Well we are both back from our Asia trips and we’re ready to get back into the swing of the podcast. We record these episodes in batches and we’re getting ready for a new one. We also plan on doing a follow up episode on “Cash is King.” So keep an eye out for that.
We’re simply going to be answering a listener's questions today.
We received a two part question from Ryan. He asked us “Is there a point when having too many products can hurt your store?” and followed up with “Does it make sense to remove low margin items in favor of high margin products?”
We answer both of these questions based on our experiences. If you are having a problem with these kind of issues, this episode could be useful to you.
The points of our first answer:
- Why having too many products can be a problem.
- The only reason to keep so many.
- How it makes inventory easier.
- How your sales stats can help pare down a large product list.
The points of our second answer:
- What are the customers buying?
- How 3PL makes things easier.
- How the business stats can help influence your decision.
- When to raise prices,
- When to mark-up a product.
- How to avoid being a mere peddler.
- The advantages of cultivating a brand and what that can mean for your products.
Resources Mentioned Today:
If you have any questions or anything you’d like us to discuss on the podcast please go to ecomcrew.com and fill out the contact form. Also we would really appreciate if you would leave us a review on iTunes. Thanks for listening!
Full Audio Transcript
Mike: This is Mike.
Grant: And this is Grant.
Mike: And welcome to this week’s edition of the EcomCrew podcast. Grant, how have you been doing, man?
Grant: I’ve been doing good. It’s been not so sunny in Seattle and back to rainy, so all’s well in the world. And how about yourself?
Mike: Yeah, I only know what it’s like outside based on looking out my window these days. It’s been pretty busy. But no, all joking aside, it’s been nice. It’s been a while since like you and I have talked because like we record some of these in batches and I was at a trade show here for a few weeks and then we had some – well, not a few weeks, but for a week and then we had the travel trip out to China and then we had a shipment show up that had some fun problems, which we’ll probably talk about either on this podcast or another time and yeah, it’s been a while since we chatted.
Grant: Yeah. I know. Funny enough, we were both in Asia at the same time and probably closer over there –
Grant: Than we are over here, from Seattle to San Diego since I was over in Saigon and – well, I guess since you were in North China, I guess we are pretty far but, you know, we both got –
Mike: Of course, it’s the same time zone.
Grant: Yeah, exactly. And probably both close to 100 degrees and 100% humidity so that was always fun.
Mike: Yeah. That was our last episode. I did a solo-cast. I’m not even sure that you even realize that because we’ve been just going crazy but yeah, I was talking about the temperatures over there. there was 100 degrees on the thermometer every day. That was like the lowest it ever was, and there was on day where the head index was 124 and I was just like, “Please let me go home.”
Grant: Oh my gosh. I managed to stay at a local’s motel when I went to go visit my factory and of course, it had two AC machines, both of which were broken, so opened the windows at night and then all the mosquitoes started flying. I’m like, “Oh my God.”
Mike: Nice. Nice.
Grant: Rock and hard place. I’m just like, “Ah, I’m just going to sleep in the heat.” So I just popped open like four beers, like chugged them all, and just passed out.
Mike: That works.
Mike: Cool. Well, I guess welcome back home as well. It’s weird because I talked to you when you were in Vietnam and I was in China, but I don’t think that we’ve actually chatted since then since we’ve both been so busy. So welcome back and I’m definitely excited to do this episode. We were chatting before this and we thought it would be a cool time to answer a listener question podcast, so this title of this podcast would be something like “Listener Questions.” And there was a question from a guy named Ryan and we definitely love getting these types of questions in. A lot of questions we get become podcast episodes just because, Grant and I sometimes are always kind of grasping at straws for thinking of ideas. You know, when you’re involved in ecommerce every single day, you don’t necessarily think about particular topics being interesting, but you get questions like this and it’s just like, “Yeah, this is great.”
So let me read the first question here, Grant, and I’ll let you take a stab at it first and get your thoughts. So the first part of this is, in bold here, “Too many products. So is there a point where having too many products can hurt your store? We currently have over 900+ SKUs but only 15% to 50% of the products move on a regular basis. Since we drop-ship, we don’t carry the product, but we want to transition to wholesale in the next six months.” So what do you think, Grant?
