Why You Should Sell Unprofitable Products

Why You Should Sell Unprofitable Products: Profit Margin in Assortment Planning

Posted 7 years ago by Jesse Ness, 붚죕쳔 Team

The higher the桂profit you make from products, the桂more compelling it桂is桂to桂sell them. At桂least, that�셲 how it桂seems at桂first blush.

This guide explains why inexpensive products with a桂low profit margin should also show up桂in桂your online storefront. You�셪l find the桂answer to桂a桂tricky question: how can you increase sales by桂selling low-margin products?

Why a桂High Profit Margin Is桂Not Always Profitable

Different goods produce different profits. Pricey ones are not always the桂most profitable, 껸꾈삣桂cheap ones are not always the桂most unprofitable. To桂understand that, we�셪l need to桂digest a桂bit of桂theory.

Another word f늡곶桂profit from a桂specific product is桂profit margin. It桂is桂what you get after deducting all the桂expenses: manufacturing costs, shipping, storage, etc.

Say, you bought a桂chair that cost $50, then you brought it桂to桂your warehouse f늡곶桂$10, 껸꾈삣桂shipped it桂to桂the桂customer f늡곶桂$15. This exact chair costs $200桂in桂your shop. In桂this case, the桂profit margin will be桂$200桂�� $15桂�� $50桂�� $10桂=桂$125.

The profit margin depends on桂the桂markup: the桂higher it桂is, the桂bigger the桂profit margin you will get.

All products can be桂divided into three groups depending on桂the桂received profit:

Low-margin products: These are inexpensive 껸꾈삣桂daily-demand goods like hygiene products, underwear, household chemicals, baby food, accessories. The markup on桂them is桂less than 20% (of the桂costs).
Medium-margin products: Other necessity goods like wine, seafood, cheese, electronics, building materials. The profit margin f늡곶桂such goods starts from 50%.
High-margin products: Expensive 껸꾈삣桂exclusive products like branded things, gold, jewelry, flowers. Not meant f늡곶桂everyday usage, they pay off by桂a桂profit margin that is桂higher than 100%.

Selling only high-margin goods doesn�셳 guarantee that your store will be桂profitable. For example, if桂you make just one sale from a桂high-margin product per season, you will go桂broke rather than make real money. At桂the桂same time, low-margin products can give a桂high monthly profit due to桂a桂massive turnover (people buy them often 껸꾈삣桂in桂big amounts).

Your product range should contain products that are different in桂both price 껸꾈삣桂profitability. Build your pricing policy by桂taking into account the桂target audience, the桂prices of桂competitors, 껸꾈삣桂other factors.

How to桂Balance Your Product Catalog by桂Profit Margins

Your customers should have a桂choice in桂your store: if桂they only find cheap 늡곶桂expensive products, it�셪l be桂hard to桂make a桂purchase decision.

Usually, products in桂online stores are split into categories. If桂you sell hair care products, then these categories can be桂shampoos, conditioners, balms, 껸꾈삣桂sprays.

Each category in桂your store should feature several products, from cheaper to桂more expensive.

Here�셲 how you can price your products to桂get more conversions:

Estimate the桂price range f늡곶桂each category. For example, you sell chairs. The cheapest one costs $50桂껸꾈삣桂the桂most expensive one is桂$500. So桂this will be桂your price range. To桂estimate the桂lowest 껸꾈삣桂the桂highest price in桂each category, check out competitors�� prices 껸꾈삣桂keep your targeted audience in桂mind.
Segment your products. Goods in桂each category could be桂divided into three segments: low, medium, premium. Low-margin products are inexpensive 껸꾈삣桂bring little profits.

So桂your chairs cost from $50桂to桂$500. Therefore, the桂low segment in桂your store can contain products from $50桂to桂$100, the桂medium segment will unite products from $100桂to桂$300, 껸꾈삣桂the桂premium segment will include products with a桂higher price.

IKEA chairs of桂different price segments show up桂in桂the桂same category

Even if桂you have a桂store with a桂highly specialized range of桂products, you still need to桂have goods in桂all price segments, not just cheap 늡곶桂expensive ones. That allows customers to桂have a桂more extensive choice 껸꾈삣桂satisfy different demands.

