of success online, but you have to walk a fairly fine line. Ideally, we want a niche with enough demand to bring in customers and support a profitable eCommerce business, but that’s specialized enough that its products aren’t widely sold in most local communities.
Tricky, isn’t it? It can be a tough balance to find, but once you do, it’s a real sweet spot in the market. We’ll discuss how to measure demand in a future section, but for now simply keep the “Difficult to Find Locally” criterion in mind.
If you can find a niche that meets most of the other criteria AND you’re excited about the niche, that’s fantastic. But of all the criteria for picking a profitable niche, I think this is the least important. In fact, I almost didn’t put it in here. People often repeat the cliché:
“Just follow your passion and you’ll be successful!”
Unfortunately, there are thousands of liberal art and philosophy majors who will attest that this isn’t always the case. Is passion important? Absolutely. Is it highly correlated with success? Definitely. But in terms of picking a profitable eCommerce niche, personal “passion” is a poor way to make a decision. Mark Cuban, the colorful businessman and owner of the Dallas Mavericks, has a great post on this where he says:
“‘Follow Your Passion’ is easily the worst advice you could ever give or get … [I]f you have been able to have some success, what was the key to the success? Was it the passion or the effort you put in? …
Let me make this as clear as possible:
– Mark Cuban
When I started TrollingMotors.net, I had zero interest in trolling motors. I had never used one in my life! But a funny thing happened as I grew the business, sold motors and got to know my customers. I became really interested!
Driving down the highway, I’d see a trailered boat with a trolling motor and think, “Wow! That’s a Minn Kota Fortrex!” On the phone with customers, I’d curiously ask what they thought of the new motor they purchased and how much run- time they got out of their previous motor.
Slowly, I became passionate about trolling motors and the people who used them. And the larger the business grew, the more passionate I became. Ask yourself this question: Given two options, would you rather own:
– OR –
When you’re successful at something, you naturally become passionate about it. It’s how life works. I don’t care if it’s water purifiers or cow manure; if it brings you success, I PROMISE you’ll learn to become passionate about it at some level.
The goal is to pick a niche with a high probability of success online and pour a ton of time and effort into that. You don’t need to be passionate about the product at the beginning, but you MUST be passionate about the process and the outcome. You DO need to be passionate about growing your business. And by the end, you’ll almost certainly be passionate about both the business and the product you’re selling.
That being said, if you can find a niche that not only meets most of the criteria we discussed AND is something you’re passionate about, by all means jump at it! It will make the early days of work easier, as you already have an interest in the niche. You will be able to add more value as you likely have a fair amount of knowledge in the field. And you’ll have a leg up with marketing because, as an enthusiast yourself, you know what problems your customers have and what’s important to them. You may even belong to their organizations or clubs.
But if you’re like most of us who can’t find a profitable niche that we’re also passionate about, fear not. You’re in good company. Don’t worry — you’ll be passionate about it before you know it!
Nothing is sweeter than repeat customers. Once a customer has ordered from you, he or she is significantly more likely to order from you again, assuming you did a great job. If you can combine happy customers with a product that’s disposable and/or consumable, you’ve got a recipe for a great recurring income stream.
I’m a fairly tall guy but have always been pretty lean. This spring I decided to make it a priority to build some muscle mass. Part of my plan was changing my diet, which included incorporating protein shakes into my daily routine.
Off I went to Amazon to sort through the dozens of protein powders available. As I searched, I noticed something interesting: Amazon offered a discount on many of the products IF I’d agree to receive them on a regular basis, say every month. They knew I’d be needing more protein powder in the future and wanted to increase the chance I’d purchase it from them. Dangling a discount to entice me to order on a regular schedule was brilliant.
Amazon recognizes the value in recurring revenue from people who buy disposable or consumable items. You should, too. Finding a product that needs replacing on a regular basis is a great way to rapidly grow a business and revenue.
We covered a LOT of important information in this post! Keeping these criteria in mind will significantly increase the chances that the niche you choose can help you build a viable eCommerce site. However, it’s important to keep the following in mind:
“There are no perfect niches. They don’t exist.”
We discussed the various facets of a good niche, all of which are important. But let me warn you now: You’ll never find a niche that fulfills them all. If you try, you’ll spend 18 months researching ideas, go crazy with indecision and never actually start a business. Keep this in mind and you’ll be in much better shape when it comes time to filter your ideas against our criteria. We want a niche that meets as many of our criteria as possible, while understanding that we’ll never find one that fits them all.
Picking a niche with the right mix of attributes is only one piece of the puzzle. To be successful, you need to have ample customer demand, great suppliers and a marketplace that’s not overly crowded.
You also need to be able to setup a store, market your business and know how to leverage platforms like Amazon and Facebook. There’s a lot to do!
If you’re interested in learning more about picking a niche – and also getting your first store off the ground – check out this free six day mini-course on how to launch your own profitable eCommerce business. There are also plenty of eCommerce conferences with lots of great information.
Did I miss any critical niche attributes? Had a chance to read the eBook? Or simply have a question? Let me know in the comments section below!