Article contributed by JustOneDime
Conventional wisdom is wrong.
For years, private label entrepreneurs have been fed a lie: selling cheaper private label products will make you more money. We’re here to take this notion and blow it to the moon.
Today, we’re going to show you six reasons why higher priced products can increase your profits and also how to fully utilize your more expensive products for larger profits:
First, higher priced private label products sell better online.
Not only do higher-priced private label products sell just as well as cheap private label products, but they actually sell better. How can we prove such a radical assertion? Data.
More specifically, we will use search term (keyword) volume data. This means:
- If we can determine which terms have the highest search volume , then we can determine which products are searched for the most.
- If we can determine which products are searched for the most, then we can determine which products have the largest demand .
- If we can determine which products have the largest demand , then we can determine what the average price is for the most in-demand products.
Why does online marketplace search volume correlate directly with product demand? Because when someone searches a term on, for example, Amazon Search, that person is a customer with the intent to buy the product related to that search term. Luckily, Amazon Brand Analytics can show us what the most searched terms are on Amazon.com—the largest online marketplace in the world. We will filter the list of results to show only generic private label products (excluding brand terms such as “Chromebook”).
The highest potential products fall within 18”x14”x8” and under 4.75lbs because items of this size save on shipping and Amazon storage fees. Therefore, our search will skip larger products. You can go with larger products if you like, just make sure your profits are strong. Following are the 10 most highly searched private label product search terms on Amazon.com as of the time of writing based on the criteria we listed above.
The first one we find is:
Next, we need to determine how much LED LIGHTS cost.
From here, we search LED LIGHTS on Amazon. And we observe the results on the first page of results for LED LIGHTS in order to determine the average price of products for that term. The average price of the products that show up for the keyword LED LIGHTS is $33.90. We will apply the same process to the rest of the most highly searched private label terms that match our criteria in order to determine price.
BLUE LIGHT GLASSES
The average price of BLUE LIGHT GLASSES on the first page of search results— $18.97
Next, we find BLUETOOTH HEADPHONES Average Price: $65.77
Next we find BLUETOOTH SPEAKER Average Price: $56.56
WATER BOTTLE $15.86
Next, AIR FRYER $121.56
RING LIGHT $56.46
LAPTOP STAND $29.22
POWER BANK $37.14
MASSAGE GUN $109.87
The average price of the top 10 private label products is $54.53.
Conventional wisdom loses the case. The best selling products on Amazon are not $15-$25, but more than double that number. You can charge an even higher price point if you differentiate your product well.
Second, higher-priced products have a larger profit margin.
Why would a pricey product have higher profit margins? Did all high-priced product sellers secretly collaborate with each other cartel-style? Nope. Let me walk you through two reasons why higher-priced products enjoy a larger profit margin as well as provide you two reasons why this works to your advantage when you build your online store:
1) Online marketplaces have fixed costs.
Here is an example that shows fixed costs in action: You have two products within the same product category: spy nanny-monitoring cameras.
One priced at $20 and the other at $50.
These hypothetical products are of similar size and weight, but the $50 spy camera is well-differentiated, branded, and comes with extra features. Shipping costs are the exact same. You don’t get charged a percentage of the sale price; you get charged according to the size and weight of the product. Realistic shipping by sea from China is $2 per unit. Fulfillment by Amazon fees (not including the referral fee), is also static and does not depend on unit price. So for both camera models, even though one is selling for $50 and the other for only $20, the FBA fees are the same!
Keep in mind, that: while we’re using Fulfillment by Amazon (FBA) for our example, similar costs proliferate throughout all the largest online marketplaces. The same is true for Pay per click (PPC). Your PPC costs do not go up because your product costs more. What drives PPC costs up is having more sellers bid on the same keywords. Well, since the keywords are essentially the same for both camera versions, PPC costs remain the same.
Additionally, higher priced products tend to have fewer sellers competing which means PPC costs are actually lower for most higher priced products! Fixed costs total for both camera models? $9. For the $20 spy cam, $9 eats up 45% of your sales price. You have $11 left over. But for the $50 spy cam, $9 is only 18% of your sales price. You have $41 left over.