Grant: Boy. That’s a big elephant to take down. I mean that’s got a lot of things going on there so I’m going to break that down a little bit. So, Ryan, too many products, on a whole, I would say yes. If you’ve got 900 SKUs and you’re just pretty much drop-shipping them, then there’s not a lot of good that can come out of it because the reality is none of your customers are going to go through your entire catalog and browse all 900 SKUs. Now, of course, you can have the SEO benefit of that but there’s a chicken and the egg. If you have 900 SKUs, you’re spreading yourself very, very thin and, unless you’ve got a very good SEO power, you’re essentially diverting all of your ranking juice across the board so you’re not doing anything particularly well.
And then there’s the 15% to 50% of the products that are moving but, you know, going on our last episode of “Cash is King,” if you obviously inventory these products and only 50% of them move, you’re in a terrible position, but with drop-ship you don’t have to worry about that. So I can see where you want to start carrying more items in the hope that you’re offering a little bit of bonanza here but my general thinking is that just having all these products really makes you unfocused. What do you think, Mike?
Mike: Yeah, I agree. I mean we have 300 SKUs on IceWraps and we’re actually looking at paring that down. We’re in the process of moving from BigCommerce to Shopify, which will become probably a multi-part episode here over the next few months, and in the process we’re looking at chopping out probably 10% to 30% of our SKUs. There’s the whole 80/20 rule: 80% of your sales probably come from 20% of your products and that certainly sounds like it’s applicable here for Ryan. We’ve definitely moved to the quality over quantity method of doing ecommerce so if you look at something like ColorIt.com, we only have maybe like 20 SKUs in the whole darn store and it still does a whole lot of business. Certainly on IceWraps if you do the 80/20 rule, 20% of our products are doing 80% of our business, which I know is accurate. 60 of our SKUs are basically generating all of our sales so we’re putting all of our effort into that by taking really the pictures and rewriting our descriptions and doing some SEO for those things.
So my recommendation for Ryan would be to look at Googly Analytics. And the only reason in my mind to keep all 900 SKUs on the site is if people are entering your site through those other 450 SKUs that aren’t really making any sales but ultimately not buying those products and then buying something else. I think that’s really one of the only few reasons to keep those, and that could be either entering through organic traffic or through Google shopping or other types of PPC. Or if it gets people on your email list. So basically, unless there’s like an ancillary benefit of having those SKUs, there’s really no benefit of having those SKUs and that would be kind of my thought. What do you think?
Grant: Yeah, I pretty much completely agree. I mean there could be the argument that the more items that you have, you’re hitting a lot more long-tail, but you’re not going to be a site like Williams-Sonoma overnight or even in one year or even in two years. And I mean obviously you can always pull out the extreme example like Jet or somebody like that, but I’m assuming if Ryan is asking us this question, he’s got gross sales probably under $5 million. And if you’re doing 900 SKUs that you really actually want to be selling, I really have to think you’ve got to be going over $20 million in sales to really justify having that many products on there, short of being a hardware company, maybe a hobby store where you just have thousands of tiny little parts or maybe even like a jewelry bead store perhaps where have different sizes and different colors and they’re more like variants as opposed to individual items. But, like you said, Mike, the photography and descriptions along would drive me completely just bonkers. And both of us are in the same boat where we’re not about quantity. You don’t want to just spam a whole bunch of products on your website and not give any amount of attention to really crafting a good, well-written description with high-quality photos to match; you’re just schlepping stuff onto your website and there’s nothing that really distinguishes you from your competitor. So yeah. That’s my though.
Mike: Yeah. And I just thought of another benefit-slash-problem depending on which way you’re looking at this, but I’ll go with the problem angle. If you have 900 SKUs and only 50% of them are selling, that means that 450 products on your site have little to no reviews, which makes your site look like it doesn’t have a lot of traffic and that is actually like an anti-social proof mechanism. So I know the way that I shop online, when I go to a site and I see very few reviews, it’s one of the few ways that you can kind of look at a site and, unless they’re cheating and writing fake reviews, you can know for sure if they’re a real store or not, legitimate. And Google shopping does this too, or in PLA ads or all that stuff, you can look and see just how many reviews a site has got, and having a bunch of products with no reviews I think looks really bad.
Grant: Agreed. Completely agree.
