“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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Product data vs. market data
Interpreting and analyzing market data
The key metric to ROI
Plotting your course for success
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The ROI Metric: Identify the Best Products to Sell on Amazon
Let me first begin by saying just about every product available to sell on Amazon as a private label product is a GREAT product to source, so long as it fits into your business’s strategy, you have the resources, and it makes sense for you as an entrepreneur. So the difficult thing is not finding a product to source. Go to Amazon.com’s home page, and you’ll see plenty of sourceable widgets. The difficulty lies in finding a product to source that fits You and Your business.
In this article, it’s our goal to help you identify what makes a product great for you, so you can build the foundation for the level of success you are looking for!
Identifying What Private Label Success Looks Like To You
While we are largely going to try to help you identify how to choose products that fit your ideal success model, we are also going to be challenging your definition of success. We’ve seen many many sellers succeed, and unfortunately our fair share of sellers fail despite our efforts. With the experience and data we have, we’d like to help you avoid the pitfalls we’ve seen others make.
So what does success look like to you in the private label world? Are you looking to hit a couple of home runs with some high volume products that profit you $10,000+ per month each? Are you looking to source a variety of low volume products that when added up bring in a hefty profit each month?
This is a decision you will have to make for yourself. If you expect to profit $5,000/month on a single product, but get into a product market where the average sales price is $10 and the average sales volume among the top sellers is around 500 units per month, you will be severely disappointed. If you are looking to source 5 products that add up to a monthly profit of $5,000/month, then this very well may be a good choice. See how expectations and how you define success matters?
Obviously we would all like 100 products that profit us $20,000 per month, but so does everyone else, which means you are going to be competing with a ton of other sellers. So in order to appropriately define your definition of success, you also need to understand how plausible your ambitions are given your current resources both financially and time-wise. Do you have a big team? Do you have thousands, tens of thousands, hundreds of thousands, a million+ to invest in your Amazon business?
Questions To Ask Yourself In Determining What A Successful Product Should Look Like
How Much Money Do I Want To Invest?
Do you have thousands, tens of thousands, hundreds of thousands, a million+ to invest in your Amazon business? The amount of money you have to invest will determine how much inventory you can afford. This may influence the products you select based on their per unit cost. This also has an impact on how large of team you can build initially (if necessary). The quantity of inventory you are able to purchase also has an effect on the amount of promotional units you will be able to give, having major implications on your ranking strategy.
How Large Is My Team? How Large Of A Team Do I Want To Build If Necessary?
Some sellers prefer to not grow any larger than themselves and a couple of VAs they hire hourly. Other sellers are willing and ready to build a massive infrastructure of warehouses and employees. Obviously this is not a question if you are just getting into the business, but for some later stage sellers this may be a barrier to growth if growing a large team is outside of your comfort zone.
What Kind Of Profit Margin Am I Looking For Per Product And Collectively?
Are you wanting to go deep on a few high volume products? Are you looking to go wide meaning going after a larger variety of low to mid volume products? There are pros and cons to each, and we’ll outline those down below!
In total are you just wanting to add a few thousand dollars to your bank account each month or are you looking to build a mammoth $1,000,000/month Amazon business?
How Many Products Am I Looking To Sell In the Next 3-6 Months?
For sellers just getting started, again, this is not a question you can answer accurately right now. It is also highly dependent on your capital. Some sellers are okay launching just a couple of products and reaping the benefits each month. They don’t want the added stress and pressure of continuously launching product after product. Keep in mind the amount of profit you are looking to make total. Going after a couple of products that may add $1,000 of net profit will not get you to your total goal of $5,000 if you are only wanting to sell two products in the next 3-6 months.
What Is My End Goal With This Business?
Is this going to be a lifestyle business for you or are you looking to maximize sales to shoot for an acquisition?
This may or may not have an effect on how you choose your products. For example, from our experience with Amazon business acquisitions in the private label world, companies are looking for strong brands. So selecting products that will allow you to build a cohesive brand will be important. With that said, Amazon businesses that are purchased solely for cashflow purposes do not typically put emphasis on having a unified brand(s). Either way, it is an important consideration in how you will position yourself for acquisition if that is your goal.
