Building an Online Store: Finding Your Niche and Sourcing Your Products

Having been in the eCommerce business for more than a decade, I find it mildly amusing when new members of our eCommerce training course say that their biggest concern is the actual building of a website. It is understandable; of course, I'm sure that I was pretty overwhelmed at the concept back in the day, although it was so long and so many websites ago, I can't really remember.

The fact is, actually building your online store is the EASIEST part of setting up a web based business. Ecommerce shopping carts like 3dcart make the process of setting up an online store pretty easy. If you can use a word processing program, you have the basic set of skills you need to easily build an online store.

There are much more important things that will make or break your prospects of making money online. Being successful at eCommerce is a lot like building a house. You have to have the right foundation or the whole thing will collapse.

In order to succeed online, you first have to choose a product niche where you have a chance of succeeding and then find reliable suppliers who will give you wholesale prices that allow you to compete in the marketplace. Get those first two steps wrong, and you'll waste a ton of time and heartache building an online store and trying to succeed when you never had a chance from the very beginning.

How to Choose a Successful Product Niche

There are a lot of factors you need to consider before building a website around a product niche. Below are the five that we consider most important, along with some other minor considerations that could influence your chance at online success:

The Big 5 Factors that Lead to Online Success:

Local Availability

If people can buy your products locally, in a wide variety, they usually do. Very few online stores are successful that are selling products that can be easily picked up at a local store. The reason is simple. Most of the time, when someone decides they want something, they want it now! People will hop into their car and buy it rather than waiting for something to arrive in several days or weeks.

If you are offering 40 varieties of a product and local brick and mortar stores have one or two on the shelf, that is an ideal product niche. On the other hand, if you have half a dozen varieties and those same six can be picked up at the local Walmart, it spells doom for online success.

Number of Searches

Clearly, people have to be searching online for the type of products your store will be carrying or it is pretty useless setting up an eCommerce store. If there are at least 70 people PER DAY searching online for the main product type, we consider that a solid product niche.

There will be various other more specific keyword phrase searches that people will perform that dramatically increase that number and you'll have many pages on your website where you can target those more specific search terms, thus increasing the total potential search volume that your website can reach.

Level of Competition

You can target a product niche with 20,000 searches per day and it will not do you much good if the competition online is so difficult, you have no chance of ever making it to the first page of the search results for any of your targeted keyword phrases.

Contrary to what many people believe, the number of websites that are selling your product line has nothing to do with how hard it will be to rank well in the search engines. Instead, the only thing you really need to be concerned about is the level of competition on page one of the search results for the keyword phrases you hope to build a website around.

The age of a site, its reputation, the number and kind of sites linking to it as well as how their site is optimized for search engines all affect how easy they will be to pass in the search rankings. For people who are new to eCommerce, it is especially difficult for them to determine how stiff the competition really is. There are manual ways to figure that out, but it takes many hours and calculations to come up with an assessment for each and every search term.

Fortunately, there are tools available that make it much easier to judge any given keyword phrase's level of competition. Most of them are pretty expensive or not very good. We use our own proprietary tool - Niche Finder Pro - because we think it is better than all of the other tools out there. It shows ALL of the various related search phrases for any given seed keyword phrase along with the number of daily searches and each one of those phrases' "Can I Rank" score. It also has columns for "Value per Visitor" and "Seasonal Immunity".

Whether you manually determine the competition or use a tool, the key to success is usually getting free traffic and it is awfully hard to get a whole lot of free traffic when you are invisible in the search engines. Sure, you can pay for advertising but the only way to continue to grow is to gradually increase your rankings in the search engines.

Product Price and Profitability

Obviously, you aren't going to make much money if there is not much profit per sale. There is no way to really know the profit margins on products before contacting potential suppliers but a good rule of thumb is to assume about a 20% net profit.  If you are selling things that have an average cost of $200, your net profit will be about $40, for instance. Some product niches have considerably higher markups (like jewelry) and some are considerably lower (like electronics) but 20% is a good starting point for guessing the profit potential of any given niche.

Also, where you are buying products from can have a dramatic effect on your profit. Buying direct from the manufacturer usually results in higher profits than from a distributor and certainly more than if you are sourcing from a middleman "wholesale" retailer. If you are buying from China, the markups can be extremely high - 100-800%. Product quality and the amount of time it takes to get products can often be a problem with Chinese-made goods, however.

The BARE MINIMUM profit per sale we will consider is $25. It's just not worth our time building a store, marketing it, getting backlinks and processing orders for anything less. Just keep in mind that advertising costs money and will eat into your profits so there is little opportunity to advertise effectively when you are only making $25 per sale. You'll need to concentrate all of your marketing efforts on social networking and have the patience to wait for your SEO efforts to bear fruit unless your profits are even higher.

We prefer to shoot for niches that have an average profit per sale of at least $50 when we are dealing with U.S. manufacturers. That allows us enough profit margin to afford to advertise immediately, while we wait for the store to make its gradual climb in the search engine rankings.

Keep in mind that we used the term "profit per sale" and not profit per item. There are quite a few product niches where people buy multiples of a product or add related products to their shopping cart. The total profit for each ORDER is what we are concerned about.

