How to conduct a product-market profit assessment
Determining whether an item sold on a particular marketplace will generate a profit, is a crucial assessment to make when sourcing new products to sell online. However, many sellers don’t know where to start.
Today we’re sharing a couple of steps to determine your product-market profit and then will go through a real-life example of what the process looks like in action.
What is a product-market profit assessment?
A product-market profit assessment is a calculation that determines whether a product sold on a specific marketplace will generate a profit, and how much that profit will be.
It’s an important calculation for online sellers to master, for many reasons, including:
- Identifying the best online marketplace for your products.
- Highlighting areas when you can reduce your online selling costs.
- Giving you the funds to sustain and grow your eCommerce business.
5 questions to ask to determine product-market profit
When Googling how to conduct a product-market profit assessment, you can become overwhelmed with the advanced tools, methods, and calculations out there.
To make things simpler, we’ve stripped the product-market profit assessment process down to five key questions.
1. What are my product sourcing costs?
First, calculate the per-unit cost of obtaining the product to sell. This includes:
- The wholesale, manufacturing, or personal labor cost of making or buying the product.
- The shipping costs for delivering the product to your storage facilities.
- The fulfillment costs for storing, packaging, picking, and shipping the product to customers — including the offering of free shipping.
- Other overhead business costs, such as insurance, wages, leases, etc.
Note that these costs might need to be divided to achieve a per-unit price.
2. Which marketplaces does my product sell well in?
Next, research which online marketplaces are best suited to your product.
As a rule of thumb, the big five online sales channels cater best to the following products:
- Walmart = mainstream products that are comparable to Amazon’s prices.
- eBay = mainstream products that are cheaper than Amazon’s prices.
- Wish = niche products and budget items for younger shoppers.
- Amazon = niche products with little existing competition on the platform.
- Shopify = niche products that are difficult to find on online marketplaces.
You can also use tools such as eBay Daily Deals, Popular on Wish, Walmart Top Selling Items, and Amazon Best Sellers to discover current marketplace demands.
Remember that this is a rule of thumb only — we’ll delve further into marketplace suitability in step five.
3. What are my marketplace costs?
After identifying the best product-marketplace fits, calculate the per-unit cost of selling on those marketplaces. Look at:
- Monthly account fee
- Per-unit sellers fee
- Advertising costs
These costs differ per sales channel, depending on whether you’re selling on Walmart, eBay, Wish, Amazon, or Shopify.
4. What is a typical profit margin?
Identify the typical profit margin that you can expect to generate from your product by researching…
Category profit margins
Use Google and eCommerce seller forums to find out the typical profit margin for your product’s category.
Competitor pricing
Conduct marketplace research to find out the average sale price for your product online and in-store.
Pricing strategies
If you haven’t already, adopt an eCommerce pricing strategy that guides your product pricing and reflects your brand. For example, if you promote yourself as a premium brand, you can expect higher profit margins but lower sales volumes. Likewise, if you adopt keystone pricing, you’ll have lower profit margins but higher sales volumes.
5. How well will my product perform on different sales channels?
The final piece of information to gather is research on how well your product will perform on different sales channels — i.e. at what price would your product generate enough customer interest and conversions on that marketplace.
Some key considerations include…
- Competition: How many sellers will you be competing against, and what are their prices?
- Stock levels: Does your competition maintain steady stock levels?
- Niches or variations: Do you offer niches or variations that are uncommon on the sales channel?
- Buy box: Who is currently dominating the buy box, and at what price?
- Fast shipping programs: Are current sellers offering free and fast shipping under the marketplace’s fast shipping program?
- Reviews: Are current customer reviews positive or can you offer better customer service or product quantity at a higher price?
- Advertising: Are sellers utilizing marketplace advertising such as sponsored products, or banner ads?
How to use this information
Once you’ve gathered the answers to these five questions, you can use the information to conduct your product-market profit assessment by completing the following steps:
1) Calculate your goal profit margin
Add your product sourcing costs and marketplace fees (based on your goal product price) together to get your outgoing product cost. Use this figure, along with your profit margin research, to calculate a goal product price.