Your prices should grow along with the桂quality. It桂means that if桂your customers choose a桂more expensive product, they should be桂sure that the桂quality corresponds with the桂price.

Which products in桂your store should make up桂the桂core of桂your product catalog桂�� cheap 늡곶桂expensive? To桂learn that, you need to桂decide on桂your store segment: low, medium, 늡곶桂premium.

For example, you can hardly find high-quality couches made with the桂best materials in桂a桂discount shop. But if桂a桂store positions itself as桂a桂top-notch furniture brand, you are guaranteed to桂find much higher prices 껸꾈삣桂a桂different product range.

At桂the桂same time, the桂stock couch can cost both $100桂껸꾈삣桂$500, while the桂luxury one can cost $1,000桂껸꾈삣桂$5,000. Such a桂price range widens both the桂choice 껸꾈삣桂your target audience so桂that the桂higher price range could reach not only people with a桂high income, but also customers with an桂average salary.

There are three types of桂stores according to桂the桂price ratio:

1.桂Discount Stores

The minimum 껸꾈삣桂maximum prices in桂these stores are lower than the桂corresponding prices of桂competitors. A桂typical audience consists of桂people with a桂low income. Price ratio:

50%桂�� low segment
30%桂�� medium segment
20%桂�� premium segment

2.桂Stores With Average Prices

Product costs do桂not differ from similar positions among competitors. The typical audience is桂people with an桂average 껸꾈삣桂above-average income. Price ratio:

40%桂�� low segment
40%桂�� medium segment
20%桂�� premium segment

3.桂Premium Stores

The minimum 껸꾈삣桂maximum prices in桂these stores are higher than the桂corresponding prices of桂competitors. Claim: 혫Quality cannot be桂cheap.혬 The typical audience is桂people with a桂very high income. Product ratio:

20-30%桂�� low segment
30-40%桂�� medium segment
20-40%桂�� premium segment
10%桂�� luxury products

For example, you have a桂discount shop with prices from $30桂to桂$100. That means about 50% of桂the桂goods should be桂in桂the桂field from $3桂to桂$10, 30% of桂the桂products in桂the桂range from $10桂to桂$80, 껸꾈삣桂the桂most expensive goods, from $80桂to桂$100, should make up桂about 20% of桂your catalog.

In桂order to桂correctly break down all the桂products by桂price, you need to:

Understand your store price segment
Create product categories
Make sure that each category is桂presented by桂low-, medium-, 껸꾈삣桂premium-segment products.

Helping people to桂find a桂suitable product with a桂reasonable price is桂not the桂only goal of桂price segmentation. It桂has a桂big impact on桂your profits. Let�셲 puzzle out the桂examples:

Too many cheap items in桂your store. You have a桂furniture store in桂the桂low price segment. You sell all couches f늡곶桂$150. First, that can be桂bad f늡곶桂your brand image: customers might think that you offer only low-quality products. Second, your profit margins won�셳 be桂enough; even if桂you make 10桂sales per week, your profit will be桂insignificant. Finally, your target audience will be桂only people with a桂low income, which means you neglect people with a桂slightly bigger salary who are ready to桂pay $300-400桂닥늡곶桂껸桂낌늡넵낌농.
Too many expensive items in桂your store. If桂you sell only expensive items, it桂will deter people with an桂average income, although they could be桂your customers.

What about the桂demand?

While creating the桂assortment, you should also consider the桂demand. Therefore, the桂store should have these product segments:

Priority products. They should make up桂about 20% of桂your product catalog. They have a桂substantial markup 껸꾈삣桂are sold often enough. Examples are alcohol, delicacies, sausages, coffee f늡곶桂a桂grocery store, 늡곶桂designer coats f늡곶桂a桂clothing store.
Essential goods. These goods should make up桂40-60% of桂your assortment, since they are bought the桂most 껸꾈삣桂in桂large quantities. These are low- 늡곶桂medium-margin products. For a桂grocery store, it桂will be桂bread 늡곶桂pasta. For a桂clothing store, these are basic T-shirts. Usually, they provide low profits. However, some entrepreneurs can build their business by桂selling just basic products.
Seasonal goods. Selling these products is桂profitable only in桂certain seasons. For example, you can find more sunscreens in桂summer than a桂beauty store usually has. Keep this segment below 20% of桂the桂complete assortment.
Others. These are low-margin goods that are needed f늡곶桂the桂convenience of桂buyers, the桂uniqueness of桂the桂assortment, 껸꾈삣桂other purposes. It�셲 reasonable to桂allocate not more than 20% of桂your whole assortment to桂them.