2) You enjoy lower sales tax thresholds in most states.
When a customer buys your product you, or the online marketplace like Amazon, often have to collect and remit sales tax. Technically, the customer pays the sales tax. Buyers give that money to you, the seller, and you or Amazon remit (pay it forward) to the state that collects sales tax tax. But what if you could reduce how often you have to remit sales tax or even lower your sales tax threshold?
Check out our crash-course on how sales tax works in the United States. You have to collect and remit sales tax if you have nexus. You have nexus if you have physical presence in a state ( physical nexus ) OR if you meet a minimum threshold of sales made in that state.
Each USA state has made their own determination as to what that economic nexus minimum sales threshold should be. For example, if your business is located in Texas, then you will always have to collect and remit sales tax for sales made in Texas.
But when you are a remote seller, selling from one state to a buyer in another state, you may or may not have to pay sales tax. If you are below the sales threshold for that state, then you don’t have to worry about sales tax in that state. The economic nexus sales threshold is usually based on how much a remote seller has sold in dollars and/or quantity of units sold—whichever is met first. As of the time of writing, 28 of the 50 US states require sales tax when you reach either $100,000 or 200 transactions annually in that state.
For example, in the state of Arkansas, if you reach $100,000/year or 200 transactions in that year, you have economic nexus in the state of Arkansas, which means you are liable to collect and remit sales tax for all sales where products are shipped to the state of Arkansas.
If you sell a product priced at $15, then you will hit the 200 transactions per year threshold in Arkansas when you have made only $3,000 in revenue ($15 x 200 = $3,000). Assuming you were shipping an equal number of products to all states every year your collective annual revenue would be $150,000 before you owed sales tax to Arkansas.
On the other hand, let’s say you are selling a product for $50 on Amazon. You would have $10,000 of revenue from sales in Arkansas before you have to start collecting sales tax ($50 x 200 transactions). Assuming you were shipping an equal number of products to all states every year, your annual revenue would be at $500,000 a year before you owed sales tax to the state of Arkansas. Put another way, selling a higher priced product allows you to grow your revenue at $350,000 more before having to collect and remit sales tax.
Now that we’ve established that high priced products net you a larger profit margin, let us give you two ways larger profit margins help your business that you might not have thought of:
1) You can be more aggressive with advertising.
With higher profit margins, you have far more power to promote your product through paid advertising. You have room to try different strategies and find out what’s working—not just on Amazon but even on Google and Facebook advertising. High profit products means you can launch your product aggressively with a healthy PPC budget, get your product in front of shopper’s eyes, collect data on the keywords that are converting best, optimize your listing accordingly, and end up scaling far faster than timid competitors with paper-thin margins. And the more sales you receive from paid advertising, the more sales you will begin to get through organic ranking.
Organic ranking is how high your product listing shows up in search results without the benefit of paid ads.
If your profit margin is small, then advertising cost of sale (ACoS) can easily consume your profits and leave you with nothing. A larger profit margin means that you can spend more heavily on advertising without going into the negative. Sponsored ranking from PPC advertising is dependent on what you bid—like an auction. The higher you bid, the higher up in search results your listing will show up as “sponsored”. PPC costs have nothing to do with the price of your product. A $20 spy nanny camera and a $50 spy nanny camera will bid on the same keywords as each other. This means that the $50 spy camera with the higher dollar profit can afford to outspend the cheaper variant to become visible to the shopper. Your gross profit margin will set the maximum ACoS for a profitable advertising campaign.
2) The extra profit margin allows you room to amaze your customers and garner more organic five-star reviews.
You will have margin to include gifts and lead magnets for your customers. Especially in the beginning of your product and brand’s lifespan, you need to ‘wow’ your buyers. When you delight shoppers, you make them grateful when they receive your product, and buyers begin to love your brand. And when shoppers feel that way, they are more likely to leave you a positive review.
Yes, you should care about reviews. Some shoppers absolutely require social proof such as reviews in order to feel comfortable enough to order your product. But reviews should not be your top concern. They are what they are. Focus on what you can change rather than what is out of your control. Think about the key factors that influence customers to leave positive and negative reviews: product quality and brand experience. You have control over that!
