What’s the first thing you need to solve for when you’re looking to start or acquire an ecommerce business?

Product.

Without nailing down the right products at the right margins for the right customers, your business is dead on arrival.

If you want to play on easy mode (and I like playing on easy mode) the most critical thing is to make sure your product is ecommerce compatible — something that has the right characteristics and margin to make selling DTC (direct to consumer) work.

Kayaks may be great products on their own, but they are a terrible ecommerce product. Too big, hard to ship, and high price point. That leads to expensive shipping, logistical headaches, and long consideration cycles.

On the other hand, skincare and supplements are excellent ecommerce products. Small, easy to ship, high margins.

Today, let’s dive deeper into how I think about choosing ecommerce-compatible products.

The Iron Rule of Ecommerce Margin

When choosing products, remember my iron rule of ecommerce:

(Product margin is defined as [unit revenue - unit cost] / unit revenue)

Low-margin or reseller businesses are hard to run. You have to cut corners on brand, packaging, fulfillment, and your team to stay afloat. There’s not enough room for ads, or for mistakes. Not where you want to be.

The only way you can dip below the Iron Rule is if you have unbelievable scale. Chewy is a good example — countless business have gone bankrupt selling kibble on the internet. But Chewy makes it work (barely) because they have more scale than you could possibly imagine. They’re building automated fulfillment centers.

Chewy is not on the same playing field as any other ecommerce brand. They’re slugging it out for customers with Amazon.

Unless you’re on Chewy’s level, stick to a 70% gross margin. Trust me. It’s way easier.

Revenue Density

When choosing ecommerce-compatible products, think about revenue density. Explained simply, the best ecom products are small, light and expensive per unit of size.

A kayak paddle might sell for $50 — a reasonable price — but it’s huge. The dollars per square inch is low, and it costs more to ship something that big, cutting into your margins. This is low revenue density.

A bottle of Gatorade is small — 20-32 ounces — but sells for only a few dollars. Easy to ship, but super small margins. Again, low revenue density despite the small size.

Most carriers (and FBA) start hurting you on cost for anything roughly larger than a shoebox. Sometimes you can build the extra fulfillment costs into your price for super specialized, niche items — but then you’re talking about a different answer to finding ecommerce compatible products…

Differentiated Products and Brand

The typical 20-year-old ecommerce dropshipping guru will sell you a course on going to Alibaba, finding the top sellers, asking the manufacturer to screenprint your logo on their items, importing and selling the item on Amazon.

It’s a race to the bottom, because that manufacturer is doing the same thing with 10 other sellers. You’re competing on price with a commodity product — which really means you’re competing on margins.

The only way to hold price vs. an ocean of Chinese competition is if you’ve got a product that is actually differentiated. It can’t be the same product everyone is getting different TikTok Shop ads for but with a different logo. That’s not a brand. Stop kidding yourself.

Brand power is the other side of the coin. Selling from a powerful brand carries weight. Think of Athletic Greens — if you’ve heard of the brand before, or if you’re aligned with their values, or you trust their army of high quality endorsers, you’re more likely to buy without thinking.

Price Point

There are three zones of ecommerce price points:

Death zone: Commoditized products under $15.

Even if your gross margins are good, you’re playing a game where you need immense amounts of scale just to pay one person’s salary. You’re just not making that many actual dollars per unit.

Generally, low price points mean you have to move more units to make the same profit, and more orders increases complexity, overhead, and the odds something will go wrong.

This is a brutal place to be.

Considered purchases: Luxury products over $100.

Customers are going to think it over, read reviews, compare, and ask around. It won’t be one-click on a Facebook ad to immediately buy. This is a much longer purchase funnel. You can absolutely make money here, but you need to be a great marketer and understand delayed attribution and educational selling.

Sweet spot: $50-$100 products.

This is the spot where you can make real dollars on each transaction if your gross margins are in the right place, and you can sling volume to impulse purchasers.

You don’t need infinite customers to stay afloat in the sweet spot. The price point makes customers feel like they’re spending on quality without breaking the bank — buying without really thinking about it.

I’ll wrap today’s newsletter with this: selling products in each of these brackets can work, but you need to take the time to decide if you should in the first place.

Reply and let me know if you have any questions. If you want more help with this, it’s something I work with my 1-1 coaching clients on (point 1 below).

If you liked this newsletter, I have 4 places where I share more like it:

1. 👔 The 1-1 coaching that I do with CEOs (I currently have ONE slot open).
2. 🐦 I tweet (a lot) - follow me @BillDA.
3. 🎙️ My podcast, Acquisitions Anonymous, where we break down real businesses that are for sale.
4. 📬 This weekly newsletter! Click here to subscribe and read past issues.

Until next time,
Bill D'Alessandro