How Things Will Change With the New Amazon TOS Update
Post TOS update, from our perspective, sellers must be more precise in selecting a “good” product because the playing field has been leveled. Pre-update, it was very easy to give away a large amount of product in exchange for reviews. Doing so generated a competitive number of reviews and built a sales history that got that product ranking for each and every keyword that the seller selected.
So if you had a super competitive product, you were okay so long as you had the money to run enough promotional sales.
Post-TOS update, generating a competitive number of reviews becomes much more difficult. Generating reviews today rests solely on having a killer product that customers want to review and leveraging a killer email follow-up sequence to ask your customers to actually leave a review.
So how will this affect your decision making in selecting products to source?
You need to be drastically more concerned with the number of reviews page one and two competitors have. While there is some misinformation in the space around a “magic number of reviews” needed to generate organic sales, our data shows us that the key to selling well organically is having a “competitive” number of reviews relative to those listings you find yourself around.
What that means is, if the page one sellers have reviews that look like this RUN FAR AWAY!
Here is a screenshot from the same keyword, “vitamin c serum” that shows how important having a competitive number of reviews is. The listing ranked 6th has 10,000 reviews and is selling 3,000+ units per month. The next guy, although ranking really well for a very high level keyword, is only seeing 270 sales per month. At the 8th position they have a decent number of reviews, especially compared to the the 7th and 9th position, so they are seeing a moderate volume of sales. At position 9 the seller is hardly seeing any sales at all because they have 0 reviews! While there are multiple factors that come into play when a customer decides which product to ultimately buy, reviews and price typically have the most substantial effect.
Are Home Runs Dead?
The short answer is no. Not at all. If you have already been working on a home run type product (home run = high volume product), then definitely don’t give up. Depending on where you are at in the product launch cycle, you may need to adjust your strategy, but don’t worry, success is still a very attainable goal.
If you are just getting started with a home run and it is your first product on Amazon, beware. It is likely to be a long and costly battle depending on what the market looks like. It can be best to get started with a relatively simple product to understand the market, the processes, and the expected results.
Our suggestion for new sellers is to get into markets where a “competitive” number of reviews is below 500. Ideally you could find a product where page one sellers ranking between #3 – #12 have a sales volume of 500-1000 units/month and have around ~250-500 reviews. These products are much easier to break into the market with and allow you to learn a lot of the ins and outs of selling on Amazon without investing too much money.
Keys To Sourcing Great Products Regardless of The Amazon TOS Update
Find a quality product!
Reviews are king on Amazon! If you have a poor quality product you are going to find yourself with a product that continues to generate poor reviews. Before too long you end with a product noone wants to buy. There is nothing worse than having thousands of dollars in unsellable inventory.
Quality products can result in the sales boosting effects of word of mouth, positive reviews, and repeat customers (depending on the product of course).
Find a product at a great price!
If you are sourcing your product at a 25% higher cost than your competitor(s) for the same exact product, they will always be able to beat you on price. You can quickly lose to the competition on listing price, promotion capabilities, etc.
Product sourcing Guru Alan Basinger has a quote that I love! He says, “You have to win on the buy!” It is spot on. Alan has a logistics company that helps bring products into the US as well as sourcing directly from manufacturers in China.
Go to China directly! The Viral Launch CEO recently went to Yiwu with a group called SourceInAsia as a mentor and saw just how powerful working with manufacturers directly can be to negotiating quality product at a great price.
Find a product with great margin!
Margin is a huge consideration for product price. Make sure there is a great margin between the price at which you source and the price at which you sell is key! If you’re not making much money per item what is the point in selling? The other fear is if the market decides to start competing on price you want to make sure you are not priced out. We’ve seen this happen all too frequently over the last couple of months.
