Finding the right niche for dropshipping is challenging, but it’s crucial. It defines your target market, the products you sell, the potential buyers, your competitors - it’s the foundation of your business. Choosing the wrong niche is the reason for most dropshipping businesses to fail.
I want to explain how I chose my niche when I started my dropshipping business selling ergonomic office chairs in Germany. It wasn’t a straight forward process but the more I got educated in this topic the more I understood the anatomy of a great niche.
But before I get into the nitty-gritty of my process I want to talk about the things I loved I knew before starting out. Since I didn’t plan to start a dropshipping business at first, these basic requirements hadn’t my focus at all and I just ignored them for the first few days. Luckily I didn’t make any stupid decision in that time but I want you to start with knowing the basics right from the beginning.
It’s tempting just to talk about the aspects that define a good niche, but what about things that you definitely need to avoid? I found only a few good articles about this topic and that’s why I want to start with a „Avoid at all costs list“ - kudos to Chase Reeves for introducing this term to me.
Competing on price. The biggest mistake is to compete on price. There are so many huge retailers in the world, Amazon just being one of them. Don’t try to beat their prices, you’ve got no chance. You’d rip off your profit margin and bring yourself in a non-trustworthy situation. Amazon is known to be one of the cheapest retailers, people are aware of that. When you sell even cheaper it’s most likely that people suspect you’re selling low-quality products. Simply because otherwise you shouldn’t be able to beat prices of the big retailers.
Selling too cheap or too expensive products. You often hear that products for dropshipping usually are priced around $200 and that’s for a good reason. With most wholesalers you can negotiate within this price range a profit margin that generates good income without the need for crazy high sales numbers. You’ll want to avoid the need to sell hundreds or thousands of products to become profitable.
When you’re selling cheap products, your profit margin normally isn’t sufficient to generate enough income unless you have a high sales volume. On the other hand when you’re selling very high-priced products, people will be hesitant to spend that amount of money online. Think of yourself, when was the last time you spent $1,000 online compared to spending $200 online?
Lacking Differentiation Possibilities. When you enter a market, you need to clearly differentiate yourself from your competitors. People need a reason to buy from you, the new player, instead of purchasing the same product from a well-known and well-trusted retailer. Make sure that you have the chance to differentiate yourself and make your products and/or service look special. Learn the details about the use of your product. What questions do people have that other retailers don’t answer? How can you add value in non-pricing terms?
High Turn-Over Rates. Turn-overs are a real pain for drop shippers. When you choose the products to sell make sure that your wholesaler delivers high-quality items. Get in touch with the sales representative and inform yourself about the average turn-over rate. For my ergonomic office chairs this rate is around 5%.
Calculate how much sales you’d need to make in order to pay for one returned product. You’re the one who’s paying for returned products because you’re refunding the money to your customer and your wholesaler most likely won’t take the product back. Obviously you could sell the returned product at a lower price online, but still you’re loosing money.
You can calculate how many sales you’d have to make in order to pay for one returned product:
number of sales = average return costs / average profit per sale
I like to treat the average product price plus shipping costs as the average return costs, because the retailer pays for the shipping when the product price is 40€ or higher. Obviously that’s the case for my office chairs.
No chance to become an expert. To sell products, people need to trust you as an expert. No trust means no sales, it’s as easy as that. That’s why you need to find a market where you can become known as expert. Don’t try to enter markets where you have no chance to getting even close to expert status. You need to educate yourself about the products and to understand their functions. Expert doesn’t mean that you need to know every single product in detail, but you need to have a solid understanding of the basics in order to market the products successfully and to deliver good customer service.
Ok, so now that you know about the things that you need to avoid when entering a new market, it’s time to dig deeper. Where do you get information about the market, the products and your potential buyers?
The best way to get first hand information is to talk to your buyers. Get active in social media, forums and any other platform your buyers spend their time. If that’s a hobbyists forum, that’s great. If that’s a group on LinkedIn or Facebook, go and join it. Pay close attention to what they’re saying and what questions they’re asking.
When I started to seriously consider dropshipping ergonomic office chairs, I remembered how my former employer handled the purchases and installations of office chairs, and what questions my co-workers had when they got their new ergonomic office chair. How would they arrest the arms of the chair, how would they adjust the back of the seat and the lumbar support? I also talked to friends who are physiotherapists. They gave me valuable insights on what information my buyers need in order to find their perfect office chair. I recognized that most other german retailers for office chairs didn’t explain these health issues on their websites. So here’s a clear chance to differentiate my business.
What was the last expensive purchase you made? A new TV? A new bike? Or a new car? Whenever people spend a bigger amount of money on a product, they do extensive research upfront. They read reviews on Amazon, they watch video reviews on Youtube and they spend hours in forums talking to people who have bigger expertise than them.
Remember when you spent weeks researching to find a car? That’s exactly the level of research you need to do in order to find a profitable niche for dropshipping.It isn’t easy, but that’s your chance to stand out of the masses. If it were easy, we all would be millionaires by doing dropshipping.
I accidentally stumbled upon ergonomic office chairs by doing keyword research. As I stated before, I can compile a few thousand monthly visitors from organic search if I manage to do SEO right. So the foundation to get traffic to the shop was evident.
Ergonomic office chairs do fall in some of those dropshipping market categories discussed above but not in all of them. For example the price range of my products is $200 - $500 and not limited to $200. That’s because I think people know that good ergonomic office chairs cost more than $200. Also it’s easy to buy even more expensive office chairs in local stores and the main competitor is also pricing products in the same range. So the price shouldn’t be a factor to decrease sales.
As I’m working with the same wholesaler as my biggest competitor I’m sure that I can compete on quality. My prices are slightly higher than my competitors, but comparing 379€ to 399€ shouldn’t be a problem if I can add value to the products in form of more detailed information about the products.
Like I said before, I’m trying to differentiate my business on how ergonomic office chairs influence the health of my buyers. All competitors talk about features, not about their benefits. So I’m trying to make every single product description focused on the benefits of the chair. People need a lumbar support because their lumbar spine tends to loosen their lordosis while seating due to softening muscles. The lumbar support is there to keep the lumbar spine in lordosis and thus reduces pain in the lower back. That’s the part of information that sets me apart from all other competitors.
I’m doing my best to grab information from health related organizations and websites and compile them into guides for my buyers. Those guides are on my to-do list for the beginning of January 2014 and I’m sure to see the first sales coming in once the guides are released.
Another way to differentiate my shop is by being present in social networks. My biggest competitors don’t even have a Facebook profile, that’s how slow some german companies are adopting to changes in life and technology. So it’s my chance to be the first in social media talking about ergonomic office chairs and building a brand around this topic. My shop can be found on Facebook, Pinterest and Tumblr and I’ll use these tools to build a brand that’s focused on health benefits of ergonomic office chairs.