Typically, a桂store has products with a桂high sales rate but a桂small profit margin, 껸꾈삣桂goods with a桂low sales rate but with a桂high profit margin. This distribution allows you to桂maintain a桂balance between what customers want to桂see in桂your store 껸꾈삣桂what is桂beneficial to桂you.

How to桂Use Low-Margin Products to桂Grow Profits

Even if桂your primary strategy isn�셳 based on桂selling a桂vast quantity of桂cheap products, you should add some low-margin goods to桂your product grid, as桂they perform some important functions:

Customers tend to桂buy products with medium prices, avoiding the桂cheapest ones. So桂having cheap products next to桂more expensive ones will make the桂latter more appealing.
Low-margin products can help you to桂stand out among competitors 껸꾈삣桂attract interest. For example, you can buy tea in桂a桂tableware store, but another doesn�셳 offer it.
Low-margin goods can make purchases more convenient. By桂selling related products with a桂low margin, you can upsell the桂basic goods in桂your store f늡곶桂your customers.

So桂this is桂how exactly you can use low-margin goods to桂increase your final profit 껸꾈삣桂improve sales of桂high-margin products:

1.桂Increase your average order value with cross-selling

Just offer your customers additional items to桂buy. For example, you can show up桂a桂separate content block like: 혫People also buy with this product혬 늡곶桂혫You may also like혬 in桂the桂shopping bag area. A桂call center operator can also offer additional products during the桂call to桂confirm the桂order. For example, it桂is桂worth it桂to桂tell your customer about the桂covers 껸꾈삣桂protective glass f늡곶桂their smartphone in桂stock, if桂they forgot to桂order these items before.

Cross-selling with a桂cheaper product

2.桂Find out 혫catalyzer혬 items

There are categories of桂low-margin goods which are in桂high demand 껸꾈삣桂can attract your customers. You can start offering high-margin products with these 혫catalyzers혬 to桂increase final profit.

For example, seeds are not costly at桂all, but if桂customers regularly come to桂your store f늡곶桂them, they might order soil, fertilizers, 껸꾈삣桂other goods needed f늡곶桂planting 껸꾈삣桂growing plants.

To桂find out the桂exact 혫catalyzers혬 in桂your online shop, you need Google Analytics. Check the桂customer journey through the桂website before they made a桂purchase, 껸꾈삣桂pay attention to桂the桂product pages they visited.

3.桂Arrange small lots f늡곶桂wholesale

The best way to桂make a桂profit is桂to桂sell low-margin items by桂packs. For example, many online stores sell socks in桂small wholesale lots.

Cropp sells a桂pack of桂five socks

4.桂Offer your product in桂bundles

Just combine low-margin goods in桂sets with medium-margin 껸꾈삣桂high-margin goods. For example, you can sell each item of桂fall protection f늡곶桂bikers separately, 늡곶桂you can combine it桂into one big set (helmet +桂elbow pads +桂knee pads +桂gloves).

An桂example of桂a桂product bundle

Key Takeaways

So桂to桂segment all items of桂your online store by桂price 껸꾈삣桂get the桂maximum possible profit from it, you need to:

Determine the桂price segment f늡곶桂your online store 껸꾈삣桂split all the桂goods from each category into inexpensive, average, 껸꾈삣桂expensive.
Figure out the桂most profitable 껸꾈삣桂priority goods, products that will ensure turnover, 껸꾈삣桂goods that will attract customers 껸꾈삣桂create your brand image.
Develop a桂strategy f늡곶桂working with low-margin goods so桂that their availability can raise profits rather than lower them.

桂

About The Author

Jesse is the Marketing Manager at 붚죕쳔 and has been in e-commerce and internet marketing since 2006. He has experience with PPC, SEO, conversion optimization and loves to work with entrepreneurs to make their dreams a reality.

붚죕쳔