Watch Out For Name Brands
We’ve seen a couple of sellers get into products that are largely dominated by name brands. This is common in baby/children’s products. For example, sourcing crayons as a private label product can be insanely difficult because the first couple of pages are almost completely dominated by Crayola. Good luck competing with them.
Also be weary of sourcing a product where the main keyword(s) is also a brand’s name. Ex. “Yeti Mug”. It can be very difficult to outrank a brand if the main keyword is the search term. Amazon attributes a LOT of rank power to the brand’s name.
Consider product size, weight and durability!
Knowing how the size and weight of a product will affect shipping is crucial to estimating margin and expense. Work with your sourcing agent or manufacturer to understand the costs associated with shipping your product into the country, to your warehouse, and/or FBA.
You will also need to know what Amazon’s FBA fees associated with shipping will be. For that you can use Amazon’s FBA Revenue Calculator which will give you a good idea (don’t bank on the accuracy of the fees).
Durability is key to providing a good customer experience and avoiding customer returns. You may want to avoid easily damaged items.
Long-Term Brand Building Or Revenue Generation
Are you looking to build a long lasting brand or just looking to solely focus on increasing revenue (not that building a brand won’t help you generate revenue)? If you are looking to build a brand, make sure to choose products that will allow you to easily add products that make sense such as a yoga mat, and some yoga massage balls. The added benefit here is you can take advantage of bundling and upselling. It also saves you time and money by allowing you to pay to have one brand created (logos, label/package archetypes, etc.).
If you are looking to simply grow revenue you can be very selective in the products you decide to source. Meaning, if the numbers make sense, source it. Sellers who take this approach end up selling products as different as a eye cream and a pet bed.
Either approach is great so long as it aligns with your idea of success in running a private label business.
Make Sure Your Product Is Created With Customer Approved Materials
You don’t want to source a cream that is going to cause rashes.
If you say your product is organic/natural/paraben-free/etc. make sure that it is. If all of your competitors are able to make such claims, you will miss out if you cannot, but don’t lie to your customers. Trust me, they will find out if you are!
The Viral Launch team uses the Jungle Scout Chrome plugin religiously when putting together launch strategies. This tool is great at allowing you to quickly analyze the most important stats of products that rank for a given search term without clicking into each listing (at least that’s how we use it). Jungle Scout also has the most accurate sales estimates overall I’ve seen.
When sourcing, Jungle Scout also allows you to easily compare how a style of product is selling better than others. For example, let’s say you are wanting to sell grill/cooking gloves (which I would advise against due to the amount of competition). You would want to know if you should invest in the type of gloves that have 5 fingers or the mittens that have one slot for your thumb and one for the rest of your fingers. Choosing incorrectly could have major implications.
We also use Jungle Scout to estimate the number of units we will need to give in promotions to achieve keyword ranking and to help give for reviews. With the TOS change these numbers will differ (which we will get into in a different section of this guide), but having an idea as to the number of units you will want to use for promotion are crucial to understanding the total costs associated with launching a product.
Greg at Jungle Scout has plenty of tutorials on how to effectively use the tool. We personally use the tool for a very limited scope of its total potential!
Project Sourcing Success (Name To Be Announced Later)
Viral Launch has seen too many sellers lose thousands of dollars by making bad sourcing decisions. By the end of October of this year we are planning on launching a new tool that will help you make more intelligent decisions around product sourcing. It will go wonderfully along with Jungle Scout or similar type tools.
If we can help our clients avoid bad sourcing decisions, we will gladly seize that opportunity!
It would take us many blog posts to effectively cover the entire ins and outs of product sourcing, and to be honest, we are not the best company to handle how to source end to end.
With that said, our extensive knowledge, data and experience in running over 11,000 product launches and working mega sellers doing 50-100 million a year in sales on Amazon, we do have plenty of beneficial tips and knowledge that can help you avoid some major pitfalls that can have serious repercussions. At the end of the day, you need to make sure you are selecting products that appropriately align with your idea of success and your resources. What is a good product for the next guy may not be a good product for you.
If you have any questions, we will be happy to answer them in the comments! If you have any feedback, we would love to hear it as well!