Seasonality

You would think this would be a no-brainer but we often see people building websites around product lines that are only bought during very short seasonal windows. A site selling Christmas trees or Halloween masks has, at best, one month of the year where they stand a chance of making money. The rest of the year, they sit dormant, piling up hosting and other fees.

Even niches like swimming pool pumps, snow skis and boating are somewhat seasonal. There's nothing wrong with building a website around a 3-4 month seasonal product niche, provided you have other websites that fill the gaps during the dead times of your seasonal online stores.

For the best chance of success, however, we recommend staying away from anything that is not bought year round - especially for your first website.

Other Considerations

There are other factors that may affect whether or not your online store is profitable - even if "the Big 5" criteria are met. These include the complexity of a product (you don't want to spend your whole day answering product questions or having customers accidentally ordering the wrong things), how difficult things are to ship (which could drastically affect the prices they need to be sold at). Custom made products also pose a problem (since they cannot be returned) as well as items that are extremely fragile (a returns headache waiting to happen). Items that people need to see and feel do not do especially well online, either (items where fabric is involved often are problem niches, for instance).

For the most part, however, if a product line passes the "Big 5", it stands a pretty decent chance of doing well online.

How to Find Good Suppliers

You absolutely must have suppliers who provide a quality product, have good warranty and return policies and who provide products at a price where you have a decent markup. Your profits and reputation depend on it.

First, you'll need to choose your store model (how you intend on acquiring products and shipping them) and then you'll need to set up supplier accounts.

Choosing Your Online Store Model

How easy it will be to get products from suppliers and send them to your customers depends on your business model. You can either buy products in bulk or you can have them dropshipped. There are advantages and disadvantages to both:

Buying in Bulk

Buying products in bulk is the traditional retail model used by brick and mortar stores. With this model, you buy a lot of products, store them somewhere, pack and ship orders when they come in and hopefully sell everything you purchased. There are pros and cons to this type of business model:

The Pros

• For sure, the easiest way to get products is to buy them in bulk. Very few brands will have a problem with you buying massive quantities of products from them at wholesale prices. That's THEIR business model, after all.
• When you buy in bulk - especially in massive quantities - you can get some very attractive wholesale prices.
• Buying in bulk gives you complete control over the shipping process. You can ensure packages are packed in a way that guards against breakage, you can be sure they are shipped immediately and you can provide tracking information to your customers immediately.
• You definitely are more aware of when products are in stock or out of stock when they are physically in your possession.

The Cons

• Purchasing bulk quantities of every single product you intend to sell takes a considerable investment. For many stores, this can mean forking out thousands or tens of thousands of dollars upfront for inventory.
• Buying in bulk is a huge risk. When you are just starting out, you have no idea which products will sell more than others and how often they will sell. Guess wrong, and you could be sitting on a ton of inventory for a very long time or sell out too quickly and your "online shelves" are bare until you can get more products shipped to you (it's impossible to make money without products). If you are selling things that go out of style, you might never sell them when new models come out.
• You need to store all of the products you bought somewhere. Because it is climate and bug controlled (hopefully), a room in your house is ideal. A garage, shed or barn leaves your products more prone to damage from the elements.
• You need to take care of packaging and shipping orders as they come in. If you plan on doing all of that yourself and providing timely order processing, you can pretty much scratch vacations off the list. If you decide to use a fulfillment center, your costs go up and you lose control over the shipping process.
• You are continually assessing inventory and managing cash flow - a somewhat stressful situation. When to order products and in what quantities will always be on your mind and will take up even more of your time.

Dropshipping

Dropshipping products is a more modern way of getting products to your customers. With this model, your supplier gives you wholesale prices and ships orders directly to your customers. Customers order from your website, you forward the order to your supplier(s) and THEY pack and ship the order directly to your customer.

Your profit is the difference in price between what you collected from the customer and what you pay the supplier when you order it from them. There are pros and cons to this store model, as well:

The Pros

• The number and variety of products you can carry is limitless because there is no initial investment in product acquisition.
• There is zero risk of having a bunch of inventory laying around, unpurchased.
• You can introduce the latest models the instant they become available.
• You do not need to find a space to store everything.
• You do not need to waste a single minute of your time packing and shipping orders. You can run a dropship business while lying in a lounge chair on the beach!

The Cons

• It is more difficult to find suppliers who are willing to dropship than it is finding ones who will let you purchase in bulk. This is getting easier every year as more and more top brands are realizing the potential of the internet, but it is still not as easy as saying "Here is a pile of money; send me a bunch of your stuff".
• In many (but not all) cases, you do not get quite as good of a wholesale price as you do when ordering in bulk.
• You lose control of the shipping process. You are relying on someone else to ship things in a timely manner and supply you with tracking information.
• Few suppliers are very good at letting you know when products are out of stock or when they become available again. This means you may have to refund purchases customers have made or spend more time trying to convince them to purchase something else that IS in stock. It also means you will have to continually ask suppliers for inventory updates.

We generally prefer the dropship model - especially for new online stores. The pros far outweigh the cons, assuming you can find suppliers who are willing to dropship for you.

