Product Consideration Questions. #4

Product Questions.Â

After you have chosen a product category you are interested in, you need to determine if the items you are considering will allow you a high enough profit margin and sales volume to reach your sales and profit goals. The following questions will help you decide what items to include in your product offerings.

Keep in mind that the product category(s) that you choose to offer for sale and the items you choose to offer will have a large effect on how you will operate your businesses. Some of the areas of your business that will be affected by these decisions are.

1. The level of customer service you will need to provide
2. The amount of individual sales help each customer will need
3. The level of returns
4. The number of customers needed to reach a certain sales level
5. Installation arrangements needed if any
6. Warranty claims
7. Terms of the sales
8. Ease or difficulty in getting good search engine placement
5. Inventory levels needed
9. Capital requirements

Diversification.Â

In our business we offer products from several product categories. We do this to diversify our sales income and to allow for the seasonal sales fluctuation of some of our product lines. If one of our web site's sales are down or one of the web sites takes longer then projected to become profitable, we can still have sales and cover our operating expenses.

How Is The Product Sold In The Real World?Â

If the products you want to sell are sold by authorized dealers it will be harder to get the manufactures to allow you to sell their products as an on line. On the other hand the product lines you do get an authorized dealership on will offer higher profit margins with fewer competitors.

If the products are normally sold in discount stores you will need to look closely at the wholesale cost to see if the profit margins are large enough to allow you to make a profit. The pricing section of this web site will help you with the math.

If the items are readily available to lots of stores and the wholesalers make it easy to get into the business of selling their products, your chances of success are very limited. The reason for this is that you will not have a competitive advantage. For example, I knew a lady selling ceramic novelties (nick knacks) she was in and out of business in six months. This was because, the same thing was offered by thousands of online stores, she had no competitive advantage. Another retailer I know sells ceramic figurines that his company designs and has them made exclusively for him. He does very well because he has an exclusive product line.

What Is The Typical Selling Price?Â

After you have selected a product category. Compare the price the merchandise sells for in your local stores against your wholesale cost. The difference between the two has to allow you enough dollars spread to offer the buyer a discount (savings) and still make a reasonable profit. Here are two examples to illustrate the point. The pricing section will go into detail on pricing products.

Item:
9' Market Umbrella
Price $330.00
Cost -$165.00
Gross Profit $165.00
Less 15% Discount -$ 49.00
Subtotal $116.00
Shipping-$ 26.00
Profit $ 90.00
Margin 27%

Item:
Chop Saw
Price 159.00
Cost -$103.00
Gross Profit $ 56.00
Less 15% Discount -$Â 24.00
Subtotal $ 32.00
Shipping--$ 12.00
Profit $ 20.00
Margin  12%

The market umbrella in our example, allows a high enough margin to let you offer the customer a discount and free shipping to induce them to buy from you. Where as the saws margin is too low if free shipping is included and only marginally acceptable with the customer paying for shipping.

KEY IDEA: What you pay for the product is not as important as the spread between a normal real world selling price and your cost. In most cases you will not be buying the product until it has been sold, so you are not tying up any money in inventory. What you are looking for is enough spread between the retail price and the cost to you, so that you can offer a discount (savings) to the customer and be able to offer low cost or free shipping and still make a minimum 25% or more return.

Is The Item Drop Shippable?Â

In an idea world, all the items you sell would be drop shipped by the manufacture to your customers and you would never have any inventory. Reality is that some manufactures will not drop ship and you will need to receive and reship the orders. Some manufactures will not break their case quantities and you will need to buy more then you need. Some manufactures will have a minimum order size. All of these types of requirements can be overcome or worked around. Just make sure you know what the supplier will and will not do, what effect that has on your cost, and weather the items cost/retail spread will accomplish your goal. The less inventory you have to warehouse the better for your bottom line profit.

Is The Item Of High Quality?Â

Your customers will be all over the United States and the world. The last thing you need is quality problems. Ask your venders what their procedures are concerning warranty claims and customer service. Reassure your suppliers that you are customer service oriented and that you will handle any problems that may arise. Do not sell items unless the quality is very good. Poor quality equals, bad customer relations, returns, extra shipping cost, and credit card charge backs.

How Does The Item Fit Into Your Product Line?Â

Not all items you offer have to be in the same category or family. Keep in mind if you offer dissimilar items that it will require another department and another group of customers to deal with. The more easily a product fits into your web sites main product category the easier it will be to administer the web site, the sales process and the web sites promotion.