Mike: So yeah, I mean that’s the reason why we’re kind of paring down. Now, the next part of this is, “Since we drop-ship,” and I think that kind of gets you into trouble easily because you’re not bringing products in, so it’s really easy to add them so that’s probably a reason to get rid of them. It looks like you’re transition to wholesale here and I’m not sure I fully understand the question, but I think that would basically mean that those 900 SKUs would be available for sale at a wholesale rate, which doing that being drop-shipping, I’m surprised the MAP is there. but assuming for a second that it is, it does make it a little bit different because obviously those SKUs might appeal to wholesalers, but probably not. I would at least take into account what the wholesalers are going to want to buy from you when you’re eliminating SKUs. But, you know, just on face value, my opinion would be to probably eliminate at least a quarter of the SKUs if not half of them, the ones that aren’t selling.
Grant: Yeah, and I interpret, when Ryan’s saying he wants to transition from drop-ship to wholesaling, that he actually wants to carry inventory.
Mike: Oh, okay.
Grant: It’s a little bit unclear –
Grant: But that’s at least my interpretation.
Mike: That makes sense. That makes more sense.
Grant: And if that were the case, 900 SKUs, I mean I would just jump off a bridge.
Grant: I mean unless you’re ready to hire a whole bunch of people and buy a whole bunch of shelving – and, again, it’s a little bit hard to tell without knowing what kind of products these are because, again, if it’s beads, you can put 900 different kinds of beads until it got a tiny room even. It’s not that difficult if you have some kind of organized system. But I mean if you’re wholesaling just who knows what else? Just maybe clothing for example –
Mike: It actually is clothing. I didn’t copy and paste that part of the question to you and we won’t mention the brand or anything here on the podcast, but it is basically fitness apparel and some gear, so…
Grant: Okay. I mean that’s still pretty darn borderline. That’s 900 different items that you have to keep track and shelving and everything like that. And, again, it really depends on your gross, total volume that you’re doing, and at some point it’s justified but if only 50% of the product is moving just on the cash basis alone, there’s no reason to hold onto product that’s not moving. Again, 90-day turnover. If you’re going over that, then your money’s sitting around not doing anything for you.
Mike: Yup. And one other thing that can cause big problems, and we run into this with IceWraps because we do have inventory in two places, so you can end up in a situation where someone spends $50, gets free shipping, the product ends up in a drop-shipper’s warehouse and your warehouse and next thing you know, you’re having to make two different shipments and it really eats into your margins. So we’ve been trying to consolidate our inventory because of that. And so I think that’s even more of a reason to eliminate a lot of SKUs. I think as preparation for carrying inventory, I might even eliminate 80% of the SKUs, which seems kind of extreme, and just go with the 20% that you – what I would do basically is use the data that you’ve been able to gather as a drop-shipper and then basically use that to transform your business and know what the 20% are that are creating 80% of your sales. And because cash is going to be such a crunch for you in the beginning, you’ll use 20% of your catalog to have consolidated inventory that’ll get 80% of the sales that you used to have and only really give you a small reduction in overall volume but at a much higher margin.
Grant: Mm-hmm. And one of the things, too, is that you don’t have to go completely black and white. For example, what Mike was saying about having the consolidated issues with drop-shipping, I’m pretty much in the same boat, too, Mike, since I’ve got my 3PL over on the East Coast. And I started off carrying 20 SKUs over there and now I think I’m up to 30, but I don’t carry anything more than that because they charge you based on pallet position and the more SKUs that you have, even if you have a single SKU of one item, that takes up shelving space. I mean you’ve got to pay for the equivalent of items sitting over there and so you’re just wasting a bunch of pallet space, and a lot of 3PLs aren’t really big fans of just having hundreds of SKUs over there with very minimal movement. They want to make money off your shipping too. So it increases your warehousing and your pick and pack and all that kind of fees. And so, that said, that’s why I carry a small amount of SKUs at my 3PL, and that way I can reduce my shipping. So it’s possible that Ryan maybe wholesales his top 10%, top 20% of items and then maybe drop-ships the rest, but at the end of the day, I think the final on this is that 900 SKUs for a normal, everyday ecommerce site that’s medium-sized, I think that’s way too much.
