A Step-by-Step Guide to Finding Profitable Products

Finding Your First Profitable Product

It’s never been easier to start a business online, and digital products are a great business investment. Ecommerce has grown by 25% year over year and is predicted to keep up the pace until 2025. But to be successful you need to find profitable products.

Over 55% of products sold on Amazon in 2021 were from third-party sellers. “Third-party seller” often means individuals or small remote companies selling products online. Agile business models like dropshipping are great for new entrepreneurs because so much of the value chain is handled by other companies.

You don’t have to handle stock, you’re not tied to headquarters or infrastructure. You only need to worry about knowing your target market better than anyone.

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So why do so many aspiring entrepreneurs fail to get to that first profitable product?

One hurdle many first-time sellers face is “analysis paralysis”. A real business is a complex thing with lots of moving parts, and you’ll get stuck if you try to imagine the whole thing at once. Spend as little time as you can thinking about details like your business card or the design of your purchase order (especially when we are in an age where there are services that allow you to get your purchase order template free). Focus exclusively on getting something to market and turning a profit as soon as you can.

Once you’ve found your first profitable product and you’re road-testing your business processes, you can see what’s really working and optimize the most critical points. There’s no use optimizing your automated email flow if your product is getting battered in delivery.

Here are three steps to coming up with product ideas and separating the wheat from the chaff on your way to finding your first profitable product.

1. Come up with a profitable product idea

The first step to finding a profitable product is coming up with a good idea. But that’s hard to do without a point of reference; no matter how imaginative you are you need to start somewhere concrete. We’ll eliminate bad ideas later, but for this first step here are some places you can look for inspiration.

Pain points

Identifying a customer pain point and solving it is a surefire way to come up with a profitable product. In the world of B2B marketing, where customers making big purchases aren’t taken in by nice branding, companies have to market something that objectively solves a business problem. In a B2C context, this is a nice asset for you to have alongside your brand and packaging.

One quick way to find out customer pain points is to look at the online reviews in any niche you’re interested in. Professional product reviews will give you some good information, but pay more attention to the customer reviews on sites like Amazon. Note the issues you find in one, two, and three-star reviews and you’ll start to see some common themes.

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Passion and experience

What are you passionate about? What are your own pain points and frustrations with the tools and products you use?

Building a business is hard. You don’t want to find your first profitable product in a category only to find that, once you’ve solved the challenge of making money, you don’t really care about finding the second.

Not only will choosing a product based on your passions keep you motivated, it’s also a great product story that will help in your marketing efforts. The payments processor Stripe was aimed at software developers early on. It began when the two founders became frustrated with setting up payments on their own software.

They understood their target audience’s pain points because they’d experienced them themselves. The frustration sparked a passion for solving the problem as best they could, and their experience with it gave them the tools to do so.

Trends

Another good source of ideas is if you can capitalize on a trend early. You should try to separate “trends”, which are driven by durable market forces and could last years at a time, from “fads”, short-term crazes which will have come and gone before anyone can build a real business from them.

To spot trends, look around on social media sites and keep an eye on influencers within your target market. A visit to Trend Hunter will immediately show you trending products like pancake-flavored ice cream, stress toys, and CBD-infused everything.

2. Validate the product idea

By now you should have some good product ideas. Great, but so do all of your competitors. In order to make a profitable product you’re going to have to do some work to make sure your idea is actually viable. And that’s before we even get to validating consumer demand later.

First, you’re going to have to analyze the existing competition for your product. Ecommerce has winner-take-all dynamics similar to SEO. Nobody looks past the first page of Google. Why would they look below the top ten sellers on Amazon for their product search?

Looking closely at your competitors and their customer reviews might give you some pain-point ideas too. Pay attention to the way your competitors try to stand out from each other. Do they offer different solutions for different markets, or are they just competing on price?

The last thing you want to get involved in is a price war, which is an assured way for established businesses to strangle new entrants. This would kill your profit margin, which is already probably quite low in a sector like dropshipping. If you’re looking to build a durable business, a quick rule of thumb would be to fulfill at least one of investor Hamilton Helmer’s “7 Powers” in business strategy.

Briefly, those are:

• Scale Economies: Declining unit costs relative to the size of your business.
• Counter Positioning: Being able to do your business in a way your competitors can’t.
• Network Economies: Your product becoming more valuable the more people use it.
• Switching Costs: Once you’re embedded in the customer’s life, it would be costly for them to switch to a competitor.
• Branding: The positive associations built up around your product.
• Cornered Resource: Something you have that your competitors can’t make use of.
• Process Power: Operational excellence your competitors can’t easily emulate.

If your business has a profitable product but none of these qualities, you’ll only have a short window in which to build up the business and pivot to something more durable in the long run. Otherwise, your competitors can catch you in a price war and start wrecking your profit margins.

Those profit margins are key to your first product. Look at the price at which your top 10 competitors are selling. You cannot and should not compete on price, so you’re going to have to price somewhere in the range they’ve settled on.

How much profit would you make selling right in the middle of that range? Consider what would go on the profit and loss statement: the costs of sourcing your product from somewhere like Alibaba, adding your branding, shipping the product to your target market, dealing with returns, paying yourself and any staff, etc.

As a rule of thumb, anything you’re going to price at $15 USD or less will have low profit margins. Anything above $50 is going to have a high upfront cost of entry which you might struggle to earn out. Your first product should be something with a relatively low risk, which could quickly earn out your upfront costs of setting up. 

A few other questions you should ask yourself to eliminate poor product choices include the following:

• Is this an impulse purchase, like a nice reusable water bottle, or is this a more considered purchase like an expensive electrical appliance?
• How much would it cost to ship the product? Is it expensive but sturdy, or light but fragile and likely to break?
• Looking at the top 10 listings on Amazon, is there anything your product could do that’s immediately, obviously better than the most popular products on offer?
• Is this product a one-off purchase, or is there room for repeat purchases or upselling with upgrades or accessories?

3. Test the product idea

Before making any big product decision, it’s always a good idea to validate demand. For established companies, this means user research and customer advisory boards. For someone launching their first profitable product you just need people who say they’re interested.

When Knox Labs first started selling cardboard VR headsets, the founder validated demand with a simple but attractive landing page in 2014 that showed off the product then asked for a pre-order. He was able to validate the overwhelming demand for the product, and Knox Labs has grown to sell all kinds of VR accessories.

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Once you’ve found your first profitable product, you can worry about the rest of your new business. You should worry about your marketing funnel in the early days–A/B testing your landing page, comparing the ROI on your different ad sources–but keep a close eye on the O2C process that actually gets your product into the customer’s hands.

Your first profitable product

Finding your first profitable product takes a little imagination and a lot of detailed research. However, if you focus on eliminating bad ideas and getting something out the door, you can nurture that early success to build something sustainable in the long term.