“The ROI Metric: Identify the Best Products to Sell on Amazon” is an excerpt from Viral Launch’s Ultimate Guide to Sourcing Private Label Gold Mines ebook. Download the full ebook at the bottom of this post.
The Key Metric to ROI: ROI Ratio
Finding the best products to sell on Amazon includes identifying and sourcing high ROI product markets.
Generally, the largest barrier to achieving sales potential in a given market is relative review quantity. We have overwhelming data showing us the relation of organic sales to relative review quantity. For example, let’s say that the majority of listings on page 1 for search “xyz” have over 1,000 reviews, but one listing has only 130 reviews. Relative to the rest of the listings, 130 reviews is quite few.
Based on what we have observed, the product with 130 reviews will struggle to sell at a similar volume compared to it’s competitors with ample social proof at 1,000+ reviews. Review quantity is a major determinant considering all else is approximately equal (price, review rating, etc.). There are certainly exceptions, but this seems to essentially be the rule. This has been observed nearly daily in our experience helping newer products achieve keyword ranking among more mature listings.
While there are certainly ways to supplement a high review quantity to drive a relatively high volume of sales with other forms of social proof (ex. Best Seller badge, Amazon’s Choice badge, superior aesthetics, etc.), reviews are generally the product market’s “economic moat”. Overcoming competitors’ economic moat (reviews), is a function of time multiplied by your review rate. The faster you are able to achieve reviews, the quicker you will be able to overcome that competitive moat. This translates to: as a product achieves a relatively similar review quantity to its competitors, organic sales volume will increase.
For this reason, we identify the market’s comparative review threshold to be the amount of “investment” necessary to reach a market’s sales potential.
ROI Ratio = Monthly Sales Potential ÷ Review Quantity
Example of high ROI Ratio: 1000 units/month / 100 reviews = ROI Ratio of 10!
Example of low/bad ROI Ratio: 1000 units/month / 1000 reviews = ROI Ratio of 1
We generally suggest looking for product markets where the average ratio is somewhere above 2-3, as these are typically some of the best products to sell on Amazon. Conversely, stay away from markets where that ratio is less than 1. The higher the ROI Ratio, the more likely it is a good market to get into (it is still important to analyze the rest of the market metrics).
An Example of Sales to Review Ratio (AKA the ROI Ratio)
Imagine the average top seller in a market was driving 1,000 sales per month with an average review quantity of 45. The sales to review ratio would be (1000 / 45 =) 22! That is incredible. Driving just 45 reviews is a very simple feat (depending on the product as some products naturally are harder to obtain reviews for). So the amount of investment, time and money spent achieving just 45 reviews, is very low considering the sales potential of ~1,000 sales per month. We would consider this a very favorable market to get into – a great product to sell on Amazon.
Conversely, here is an example of a product market where the ROI Ratio (sales/review ratio) is approximately 1 or less. The amount of investment (time and money) needed to obtain a competitive number of reviews (1,000) in order to reach the sales potential (~1,000 units/month) is far too high for our liking. There are obvious exceptions: maybe you have the money to bully your way to the top, perhaps you have a dramatically superior product (very RARELY is this a viable excuse), maybe you are okay with a low sales volume for this product as it’s a natural extension of your brand, among others.
The Psychology of Review Quantity
Here is a brief rundown of our assumptions into the customer psychology of this phenomenon. Review quantity stands as the most evident form of popularity to the consumer among the products shown in the search results (while Amazon provides BSR to provide an indicator of popularity, a simple survey of Amazon buyers will quickly reveal this is not a well known metric nor is it shown in the search results). Which product do you think has sold more units?
As consumers we want a “safe bet” when it comes to making a purchase. We want to be sure that whichever widget we purchase will completely satisfy our needs and will not break within an unreasonable time. Consumers also fall subject to the bandwagon effect in which they buy the item because it is “popular”, which in turn, increases its popularity. “Many others are purchasing/not purchasing this widget for a reason, so I will take the safe bet and follow suit.”
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The ROI Metric: Identify the Best Products to Sell on Amazon