Setting Up Supplier Accounts

Unless you are planning to source your products from China or India, where they couldn't care less who they are selling to, the business model you choose will have a direct impact on setting up supplier accounts.

We cannot emphasize this strongly enough - no matter which model you choose, you need to actually pick up the phone and call suppliers! Nothing is easier to blow off than an email or Contact Us form submission and speaking to someone over the phone gives you an opportunity to establish some rapport and a good working relationship. It's also the fastest way to get answers to questions for both parties.

If you plan on ordering in bulk, the phone call should be relatively easy. You'll discuss minimum order quantities, whether they need all the money upfront or have something like net 30 payment terms and you'll want to get a list of their products, prices, where to get images and discuss the ordering process.

If you intend on dropshipping, the process is sometimes easy and sometimes far more difficult. Whatever you do, DO NOT take the easy way out by signing up to dropship directories. In almost every case, these are the middlemen of middlemen and you will not get anything close to true wholesale prices through a dropship directory. The online complaint boards are littered with people moaning about how the prices they are getting from these supposedly wholesale directories are more than what others are selling the same products for online.

Likewise, simply doing a search online for "[product type] dropship (or wholesale)" typically results in less than stellar suppliers. Occasionally, you'll find a real supplier this way but there is a more reliable way to get good wholesale prices.

In order to stand the best chance of getting the very best prices, you are going to need to contact the real wholesalers and the best place to start is at the very top of the supply chain with the brands, themselves. Do a Google search for your main product line and see what brands the top sites are selling. Then search for those brands online and go to their Contact Us page to get their phone number.

Before calling a potential supplier, definitely make sure you have all of your ducks in a row. At bare minimum, you should have the following in place before contacting anyone:

• A domain name
• A registered DBA (Doing Business As) entity
• A sales tax certificate (also called a resale certificate in some states)

Depending on your experience and how difficult your product niche is to get suppliers, you may want to set up a "placeholder" or "dummy" website so that potential suppliers can see that you know what you are doing. Some suppliers may assume that you are already selling online if they look at the website, so it is definitely a good idea to have their competitor's products on your dummy site. Just make sure that the supplier you are calling's products are not on the site or you could have some explaining to do!

Call the brand first and ask them who you need to speak to about setting up a reseller account. When you've got the right person on the phone, tell them that you are in charge of setting up reseller accounts for your company and ask them how you go about doing that. They will likely discuss filling out an application and ask about your business.

DO NOT, at this point, tell them that you want to dropship their products. If they mention minimum purchase requirements, you can then state that you always start off dropshipping before you order in bulk so that you can establish which products of theirs you need to order, and in what quantities in the future. We have never had a company who started off dropshipping for us turn around later and pull that dropship account because we never started ordering in bulk from them. It is important that you emphasize that you will be paying for orders the moment that they are placed and WILL NOT need credit terms.

If they say they will dropship, great, your work is almost done. Find out about their warranty and returns policy, how you will place orders and, of course, get a list of their products, prices and discuss where you will get images of those products (which is typically available in a download file or they simply tell you to copy them off of their website).

If they say that they will not dropship and they have their own retail website where they sell directly to the public, ask them if they can provide you with a 30% off coupon code (or whatever they may agree to) and you can just order from their website and enter your customer's address as the shipping address.

If they are not willing to do that, tell them that you really want to feature their products on your website because they are clearly the best on the market (a little butter goes a long way). Ask if they can give you contact information for their best distributors, who may be willing to dropship. Although distributors often have slightly higher wholesale prices than buying in bulk from a manufacturer, the quantities they purchase are sometimes so large, you get wholesale prices that are just as good as if you tried to purchase smaller bulk quantities from the manufacturer. Better still, distributors often carry several brands so you may only need one great distributor to pick up a wide variety of brands!

No matter what, remain professional and courteous. Plenty of suppliers who say "no" initially end up becoming suppliers down the road, so don't burn any bridges. There are usually quite a few brands in any given product niche and you only really need one to start an online store so keep making calls until you land one. You'd be surprised at how many who initially turned you down suddenly want to be listed on your website when you start showing up prominently in the search engines with nothing but their competitor's products on your site!

What's Next?

If you manage to find a great product niche and at least one reliable supplier, the rest of building a successful online business is comparatively easy. You have much more control of everything else in the process.

You still need to build your website, optimize it for search engines, set a few things up to launch it properly, market your store, get backlinks, etc. Obviously, it would be impossible to discuss everything you need to do to build a successful online business in great detail without creating the War & Peace of blog articles (this one's already pretty long).

We discuss all of those things and many more in comprehensive detail in our eCommerce training course - Store Coach. Our FREE online course will provide you with all the basics you need to start earning full time income from your home.

Dave Hermansen is a true ecommerce expert who's been selling online since 2003. He's one of the pioneers of the dropship ecommerce model, and he and his brothers have built in excess of 100 successful web shops over the past 15 years. Since 2010 they've been teaching niche ecommerce via their training program, StoreCoach.com, and have helped hundreds of entrepreneurs quit their day job or just supplement their income.