One great way to delight customers is to unexpectedly include small, inexpensive gifts that buyers perceive as high value. Do not say that your package includes these surprise items on your product listing.
Then, when the customer opens the box and gets more than they expected, they are delighted. However, you can only afford to include non-advertised gifts in your product’s packaging if you have the profit margin to invest in gifts. See how having great profit margins influences the success of your business at every level?
Third, you can sell fewer products and still be profitable.
This means less effort, less time, and ultimately less costs to run your business. Get out of the volume game and get into the profit game! Ever notice those high-end clothing and jewelry stores that no customers ever seem to be in? Those businesses make such a high dollar profit on their products that they can cover their operating expenses with only a couple of sales a day. Now, if you’re selling a product on Amazon, you should aim for at least ten sales per day once you’re up and going.
Using that as our conservative model, selling a $50 spy camera at the recommended 40% margin will net you $200 per day as passive income. Not bad. Launch a few more products with similarly modest profit and you have scalable passive income. If you sold a $20 spy camera, not only would it be unlikely that you could net a 40% margin, but you would also have to sell more units in order to meet the same dollar profit as the more expensive model. But let’s be generous for a moment and say the margin is 40%. In order to net $200 profit per day and live off of this product, you would have to sell 25 units.
Even if you stick to the old way of thinking where “lower priced products move faster”, would they really sell two and a half times as fast? No. There’s too much competition at the bottom.
Fourth, you blow customers' minds with a superior product.
With higher profit margins, you can afford to build a more unique product that stands out from the rest, resulting in a very delighted customer which means more 5-star reviews, faster ranking, more sales, and ultimately more money for you.
Most ecommerce ‘gurus’ say, “Sell cheap products and make a ton of money.” Many sellers intuit that they will have to invest less money to get started when they sell cheaper products. Both are false. And if you don’t fall for it, it means that you will not be following the pack. Why is this important? Higher priced niches have fewer competitors. If most people want to sell cheap products, then it follows that the low priced product niches are crowded and that the high priced product niches have leg room.
Fewer competitors = more of the niche’s sales go to you, less competition for ad space resulting in smaller PPC costs, and overall less to worry about. And when sellers are hesitant to sell high-priced products, that also means...
The chance of someone wanting to copy your product will be low.
There will be fewer future sellers trying to get their cut of your market.
There will be fewer competitors (if any) trying to make an exact copy of your product.
And finally, you don’t have to worry nearly as much about illegal hijackers trying to sell counterfeits of your brand.
We know Chinese sellers. We have a full-time sourcing team in China made of Chinese nationals who speak Mandarin. Chinese sellers do not want to target expensive items. The risk of losing money is too great if their hijacking gets found out and stopped early. Speaking of sourcing from China...
Fifth, you enjoy lower minimum order quantities (MOQs).
When you order inventory from suppliers, they will say that you must order at least a certain number of units before the supplier will produce your product. For products where manufacturers only receive $2 revenue per unit from the seller, the MOQ is likely to be at least in the 2,000 units range for a total bill for the seller of $4,000. Why?
Most of the time and manpower involved in production has to do with setting up the production line. They could spend six hours setting up for a process that, when started, only takes a single hour to produce 2,000 units. If they set up the process to produce only 200 units, it would still take roughly the same amount of time. It would not be worth it to manufacturers if they only produced 200 units of a product that they only make $2 on each. A supplier would only receive a revenue of $400.
But what if they made $20 on each product? In this case, if they produced 200 units, then their work would net them $4,000. Much more worth their time. When you sell a more expensive product with larger manufacturing costs per unit, you can negotiate lower MOQs. Let us show you three reasons why that benefits you:
1) You can test your product and product market without investing in a large amount of inventory.
There’s a reason the Just One Dime has this mantra, “Optimize. Optimize. Optimize.” Your product may not be perfect when you first launch. Your product listing will absolutely not be perfect when you launch. When you build a business for the long-term, you must use feedback from your buyers and data to improve your product and listing. Software companies call this “iterations.” That way you can achieve a better click-through and conversion rate and more five-star reviews for your product.
