Summary: Ecommerce Evolved - Chapter 3: Think Before You Sell (1)
Summary: Ecommerce Evolved - Chapter 3: Think Before You Sell
This post is the 4th of a series of posts I'm writing to summarize the book Ecommerce Evolved by Tanner Larsson, available on Amazon:
https://www.amazon.com/Ecommerce-Evo...9352160&sr=8-1
Here are links to the other posts:
Introduction
Chapter 1: Funnel-Based Ecommerce
Chapter 2: Recurring Income Core
Chapter 3: Think Before You Sell (this post)
Chapter 4: Conversion Tricks, Sales Boosts, and Profit Maximizers
(Disclaimer: These are my personal notes so I've paraphrased quite heavily in some places. If you like what you read, please buy the book to get the complete information in its original glory.)
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Chapter 3: Think Before You Sell
Product Pricing and Margin:
The higher the profit margin, the easier it is for your business to grow and profit. Costs don't just include product cost - you need to factor in customer acquisition costs and fixed expenses etc. Most ecommerce owners look at gross profit margin and think they're making a profit when they're actually operating at a loss after other costs.
3 Types of Profit Margins:
1)Gross Profit Margin -> Sales price - Cost of Product. Shipping and promotion costs not included.
2)Operating Profit Margin -> AKA EBITDA or "Earnings Before Interest, Taxes, Depreciation, and Amortization", this is the most important margin, and is the only usable metric for daily budgeting, forecasting, and operation of your business. There are 2 ways to calculate this margin. On a product level: Product Sales Price - (Operating Expenses for Single Product + Cost of Manufacturing, Selling and Fulfilling That Product). On a company level: Total Sales Volume - All Business Costs Excluding Taxes and Interest on Debt.
3)Net Profit Margin -> Total Sales Volume - All Business Costs Including Taxes and interest on Debt
Rule of Thumb for Product Markup:
Markup = at least 3x the production value. e.g. If product costs $5, need to be able to sell it for at LEAST $15 - else look for another product.
Ideal markup and margin numbers using the 3x rule:
Markup: 150%
Gross Profit Margin: 60%
Operating Profit Margin: 40%
Advertising and Overhead: 20%
Important: Don't just look at % profit margin, but also the dollar amount which is as important if not more.
Sell Your Own Products:
Give people a reason to buy from your store by offering something worth buying, whether it be a private label product, an original product, or even a series of products in a brand of your own. 2 advantage to having your own brand are:
1)Businesses with unique products are much more valuable when it comes time to sell.
2)With your own products you can control your prices and have 60% or higher gross margin, vs. for example name-brand electronics that have 10-11% gross margin because everybody is selling them and the competition results in the margins getting squeezed.
(However, selling your own products alongside brand-name products will give your brand credibility by association.)
Don't be afraid that creating your own products is out of your league - costs may be lower than you think. Mexico, Sri Lanka and China are popular for finding manufacturers.
8 Product Selection Criteria:
1)Niche-specific -> Products needs to be a fit for your target market.
2)Durable -> Broken products will result in refunds.
3)Moderate to high quality -> High quality products = customer satisfaction. Higher price points justified.
4)In-demand -> Do your research to verify this before buying inventory.
5)Retails for at least $25 -> Otherwise would make for too low of a gross profit dollar amount.
6)Solid margins -> Make sure gross margins will provide you with enough operating profit to grow your business.
7)Lightweight -> To avoid hefty shipping costs.
8)Unique -> For reasons previously-listed. Also look for products that complement existing products.
2 Manufacturer Criteria:
1)High capacity -> Make sure their capacity can keep up with your sales volume.
2)Raw materials -> Make sure their supply chain is solid - that they won't have problems getting raw materials.
2 Ways to Sell Products Under Your Own Brand:
1)Private Label -> Involves finding existing products, modifying them slightly (e.g. change the color), and branding them with your logo and packaging. Examples: Kirkland, Great Value. Alibaba is the most popular platform for sourcing, but watch out for trading companies that are just buying from manufacturers and reselling with a markup.
2)OEM (Original Equipment Manufacturing) -> If you have an idea for a new product, or make heavy modifications to an existing product, consider OEM - working with a factory to create a prototype of an original product. Requires a bigger budget, so go with private label first if you're new. Do adequate research first to verify product has demand!
Innovative Ways to Offer More Merchandise to Keep Customers Buying:
Don't ever think your customers are "done" buying from you. There are innovative ways to satisfy customers to keep them buying from you.
Print on Demand -> Selling custom merchandise that is printed only when an order is placed. Create designs for mugs, t-shirts, whatever else, and add them to your store. Examples: CreateSpace for books, CDs, and DVDs; Amazon Merch for t-shirts and apparel; GearBubble for shirts, mugs, necklaces, bracelets, and other promotional and general merchandise.
Crowdfunding -> Collects funds from people all over the world to bring a product into market - great to verify interest, raise budget, and get exposure for a new product. Kickstarter or Indiegogo are great platforms.
Crowdsourcing -> A combination of print-on-demand and crowdfunding, usually seen in apparel markets. Teespring is an example.
Digital Products -> Can dramatically increase profits by increasing perceived value at little to no added cost. Can be combined with physical products as a bundle or upsell, or can be upsold as separate products or as a continuity.
4 Main Product Fulfillment Methods:
1)Arbitrage -> Find products being sold on AliExpress, eBay, etc., list the product in your ecom store with a mark-up, and when the customer orders it, you buy it and ship it.
Issues with this model: Inventory can run out (4 items left and you just sold 20), shipping times are typically long, US Customs Service is starting to crack down on the use of ePacket to get around paying import and export duties, and payment processors like Paypal hate the high charge-back rates from unhappy customers due to long shipping times etc.
Arbitrage is good for testing products though.
2)Drop Ship -> Better than the arbitrage model but not ideal because gross margins are too low. Can be used to test products as well.
3)Third-Party Fulfillment -> Involves buying inventory and finding a fulfillment house to store, pick, pack, and ship products. Can brand your products with logo stickers and pack them in your custom packaging. Most charge a fee per order or item sold, with additional monthly fee for storage if inventory doesn't sell quickly. Using one located closer to your customers can decrease shipping time. They can offer good prices because they get shipping discounts for the large volumes they ship. Amazon FBA is an example, but downside is they put everything in an Amazon box so you can't use your branded packaging.
4)In-House Fulfillment -> Setting up your own warehouse that you use to pack and ship products. Some people use their garage and transition to a warehouse as they grow. Involves more costs and effort - you have to deal with shipping services like UPS, custom packaging, warehouse staff, inventory systems, tracking, theft, loss. Advantages: You control the entire process, can do whatever customizations on your shipments, and control shipping times better. You can use a fulfillment house in the beginning, then set up in-house fulfillment when you have the revenue.
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Next: Chapter 4: Conversion Tricks, Sales Boosts, Etc.
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