The positive difference between your product costs and product price is your goal profit margin.
2) Calculate your realistic profit margin
Add your product sourcing costs and marketplace fees to get your outgoing product costs. Use your marketplace research to determine a realistic marketplace price for your product.
The difference between your product costs and realistic marketplace product price is your realistic profit margin.
3) Make your product-market profit assessment
The difference between your goal profit margin and your realistic profit margin for each sales channel will enable you to make an assessment on product-market profit and fit.
Example: How to conduct a product-market profit assessment
Let’s see this process in action by conducting a product-market profit assessment together.
For this example, we’re going to assess the product-market profit of a cookbook stand, since our research shows that more people are cooking from home and searching for cookbook stands online.
1. Product sourcing costs
We’ve found a bamboo cookbook stand for $2.98 plus $2.02 shipping on Alibaba.
Using Deliverr’s fulfillment cost calculator, we’ve estimated fulfillment costs as:
- Storage = $0.08 per unit per month
- Fulfillment = $5.95 standard
Since we’re using an outsourced fulfillment provider and selling from home in this example, our business overhead costs are low — so we’ll put them at $0.50 per unit.
2. Best-suited marketplaces
Using some simple marketplace and competitor research, Walmart and Wish look like the best marketplaces for our cookbook stand.
Walmart, because it is suited to mainstream products and has a relevant association with grocery purchases; and Wish, because its curated shopping feed connects shoppers with products suited to hobby interests such as cooking.
3. Marketplace costs
Neither Walmart or Wish charge a monthly account fee. Therefore our marketplace costs consist of:
- Walmart referral fee of 15%
- Wish revenue share of 15%
4. Typical profit margin
To identify a typical profit margin, we’re going to use three sources:
A quick Google search shows us that the typical markup for home and kitchenware is between 200% — 400%.
Competitor pricing
Amazon research shows that most cookbook stands are priced between $15 — $25.
Pricing strategy
We’re going to adopt a price matching price strategy, keeping prices in-line with the current competition.
Accordingly, let’s set a goal product price of $20 — a 300% markup and in the middle of our competitor’s prices.
5. Marketplace performance
To identify a realistic profit margin, let’s look at the potential marketplace performance of our cookbook stand on Wish and Walmart.
Wish.com
- Competition = a high number of sellers, with average prices between $4 — $16.
- Niche = the majority of the stands are wireframe stands, with little competition for our bamboo stand.
- Fast shipping = six cookbook stands are eligible for Wish Express, with prices between $12 — $15.
- Stock levels = two of the Wish Express listings are low in stock.
- Reviews = only one of the Wish Express listings had a customer review.
A realistic product price would be $15 to match other sellers and take advantage of when they run out of stock.
Walmart.com
- Competition = low, with only 39 results priced between $8 — $25.
- Niche = there is only one similar bamboo stand, at $17.
- Fast shipping = none of the listings qualify for 2-day delivery.
- Stock levels = stock levels are high.
- Reviews = no reviews on similar stands.
A realistic product price would be $20, because the only other niche product has no reviews and doesn’t offer fast shipping.
Product market profit assessment
With this information, we can make the following calculations:
Goal profit margin
- Outgoing product costs = $8 ($5 sourcing costs + $3 marketplace fee)
- Goal product price = $20
- Goal profit margin = $12
Realistic profit margin — Wish
- Outgoing product costs = $8 ($5 sourcing costs + $3 marketplace fee)
- Realistic product price = $15
- Realistic profit margin — Wish = $7
Realistic profit margin — Walmart
- Outgoing product costs = $8 ($5 sourcing costs + $3 marketplace fee)
- Realistic product price = $20
- Realistic profit margin — Walmart = $12
The best marketplace for profit margin is therefore Walmart. Don’t forget to build in your storage and fulfillment costs in your calculations.
It is always important to take into consideration other factors too. For example, the low stock levels on Wish could indicate higher customer demand — meaning that you’ll generate more overall profits from a lower profit margin.
The best way forward would be to test both platforms to establish your final calculation: profit margin vs. sale volume. Only then, can you determine true product-market fit.
Originally published at https://deliverr.com on May 13, 2020.