Mike: Yup. So I think we’re in agreement on that and let’s move onto the part two here, which is margin. So, “Going along with the first question, we drop-ship a majority of our products. Our gross margins can range from 20% to 50% depending upon the brand. We have one particular brand that sells well, $3,000 to $4,000 a month, but our gross margin is about 21%. I actually cringe when we get an order from that product. I tried negotiating with the vendor with no luck. Does it make sense to remove low-margin items in favor for high-margin products? FYI, our best-selling apparel has a 40% to 50% margin and we would have no problem giving them more business.” What do you think, Grant?
Grant: This is a great question, and this one actually hits pretty close for me because the reason I actually have a 3PL – I mean I would preferably not have one if I could, but again, cutting boards are heavy and they take a fair amount of shipping. Even with a 100% markup, my shipping ends up being about anywhere from 15% to 25%, maybe even 30% depending on the item. And any time I actually sell an item that’s probably under $40, even though I charge about $6 for shipping, I’m practically breaking even, especially if it’s from my 3PL because you've got your box fee, you’ve got your packing fee, you’ve got your warehousing fee, and then your merchant fees. When everything adds up, I essentially break even, and on some really ridiculous routes out to Florida or Maine when I have to ship it from Seattle because I don’t have it in stock over there, then I might actually even lose money. So I understand the pain of being dented with a few items that are low-margin.
Now, the answer to that, again, is not a simple answer. If you have low-margin items and you’re losing money, the obvious answer that most people would say would be, “Well, don’t sell it.” But my answer is essentially, “What is the lifetime value of your customer?” There’re many companies that have loss leaders. Best Buy had it all during the ‘90s when they sold CDs that essentially broke even to have people come in. Costco has rotisserie chicken and they’ve got hot dogs. They don’t make money off that but, man, I’ve eaten a lot of Costco hot dogs and rotisserie chicken. I don’t know if you’re in the same boat, Mike, but yeah – I love me some chicken.
You know, it really depends. If you’re losing money or breaking even on an item that’s $10, I mean, so be it. No big deal. And for me, if this 3PL is sending it out, I don’t have my employees working on that, so whatever. You know, it’s like five, ten seconds, automated, boom, no big deal. 50 cents to acquire a customer? That’s what you’re going to pay in marketing costs anyway. So that’s kind of my thinking on that. What’s yours, Mike?
Mike: Yeah. I mean obviously, these questions are tough when you don’t have all the different data points and it’s never like a one-dimensional problem, right? So I’ll just talk in generalities. I mean with IceWraps, for instance, I mean our bottom line pretty much for bringing anything in is 50% gross margin, meaning we sell it for $100 and buy it for $50. Obviously, there’s shipping involved, like Grant was saying, there’s PPC stuff to get traffic even there, credit card fees, labor to pack it and everything so the net margin ends up being significantly less. So I personally just can’t really imagine operating on less than a 50% margin anymore. It’s one of the things that we learned about running Treadmill.com where we though early on, or our hypothesis was, “Well, even though it’s low-margin, we’ll make it up with high-cost items and the per-transaction profit will be higher.” But the reality is that you’re always spending money in other parts of your business on a percentage basis for rent and, like I said, shipping, credit card fees, all these other things.
So I tend to try to get to that 50% number and even try to get the vendors to give me free inbound shipping at that price and we try to buy in high volume to get to that. I personally think that gross margins in the 20% range, it gets really thin. It’s tough. I mean the only way that I could possibly justify that for you, Ryan, is that you’re drop-shipping so there’s a lot less overheard than we have, but there’s still going to be overhead. And I would still, again, look at Google Analytics. I mean if it’s a situation where most of your business, the 20% margin business isn’t buying 50% margin product, it isn’t that loss leader, it isn’t the thing that’s converting them into other, higher-margin stuff, then I would personally cut it out in lieu of – you know, hopefully you can sell the 50% margin stuff in its place. But, again, we don’t know your business particularly so it’s easy to say that and now have all the different data points. So if it’s a situation where you feel like you can cut 20% margin business and still get the transaction, it’ll happen on a 50% margin item, I would definitely look into that. That would be my take on it.
