To have a success business, you need to have a clear understanding on what you're going to sell and who you're selling it to. 99% first-time entrepreneurs don’t put a great deal of thought/ financial into their niche.
Your niche impacts a lot of things, including:
Your sales figures
Your profits potential
How much effort you’ll have to put into customer support
Whether or not you’ll have repeat customers
This is why it’s important to take some time to think of a niche that is strategic.
Your niche is broken into parts: price, audience, market opportunity.
Pricing
At the most basic level, we all understand this concept:
Price x Quantity = Revenue
Average Order Revenue = Revenue / Order #
If you sell cheaper items, more people are likely to purchase, but your Average Order Value (AOV) will be smaller. If you sell more expensive items, less people are likely to purchase, but your AOV will be larger.
What is that means to me?
After effort and cost for operations, warehousing, and marketing costs, most ecommerce store owners end up with a 15-20% net profit margin.
If you’re selling a $500 item, you’re only making $100 on that sale, where if you're selling a $200 item, you’re making $40.
Think of it this way:
The amount of time and energy you spend on processing and fulfilling your order is the same regardless of whether you’re selling $100 items or $500 items. You might as well get more bang for your time, right?
Try to price your items/ order at $500 or above. Assume you can get 10 orders per day, you can achieve $500x10x30 revenue = $150,000 and approximately $30,000 profit.
Branding
You want to avoid area which are already dominated by household names. Example, you won't want to sell groceries against supermarket. Your headphone die and you might go to Sony, Bose, Beats or even Apple.
However, if you want to buy a "chandeliers", you will likely google it.
See the difference in behaviour? In niches dominated by a few brands, consumers don’t even think about alternatives.
Please stick with your niches and products that don’t evoke much brand loyalty or brands that are already top-of-mind for a certain type of product.
Popularity
You should try to identify a niche or product that’s slowly but steadily growing in popularity. To help you along, here’s a handy tool: Google Trends. https://trends.google.com
Just plug your keyword in and you’ll be able to see how many people are searching for the term (either worldwide, or within a specific country).
For example, if you look at the term “wellness”, you’ll see a nice upward trend over the last 5 years.
Last but not least, consider the longevity of your customers.
Longevity
It’s important to have some foresight when you’re starting a business. Business owner should increase their Customer Lifetime Value (CLV), and they come up with strategies to retarget their existing customers and keep selling to them.
Here’s the tricky part. Certain niches are absolutely horrible for customer longevity. It pays to be aware of these upfront, so you don’t find yourself in a bind when you’re 6 months into your business and trying to figure out how to increase your CLV.
One example? The wedding niche.
People automatically assume the wedding niche is highly profitable because, well, people are willing to splurge on their big day. That’s true, but what they don’t realize is that the “lifespan” of each customer is surprising short. You might have 100 customers today, but these 100 customers will have churned within 3 months — and they’re never coming back.
While other ecommerce stores will be able to work on customer retention and sell to their existing customers, it’s a different story for you. In order to scale your business, you’ll have to spend aggressively on ads and other forms of marketing. You’d be stuck in an endless loop of customer acquisition. And once you stop, your sales drop too.
In Summary,
Unprofitable niches are typically associated with cheaper-priced products, evoke a ton of brand loyalty, aren’t growing in popularity, or don’t have customer longevity.
Profitable niches, on the other hand, are associated with more expensive products, don’t evoke brand loyalty, are growing in popularity, and have customer longevity.
I recommend not blindly going into a niche you know absolutely nothing about. In a selling cycles, you should either know the seller or buyer behaviour. If you find a niche that fits the above criteria but is new to you, take your time to do some market research. (Google it!)
At the end of the day, the more you understand your competitors and how the niche or industry functions, the better your chances of building a successful online store.