Click-through rate means the percentage of shoppers that see your product listing and click on it to view your product profile compared to the total number of shoppers who see your product listing. (Clicks per total views.)
Conversion rate means the percentage of shoppers who, on your product listing, buy your product compared to the total number of shoppers who visit your listing. (Buys per product page views.)
Let’s imagine that you’ve sold 150 units when you realize that your product, a camera bag, has a flaw. The strap isn’t long enough for robust men. Now, if you had a 2,000 unit MOQ, you have 1,850 units of unworthy product sitting in inventory. You’d want to make your money back on the product, but your reviews could suffer. Potentially 1,850 unfavorable reviews.
If you sold a more expensive camera bag and had an MOQ of 200 units, you would instead be sitting on 50 units of inventory. That’s a lot less potential damage to your brand. Plus, in the event that your market niche wasn’t as hot as your product research made it look—maybe you sold fidget spinners—it’s much easier to liquidate 150 units than 1,850.
2) You enjoy smaller shipping and storage costs.
Shipping is charged by the size and weight of your inventory. Therefore, if you have a smaller order, you will get charged less. Additionally, with a lower MOQ, you can move the inventory more quickly. Keep in mind that fulfillment by Amazon increases their storage fees if your inventory hasn’t rotated in over six months. You will not have to worry about rotating 200 units as much as you would 2,000 units. Also, did you know that Amazon has instituted new inventory restrictions for products new to their platform?
You’re only allowed to send in 200 units for your first shipment. Having a low MOQ is one solution to this issue. For your following shipments, you may be allowed to send in more than 200 units based on your inventory management performance. If your product has validated itself through sales on the first order, you can place a larger order and negotiate a lower cost per unit with your supplier.
At this point, you might be saying, “But what if I sell out?” It’s true. You could sell out with only a few hundred units of inventory instead of thousands. But I would much rather have that problem, having made a ton of money, than having thousands of units sitting in fulfillment centers unsold. Sitting inventory doesn’t do you much good. If you sell out, temporarily close your listing on Amazon to preserve as much ranking as possible.
3) Your money will turn liquid much faster, which will improve your cash flow.
You can move 200 units much more quickly than you can 2,000. When you sell a more expensive product with an appropriately high profit margin of at least 40%, you are not only making more cash in total, but you are generating cash faster. In order to have a thriving business, you must move product and turn it into cash that funds your next shipment and more.
Cash is like the blood in your business’s veins. If it’s just sitting in one part of your body, it doesn’t do you any good. It has to move through your heart and get recycled. The money that was once sitting in a warehouse in the form of a product turns into liquid cash that gets reinvested into new inventory and keeps your business alive.
But this doesn’t just help your business. It helps your brand….
Sixth, investing more money into each unit makes it easier to build a brand.
You can source products from Chinese manufacturers that are both cost effective and high quality. But even then, if you only invest a few dollars into your product, it can only be so differentiated and only have so much actual value.
Remember: the better you differentiate your product, the less dependent your product will be on reviews, and the more likely you are to stand out in a sea of other products. Your high-value product will help you build a brand experience.
Buyers are already emotionally invested in your product when they buy it. They want to like it and feel good about their purchase. Delivering and over-delivering on the product brand experience is the number one way to implant your brand in their mind. The higher the quality of the product, the more likely buyers are to mention to your brand to their friends. Once enough people know about and buy from your brand, the more trustworthy your business will seem and the more money you will end up making
This all leads to one goal: grow your brand and business to the point where people will buy your product solely based on the fact that they love and/or trust your brand. And someday, you can even sell your business, something multiple Just One Dime students have already done!
What is the right product price? We recommend products that retail for $25 minimum. Your product could be over $100 or $200. As long as it sells at a great profit, that’s what matters. We fight for a minimum of 40% pre-PPC profit, but oftentimes achieve 60% or even 100% profit margins. Ultimately, you can only price your product as high as the market will tolerate. We usually recommend pricing your product just below your top competitor that makes at least 10 sales per day.
See JustOneDime at the White Label World Expo, happening on September 1st & 2nd at the Las Vegas Convention Center. Register for your free tickets today!