If you’ve visited a car dealership in recent years, you may have noticed salespeople are more enthusiastic about showing you trucks and SUVs than sedans. Perhaps these salespeople harbor a lifelong passion for hauling cargo, but more likely their reason is simple: SUVs and trucks come with higher profit margins than sedans. SUVs, trucks, and sedans all cost roughly the same to manufacture, but SUVs and trucks have higher retail price tags, translating to more net profit for the sellers.
No matter what you sell, the key to high profit margins are controlling costs while achieving a premium price. Here’s how this strategy works.
What is a high profit margin product?
A high profit margin product is one that produces a notable profit on each unit sold, meaning that you spend less to source an item than your customers spend to purchase it. Imagine you sell custom-printed t-shirts for $12, but your equipment, raw materials, and labor cost $11. This means you only turn a net profit of $1 on each shirt sold. Yet, if you keep your costs the same and raise the price to $20, your profit margin jumps to $9 per shirt. In other words, you’ve gone from a comparatively low profit margin to a high one.
How to calculate a profit margin
Calculating profit margin involves a simple formula:
Profit margin = Retail price – cost of producing that item
The retail price is the amount the customer pays you to buy an item. The cost of producing the item includes raw goods, machinery, labor, and shipping costs. If you use accrual basis accounting, you might also include your marketing budget as part of the cost of production.
Why you should focus on high profit margin products
High profit margins contribute to business growth because they provide a high return on investment (ROI). When online retailers stock high profit margin products in their ecommerce stores, they net a comparatively high amount of money on each sale.
Consider an online retail store that sells two products: Product A and Product B. Each is priced at $100. However, the online business pays $88 to make or acquire Product A and only $61 to make or acquire Product B. This means there is a net profit margin of $12 on Product A and a net margin of $39 on Product B. So even though retail customers pay the same amount for both items, the online seller makes a lot more money selling Product B in its ecommerce store, thanks to its comparatively huge net profit margin.
5 Types of products with high profit margins
If you’re looking for high-margin profitable products to feature in your ecommerce business, there are numerous options. Some of these products come with high retail price tags; others are relatively low cost to customers. All offer significant profit margins for online stores. Here are five product categories to explore:
1. Speciality products
This category includes phone accessories, kitchen gadgets, watches, and collectibles like trading cards. These products can often be mass produced for comparatively little money and sold at a significant markup due to demand from a niche market. Some specialty products, like phone accessories, enjoy broad market demand. Others, like specialized watches, have a more niche target market. Timbuk2, which makes specialty bags, and One Blade Shave, have built their Shopify online stores around such products.
2. Children’s products
This category serves parents shopping for their kids. Americans, in particular, are known for spending a lot of money on children’s toys, many of which can be manufactured at a low cost and sold for a comparatively high price. Babylist, powered by Shopify, has thrived in this high-demand market.
Selling candles can produce a good profit margin, ranging from 25% to 50%. These profit margins are made possible by a large network of overseas candle suppliers who can produce large orders for relatively little money. You can even net high profit margins when you make your own candles because the raw materials are largely inexpensive.
4. Private label products
Private labeling is when a manufacturer makes a custom product for a retailer, based on the retailer’s specifications. Ecommerce merchants can partner with manufacturers to create custom-made private label products to sell online. The private label category includes custom clothing, jewelry, fashion accessories, and health and wellness products. Companies like Victoria Beckham Beauty, Blume, and Frank Body have built successful ecommerce stores in this sector.
Dropshipping is a close cousin of private label brands, and it represents another high profit margin option for a successful ecommerce store. In the dropshipping model, ecommerce merchants sell products that are manufactured, warehoused, and shipped by a third party. You can sell many products via a drop shipper, including coffee, clothing, and phone cases. Dropshipping can offer good profit margins because you don’t have to rent retail space or warehouse space, and you won’t need employees to physically manufacture your products.
What makes a good high margin ecommerce product?
- Demand and competition
- Production and sourcing costs
- Shipping and fulfillment costs
Having a high volume of online sales does not automatically equal high levels of profitability. For an ecommerce product to be especially profitable, it needs to fulfill most of these criteria:
- Quality. Customers expect high-quality products; anything less could increase customer returns—quickly inflating your business expenses, and eroding your profit margins. Only sell products that will consistently satisfy your client base.
- Demand and competition. Too much competition can lead to price wars, and these can eat into a company’s profit margins. Market research can reveal sustainable customer demand for various products, and help steer you away from sectors that are already saturated with competitors.
- Production and sourcing costs. Production and sourcing costs—including raw materials, equipment, real estate, and labor—are the largest business expenses for most companies. You can boost profit margins without raising prices if you tamp down production costs.
- Shipping and fulfillment costs. The size, weight, and durability of your products directly impacts the cost of shipping them to consumers. Smaller, lighter items require less postage, and durable items don’t require special packaging to ship. You can enjoy high profit margins selling heavy, bulky items like fitness equipment, but it’s even easier when you ship lightweight items like clothing or beauty products.
- Pricing. You can boost profitability by raising prices, but tread carefully: You don’t want to price yourself out of the market. Researching competitors’ pricing can help you understand what customers are willing to pay for an item.
4 tips for maximizing profit margins
- Look for niche opportunities where there’s high demand but low supply
- Negotiate with suppliers for lower prices
- Suggest related products
- Keep your pricing competitive
Whether you’re launching a new business or refining your existing one, you can optimize your profit margins by following a few simple tips.
- Look for niche opportunities where there’s high demand but low supply. You’ll have the most flexibility with your pricing if your industry isn’t already filled with competitors. Your heart might want to focus on making women’s accessories, but your head might tell you to incorporate a children’s line into your offering.
- Negotiate with suppliers for lower prices. Instead of raising prices on your customers, consider increasing profit margins from the other direction. Shop around for suppliers and negotiate to make sure you’re getting the best prices.
- Suggest related products. Once a customer is on your website or browsing your ecommerce store, you can enhance the value of their visit by suggesting related products. This increases the customer’s shopping cart totals and produces a more profitable transaction.
- Keep your pricing competitive. It’s natural to want to make as much money as possible from a sale, but your expectations have to align with market realities. After all, you can only reap a profit margin if customers are buying your products. You might choose to charge a little bit more than your competitors to boost your own profit margins, but make sure your own prices are in the same ballpark.
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The article originates from: https://www.shopify.com/blog/products-with-high-profit-margins