Question

When designing your product, you saw that adding features increases the desirability of the product to your target market, but it also increases the production cost. This means your profits will decrease. Using an example from this simulation, how can you strategically balance giving customers what they want while also making a good profit?

Answer 1

When it comes to building a highly profitable ecommerce business, choosing the right product is without a doubt the most important piece of the puzzle.

A critical first step in making sure you’ve picked a winner is evaluating the market demand, existing competition and viability of the product itself.

Get this step wrong and you run the risk of wasting your time and energy, or worse, sinking a bunch of money into inventory you can’t move.

Get it right and you set yourself up for sales and success.

To help you determine if you’ve got a viable and profitable product idea on your hands, we’ve put together this comprehensive guide that shows you exactly how to take a look “under the hood” of your market and your product to make sure you’re building your business on a strong foundation.

Let’s dive in.

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Note: In this post we’re going to show you how to analyze a variety of factors to better understand the viability of your product idea is. We will do this by using our own product choice, a coconut oil hair care product, as a case study.

It's important to remember that no single factor can give you 100% confidence in your product choice. Rather, it’s a combination of many factors that will help you paint a more complete picture and will allow you to make the best possible decision.

Make, manufacture, wholesale or dropship

Before we get into our evaluation, we first need to recognize that there are several ways we can build a business around a coconut oil for hair care product. The first step is to decide how we want to build this business: make, manufacture, wholesale, or dropship.

• Make - We can make a coconut oil based hair care product relatively easy. We were quickly able to find recipes and ingredients available online to make our own unique hair care product. We’re lucky in that a product like this doesn’t require sophisticated processes or hard-to-find ingredients. Making a product like this would be relatively easy and inexpensive. Purchasing in small quantities to make our initial product means our margins will be smaller but as a new product and brand, we would also have full control over the pricing and a lower inventory risk.
• Manufacture - This would consist of working with a manufacturing partner to develop a coconut oil based hair care product. Because of the relatively simple nature of the product we're creating, this option doesn’t make much sense until we get to a point that we cannot keep up with demand on our own. This costs associated with manufacturing a product like this would be much higher than if we were to make it ourselves due to minimum order quantities set by manufacturers, likely in the thousands of tens of thousands of units range.
• Wholesale - Purchasing wholesale means purchasing commercial and independent label coconut oil hair care products and reselling them on our own site. Typically your margins for reselling products are around 50%, so a product that costs us $10 to buy wholesale would retail for around $20. When buying wholesale, you’ll have little control over pricing as the prices are usually established by the manufacturers and expected by the market.
• Dropship - If we didn’t wan’t to carry any inventory ourselves, we could go the dropshipping route. If we were to work with dropshipping partners, we would be looking at a much smaller margin, usually around 20%. This means that we wouldn’t have any startup costs for our inventory. Instead we would list the product on our site and when we make a sale, our dropshipping partner would charge us and ship the product on our behalf. If you're interested in dropshipping, we recommend Oberlo.

For this evaluation we have decided to evaluate the viability of building a business around making our own coconut oil hair care conditioner product. Remember, when choosing a business type of your own, you can always go back an reevaluate other business models if your first choice doesn't meet enough of the criteria below.

How to evaluate your product idea

For each evaluation criteria below, we’re going to briefly explain it and then use it to evaluate our product idea. Many of the decisions are arbitrary and you may have a slightly different opinion for each criteria. For many of the points there won't be perfect answers, rather educated guesses. Each of these criteria are meant to help you better understand your own product choice and all the factors of building a business around it.

You can use these 16 questions as a framework, substituting our product choice for your own in order to get a better idea of your products potential and to avoid dangerous potential pitfalls.

Market based criteria

The first thing we want to look at is market based criteria. These are criteria that are usually external facing like market size, target customer, whether you're dealing with a trending product, and so on.

1. What is the potential market size or demand?

Gauging market size and demand can be difficult but you’re going to want to have some sense of the potential market size and demand before investing any significant amount of time, money and energy in your venture. It can be as simple as using a service like Buzzsumo to better understand how many people per each day are talking about your potential product. Perhaps the most popular tool is the Google Keyword Planner Tool which will help you determine how many people each month are searching for keywords related to your product idea.

Evaluation: We determined in our last post that search volume for coconut oil hair products is extremely high. Using Google’s Keyword Planner Tool we were able to determine that there are over 73,000 searches per month in the USA and Canada for coconut oil for hair and similar keywords.

Using Buzzsumo, we were also able to determine that there were approximately 150-250 Tweets per day mentioning our main keywords.

This information doesn’t give us 100% certainty that our potential products will have a market of buyers but it's a vote of confidence that if we do launch a coconut oil for hair product, there are likely people with with interest in learning more.

2. Who are your competitors?

It’s always good to know who you’ll be competing against if you choose to start your business. The more you understand about the competitive landscape before you start your business, the less potential surprises you’ll face later.

Learn More: How to Conduct a SWOT Analysis for Your Business

Evaluation: From our analysis and as we mentioned in our previous post, there are three areas of competition in the coconut oil hair product market:

• Pure Coconut Oil - Pure coconut oil is the main ingredient and from our research does a great job on its own of moisturizing and repairing hair. Pure coconut oil is readily available online and locally.
• DIY Coconut Oil Recipes - Do-it-yourself recipes are available online. All recipes obviously include coconut oil as the base ingredient, but also combine various other ingredients to improve the effects of the final product or to help change its core function/texture. For example, hair conditioner vs. hair mask.
• Commercial Coconut Oil Hair Products - These are products produced by businesses large and small and contain a proprietary blend of ingredients to create a unique and perceived better final product.

We didn’t find any true market leaders for our coconut oil for hair products rather a very fragmented market of manufacturers and retailers.

3. Is it a trend, fad, flat or growing market?

Just as important as knowing your potential market size and demand, is also knowing which direction the market is going. The last thing you want to do is spend a lot of time, money and effort to create a product and establish a business just to find that you missed the boat and the market is rapidly declining.