5 Steps to Product Profitability Research

One of the biggest mistakes people make when deciding whether to sell a particular product online is skipping the steps of product profitability research. This can lead you to sourcing products people don't want to buy or products that offer razor-thin profit margins.

While there is both an art and science to building a profitable product line, today we'll look at the science of researching a product's profit potential in five easy steps.

If you're a research hound like me, you'll love searching out the numbers to determine whether a product will help you hit your revenue goals.

But even if the thought of research makes you groan, you'll find these five research steps quick and easy to do. Most important, you'll be delighted with the results they produce: profitable products!

1. Research the marketplace

The first step in determining whether a product has profit potential is to take a quick "walk" through the marketplace you plan to sell your product in. You don't need to make this an arduous task. You're just trying to get an idea of what's happening in the marketplace.

Here's what to look for:

• Is the product currently being sold successfully there?
• What is the ratio of supply and demand?
• Are there hundreds of sellers competing for a few sales?
• Is the product in hot or steady demand?
• What is the price range the product is being sold for?
• Does a competitor or the manufacturer have a corner on the market? Or is there room for you to bring more products into the marketplace?

If you sell in a marketplace like eBay, you can use Terapeak Research to get reports on the number of listings for a particular product, the sell-through rate, the average sales price and more.

Amazon assigns a product ranking to each product it sells. You'll find that information for free on each Amazon product page. Look at the product rank to determine if a product is in demand.

You can also look at comparison shopping engines like Google Product Search, Nextag and The Find to see what price the product is selling for on other sites across the Internet.

In addition to pricing data, make note as to whether your potential product has a merchandise-to-market match. A product that sells profitably on Amazon may not be as profitable on eBay or vice versa.

Note: If you're trying to break into a highly competitive, saturated, notoriously low-margin market (like mainstream electronics for example), you either need to have a supplier that gives you rock-bottom prices or be prepared for thin profit margins on that product.

As an online retailer, part of your job is to keep abreast of what's hot and what's not

2. How is the product trending?

When you're looking at the marketplace data in Step 1, you're essentially taking a snapshot of where the market is now. But you also need to take into consideration where the market will be by the time you list and sell your new inventory. This is especially true for wholesale products you plan to sell for the next six to 12 months.

If you already sell products in a particular category, you should have a handle on the trends in your category. As an online retailer, that's part of your job—to keep abreast of what's hot and what's not.

Otherwise you'll find yourself sourcing a product that's reached its peak and is now on the decline. And the profits are declining with it.

Here's an example:

You come across a great deal from your supplier on neon green desk lamps. You think the lamps look good and the price is right. But can you make a profit on them?

If you haven't kept tabs on the trends in your niche, you may not know that the hot neon lamp trend came and went a year ago. The lamps people want to buy now are designed with classic finishes like polished brass. All of a sudden, that case lot of 100 neon green desk lamps at a great price isn't such a good deal after all.

3. Find a good supplier

The rule of thumb in retail is you make your money on the buy. "The buy" is what you pay for the inventory. There are many industry-insider ways to locate quality wholesale suppliers, and it's something I cover extensively in my Power of 10 Product Sourcing home study course.

Be aware that in order to get true wholesale pricing from your supplier, you'll need to be set up as a legal business entity and have a tax ID number. This must happen before a supplier can quote you a price or send you a product catalog.

Also, don't be afraid to negotiate pricing! Suppliers want to move their inventory, too, and often have wiggle room on shipping charges or bulk quantity discounts. This can dramatically impact the profit potential of your new product.

4. Run the numbers

You've found a supplier, now it's time to run the numbers on your complete cost of goods sold (COGS) to determine the product's true profit potential.

CoGS includes:

• Base cost of goods. What is the base cost of this inventory, including shipping, to your place of business? The base cost is just the starting point for determining how much you stand to make on this product.
• Fees. If you sell in a marketplace that charges listing or final value fees on specific items, you must factor these into your profit margin equation.
• Cost to deliver. This can often be a hidden cost, but it can dramatically impact your profit margin. What does it cost you to deliver the goods? Wrapping materials, shipping and staffing resources? It costs a lot less to sell a pre-packaged product you can pick off the shelf, pop in a box and hand to the waiting arms of the FedEx driver than it does to prepare an oversized, heavy, fragile or odd-sized item for shipment. And don't forget shipping costs! With the popularity of free shipping, you may just break even, or even lose money on the sale, due to shipping costs alone.

Until you test the sale of a product in your store or Web site, it is an unproven product

Now at this point, you're probably asking "What's a good profit margin? What should I look for?" There are a variety of factors that go into determining whether a product has an acceptable profit margin. You can learn more about this in my recent Auctiva EDU article, 4 Must-Know Facts About Profit Margin.

Once you've established the profit potential of the product, you need to look at how many you'll need to sell in order to hit your revenue goals.

You'll also need to look at the purpose of the product, is it a "product line staple," something you expect to sell regularly and be a core revenue generator? Or is it a cross-sell product that you'll market as an add-on to increase the value of each sale?

5. It's time to test it!

You've now made an informed decision about whether it's worth your time to purchase this inventory. But you won't know for sure whether it's profitable until you test it!

Until you test the sale of a product in your store or Web site, it is an unproven product. The only way you'll know for sure if a product will be profitable is to bring in few units and see how they sell and for how much.

If you're buying inventory wholesale, you can purchase samples from the wholesale distributor, or even source some product via retail channels to test market them. If you're buying closeout or liquidation inventory by the pallet, you won't be able to test small quantities. In this case, you'll need to rely on your due diligence in steps one through four.

Once you've test marketed your new products, and they've proven themselves to be winners, you can go back and reorder more of your profitable products!

When it comes to researching a product's profit potential, keep an open mind as to where it can be sold. If a product is saturated on eBay U.S. there may be a big market for it on an international site, like eBay AU.

Limiting your research to one marketplace will cause you to miss opportunity elsewhere. On the other hand, if you've looked at several marketplaces and there's no demand for the product you want to sell, it's time to let it go and move on. There are too many other profitable products out there to sell!