When selling products online, one of the most important factors to determine is its rate of return — or in other words, the amount of profit you stand to make on your initial investment.
No matter what type of products you sell, you incur costs associated with producing and selling those items. To determine your gross profits, you must subtract the cost of goods sold (COGS) from your total revenue earnings. You can then determine your gross profit margin by dividing gross profits by total revenue.
In a volatile economy, product categories that deliver a high rate of return are more important than ever. Inflationary pressure, supply chain disruptions and other unexpected setbacks can easily cause a business with low profit margins to go under.
While pricing, manufacturing partners and other strategic elements play a role in determining your profitability, the product categories you choose to sell will directly influence your return rate. Avoiding product categories with particularly low profits could prove key to survival in 2023 and beyond.
1. Lawn and Garden Supplies
Lawn and garden supplies are tied to housing markets — and currently, the U.S. housing market is facing several negative factors. Mortgage rates have recently surged above 7 percent, on the back of record-breaking price appreciation following the COVID-19 pandemic. While many economists now expect some level of correction to housing prices, rising interest rates have made buying a home unaffordable for many.
With housing prices and mortgage rates now significantly higher than they were before the COVID-19 pandemic, more would-be buyers are going to delay homeownership. They may continue to rent, or choose to purchase smaller, less-expensive properties that require less upkeep (such as a townhome or condominium). And as a result, the need for products in the lawn and garden categories is likely to suffer.
Furniture is often sold as a high-end product, which can give the assumption that furniture sellers enjoy a high rate of return. But furniture can be a risky product category for less-established e-commerce stores, particularly with major retailers like Amazon and Walmart successfully competing in the sales of low-cost furniture items.
One of the biggest challenges in selling furniture is the size and weight of each individual product. The bulkier and heavier the item, the more expensive it will cost to ship. Buyers generally aren’t willing to spend hundreds of dollars on shipping, so sellers typically account for shipping costs into their list price and then offer “free” shipping. But this can easily cause prices to exceed what customers are willing to pay.
When combined with the fact that quality furniture is often expensive to manufacture, the total cost involved when trying to sell this product category make it a major risk.
Fragile items like glassware bring their own set of complications. Such items require specialized packaging to reduce the risk of damage while in transit to customers, which can eat away at their profitability.
Even when taking necessary precautions, however, there is still a high risk of the product arriving in a damaged or defective condition. In fact, surveys indicate that a damaged or broken item contributes to 80.2 percent of online purchase returns.
To avoid upsetting customers, e-commerce retailers must either provide a refund or a replacement product. In this scenario, you could potentially end up shipping two products to a customer, even though they only paid for one. This can quickly eat into your rate of return, especially if you are also forced to change shipping or manufacturing partners to reduce the frequency of damaged orders.
4. Household Products
Everyday household products cover a wide range of items — from toilet paper and cleaning supplies to silverware and towels. If the product does not have a strong differentiating factor, it is unlikely to gain much traction with online buyers. Household products are already readily available at a low cost from stores in their neighborhood, be it a local grocer or a nearby Walmart.
Indeed, even on well-established sites like Amazon, achieving a significant profit margin in the household goods category can be a challenge. A 2021 research report by McKinsey found that household goods were Amazon’s least profitable channel in terms of profit margin.
Generic products in this category may be able to be manufactured cheaply, but because they are so readily available elsewhere, e-commerce sellers have less opportunity to charge higher prices. Without a unique differentiating factor, they are likely to remain unsold.
5. Form-Fitting Clothing
While clothing can be a highly lucrative product category for e-commerce sellers, form-fitting or “slim-fit” clothes are a riskier product category. In fact, studies have found that 46% of returns at online retailers are because clothing “was the wrong size, fit or color.”
The problem, of course, is that customers have no way to try on clothing when shopping online. Including measurement information and sizing charts can be helpful, but some customers will still “hedge their bets” by purchasing the same item in multiple sizes and then returning the one that doesn’t fit.
Because customers expect free and fast returns, this can quickly drive up your cost of goods sold. Unique and trendy clothing can still be e-commerce winners, but loose-cut clothing is a safer bet.
Prepare Your E-Commerce Brand for the Future
There is no telling just what the future might bring. Customer preferences can change. Economic disruptions can drive up manufacturing costs, or lower your target audience’s buying power.
When such setbacks occur, the companies with the lowest profit margins are at the greatest risk of going out of business. For e-commerce brands, staying away from product categories with a low rate of return could make all the difference in their ability to stay afloat during hard times — or to maximize their revenue potential during good times.
With Manufactured, you have a trusted partner to help you manage the entire manufacturing process from start to finish. With a wide network of partners from across the globe, you can find the right partner for your unique needs so you can control costs and deliver quality products to your customers, all while achieving strong returns.
Interested in Manufacturing Financing, Inventory Funding, or a Private Label Product, contact us and let us know!
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