What Is The Demand?Â

This question is less important online then in a brick and mortar store serving a local limited market. Yet the demand question does give some measure of how the item will sell. If the item has a high demand and lack of distribution you may not have to discount it much. If the product has low demand on a local basis, but you feel by servicing a national market you can sell enough to make it worth the effort you may have a winner. If the item is readily available everywhere, the only reason anyone will buy from your online is a low price.

Is The Product Custom Or Stock?Â

Some products lend themselves to special orders. These products tend to be more expensive, drop shippable, and more profitable. These will be products were the customer gets to choose colosr, fabrics, finishes and or options. The buyers tend to be more willing to wait for delivery as long as they can get what they want. Seek out this type of item as they have many benefits to the online retailer. Some of these benefits are, no inventory, higher profit margins, fewer returns, wealthier buyers, less competition etc. You will want to deal only with experienced manufactures and known lead times. Manufactures who miss their ship-by dates will cause you a lot of grief with customers.

Who Are The Buyers?Â

When considering a product line, you want to know who the buyers are. Most products are sold to the general public and are no problem. Some customer groups can be more defined and the potential opportunities and problems can be more easily anticipated.

Here are a few examples to get your thinking started.

1. Cue sticks are sold mostly to young males. Young males tend to have less money to spend. This product line will have more of the following problems then other product lines. Instances of stolen credit cards, more product returns, and lower profit margins.

2. Office furniture items are sold mostly to businesses and that will require you to offer open account terms and run credit checks on the buyers. Your ability to carry the resulting accounts receivables will greatly affect your sales volume.

3. Toy sales are for the most part seasonal, with most of the sales in the fourth quarter of the year. This means that you will need to deal with a rush of orders over a short time frame and deal with upset customers if you miss the ship dates.

What Are The Barrier To Selling This Product?Â

With some products you will have a hard time getting the manufactures to sell to you if you sell online. They may have concerns such as customer service, warranty claims, price erosion, and loss of their local dealer network. From their point of view they have a factory to run and an existing distribution channel to protect. You may have to convince them that you are not going to butcher the current pricing structure, that you will and can offer customer service and that you will handle any customer problems that may arise. You will need to convince them that you are an asset that will bring extra sales volume to their business.

How Will The Customer Buy This Item, Call or Online?Â

If you sell items that you make only 25% on, and the customers by on line, and you have it drop shipped, it just might be a good product for you. If on the other hand, the customers calls the orders in, you will need a margin of 33% to cover the cost of handling the phone calls.

Here's a general rule to follow, items selling for under $100 use a 40% minimum mark up (total cost to you x 1.67 = 40% margin).

Higher priced items can be profitable at margins in the 25% to 35% range, as you will have fewer customers to deal with and less cost per sale. This may not seem to important at the moment but payroll cost and shipping cost will become your biggest issues.

Questions To Ask Manufactures.Â

After you have contacted the manufacture and received their literature, you will need answers to the following questions.

1. Will they drop ship direct to your customers?
2. Is there a drop ship fee?
3. How do they ship, truck, UPS etc.?
4. What is the lead time?
5. What are the terms?
6. What are their pricing policies?
7. What are their shipping policies and cost?
8. How are warranties handled?
9. Do they have suggested or minimum advertised retail prices?
10. How do they prefer the customer service to be handled?
11. Do they have any suggestions or recommendations?
12. Are images and product information available on disc.

The Competition?Â

" Know thy competition". This has been a saying in business for as long as I can remember. BUT! I do not worry about the competition.

I look at it this way, you can worry about the competition, or you can be the competition.

The web is new; being only ten years young and the shake out of the early is underway. So, for the next few years the competitors, the ones who make it, are still being determined by the market place. You, if you run your business well, study, learn, and grow your business, can become the competition.

Each morning I look in the mirror and say.

" I am the competition and everyone is trying to catch me".

At the beginning of each year I formulate a vague plan of where we need to be twelve months from now. At the end of each year I ask myself.

"Are we better prepared for the coming year then we were the year before"?

If I have done my job, the answer will be yes, at that point, we are the competition. Your job is to become the competition, you begin when you choose the product categories that you will offer.

Next?Â

Your next step after choosing what products lines you will sell, is to set the retail pricing strategies.

"Take a firm resolution, that barriers will be surmounted" Jim Glasgow