If you’ve read any comments from an Amazon selling influencer, you’ll see them scoff and laugh at anyone who is not hitting at LEAST a 30% profit margin on all of their products.
Besides, if you have the choice between selling a high-profit product and a low-profit product, you would always choose higher profits, right?
Well, this isn’t always the case, and there are a few reasons why it might be prudent to plan to sell a product with a lower potential profit margin over a higher one.
Let’s go over some times this will be the case, but also some weaknesses with this strategy.
4 Reasons You Will Want to Sell a Lower Margin Product
Lower-priced versions of high-margin products make for easy product creation
High-margin products are typically innovative, use high-quality materials, and have a price to match.
However, there are a few weaknesses to these products you can take advantage of:
- These products typically have huge teams behind them, demanding high prices
A lot of the time, high-margin products are backed by companies that have multiple employees. By contrast, many Amazon sellers are a team of one and can sacrifice a lot of margin by being the sole business owner.
So beyond having a higher price for paying for these quality materials and designs, these products need to pay for everyone behind that product.
If you can manage to make a product of similar quality to these high-margin products, you can get a quick advantage by providing a lower price to customers due to you not having to provide paychecks for an entire team, and also not having to put a ton of resources into R&D.
- These higher-margin products have done a lot of innovative research for you
As long as the unique offering of higher-margin products isn’t protected in any way (like a patent), you are free to make something similar and offer it at a lower price to the Amazon audience.
While some might consider this a borderline unethical way to create a product, you don’t have to make ripoffs of what’s currently on the market.
Map out the different ways companies innovate in a product category, add in your own innovations, and put it all together to make a strong offering that’s unique and of high value.
Working in tandem with a good manufacturer, you can sidestep a ton of the typical costs of an innovative product-based business by leveraging all the tools, information, and people available to you.
Less Competition for Lower Margin Items (Sometimes)
While you might think that products with lower margins have more competition, that’s because you’re looking at heavily commoditized items.
However, if you’re making lower-margin versions of existing high-margin products that exist on Amazon, then you have less to fear in the way of competition.
While high-margin products are out battling it out on being the most innovative, having the best branding, and spending the most on advertising, you can get around a lot of these advantages of your competitors with an appealing price if you can come close to matching them in quality and presentation.
Lower Margin Products Rank Higher On Amazon
Some of the biggest manufacturers and brands for products on Amazon never show up on search terms you would imagine they should be dominating. If you want to find them, you will either see them through advertising or from people searching those actual brand terms.
Why don’t these products show up on generic keywords? They’re too expensive!
Branding has limits on Amazon, and that’s because of the way Amazon’s algorithm works.
The biggest factor to rank on Amazon is sales velocity, and higher sales velocity is typically had by lower-priced items.
Lower-priced items are typically lower-margin products.
With all of this in mind, if you can make a high-quality, but competitively priced product, you will have the makings of a very powerful organically ranked product.
4 Reasons You Wouldn’t Want to Sell a Lower Margin Product
Cash Flow Can Be a Challenge
High-margin products provide a lot of cash, and cash is extremely helpful to a business.
When you go the route of lower-margin products, you realize profits at a slower pace, but you’re still on the hook to restock your products all the same.
As if margins weren’t low enough, you will likely need to take on borrowed cash earlier and more often than those who sell high-margin products, hurting your margins even further.
While it’s a bummer that lower margins can lead to even lower margins, you can still make it work within the structure of your business, as long as you account for your costs and make sure you are always hitting your goal ROI.
A great way to make sure cash isn’t an issue is with a merchant cash advance, which is a unique form of funding that focuses on the revenue generated from a business rather than traditional loan metrics.
Logistics Become More Difficult to Manage
Lower-margin products require you to sell more individual units to match the same levels of profit (not margin) as high-margin products.
As the volume of products you sell goes up, the complexity of your business increases.
You’ll need more storage space on sea vessels, you’ll be balancing more SKUs, and you’ll have to come up with more products than if you went the higher profit margin route.
If you do decide to go the route of selling products that don’t have the highest margin, know that you’re signing yourself up for more work to go along with the benefits highlighted earlier.
Price Sensitive Customers Aren’t Always the Best
One phenomenon that seems to exist in the physical product world is that customers who buy the lowest-priced items have the highest expectations for those products.
With cheaper products, sacrifices have to be made to things like design, build quality, and materials used, but the purchasers of those cheaper products don’t seem to think that’s a good enough reason to not receive the same value as products that cost 5 to 10 times as much as premium versions.
Competing On Price Can Be Dangerous
We’ve all heard of the race to the bottom, and by using price as a fundamental strategy for your business, you are joining that race.
While you gain all the advantages of not having to innovate so hard or spend on costly R&D, you run the risk of others doing what you are doing at the same time, and your offering will lose any unique value proposition among a sea of similar products.
The best thing to do to fight against this kind of thing happening is to still try and innovate, brand, and present your product in a similar fashion to expensive premium options that exist, that way you won’t look like a ripoff, but merely a company that manages to deliver quality for a reasonable price.
If you can take anything away from this guide, it is that you shouldn’t be afraid of lower-margin products.
A lower margin product can be your gateway into a broader product catalog that includes higher margin, more competitive products that were launched with the assistance of the first products you were able to bring to market due to them being lower margin and lower competition.