Grant: Yeah, 20%, I think it’s a really low number and to me, even net 20% is kind of low. I mean I’m running probably just under 20%, somewhere, in terms of net, but 20% gross gives you so little room to move with. I mean I can’t think about it as anything other than a loss leader, so $3,000 to $4,000 a month, I mean that’s a fair amount of just churn and burn through a lot of – and there’s going to be returns in there, too, and there’s going to be chargebacks, especially on clothing. And they’re going to have the pick and pack fee and the drop-ship fee, so with a gross margin of 20%, I can almost imagine net on that is like -10% and that would be almost conservative. I mean that might get to net -15% if we’re talking about shoes or something like that. So in regards to negotiating with the vendor, I mean there’s no better negotiation than saying, “Hey, guess what? I’m not going to sell your product anymore,” and that’s when you actually get to know how much they actually value your business.
Another option is something I’ve done. For example, one item that we do with our cutting boards is that we offer customization and you can engrave it if you want to. And in the beginning, when we were hungry for business, we said, “$50, we’ll engrave anything that you want on there. You want a, say, family portrait on there? Fine. We’ll engrave that on there.” We just wanted to get reviews and get business, even though it wasn’t very high-margin. People might think $50 is like, “Wow, that’s pretty expensive,” but if it takes my designer an hour and another hour going back and forth on email, all this type of stuff, we barely make money. We just make money on the cutting board. So we had a lot of business doing that, and at some point, I just realized my designer is busy just not making me any money. So what do I do? I just raise the prices. So now I’m not really that interested in one-off engravings anymore. I want to do business to business. We just landed, for example, a $5,000 order today where we’re going to do 150 of them. My designer still spends two hours on it but we sell 150 cutting boards instead of one. So in that regard, I just up the amount of money that I charge for the engravings. And lo and behold, we have a few less engraving orders here and there, but we actually make a little bit more money on it.
So I would say maybe even experiment with raising your prices. And if sales go down, you’re actually, in my opinion, weeding out the customers that you don’t want because the customers that come to you that are looking for the best possible deal are not the loyal customers. Those customers are the ones that are looking for a good deal. They’re the eBay buyers or the flea market people. And they’re the ones that’ll give you the most grief, too, give you the most returns, give you the most customer service problems. You get the guy that’s paying a premium that doesn’t even bat an eyelash, you’ve probably got a more loyal customer there. So it kind of weeds itself out. So that’s kind of my thought about it.
Mike: Yeah. I mean it’s definitely good advice and as you were talking there I was just thinking a little bit more about margins. This is going to be a little off-topic from what Ryan was asking, but I think that if you look at our evolution here, Grant, from running a drop-ship business with Treadmill.com to running a business where we’re selling other people’s products with IceWraps or CuttingBoard and we’re trying to target that 50% margin or 100% mark-up, whatever way you want to look at it, to then eventually doing our own branded products where the margins are better to eventually getting to a point where we have a thing like ColorIt where it’s branded all the way through, the whole evolution each step of the way, it’s been higher margin, higher margin, higher margin, and each step of the way it’s been kind of a realization for me that we just weren’t making enough money in the earlier days. And you’re putting the same amount of effort forward to make less money. I would look at it this way: you’re not taking less phone calls, responding to less emails, spending less time shipping the product out, et cetera, et cetera, et cetera on the lower-margin stuff. You spend the same amount of time on the higher-margin stuff. It’s just basically a much better return on investment for your time.
So with our branded products, we’ve moved to a model of 100% ROI, which is return on investment. So if it’s something that we buy for $10, we want 100% ROI, meaning that after all expenses, that we have $20 in the bank. And we use Amazon’s model for that calculation even though we do sell on other channels. So, basically, the way we look at it is if we’re buying a product for $10 landed at Amazon – from China or from wherever we’re buying it from into Amazon’s warehouse – when Amazon then sells it and we pay the shipping fee and the 15% referral fee and the pick, pack, and shit fee and all that other crap, that they give us back $20. And that’s the margins that we’re looking for now so that’s actually going to be a much higher margin depending on how you’re looking at it compared to what it’s selling at at retail. And then, if it does sell at our own site like ColorIt.com, then the margins are even higher. But we do have obviously other expenses when it sells on ColorIt.com, namely it typically would be advertising. But those are the margins that I’ve been looking at now. Grant., I don’t know what you’ve been doing with your branded products. I know you’ve got several that you’ve been working on as well. Are they similar in that regard?
Grant: Yeah, absolutely. And I don’t think this is off-topic as well. I mean I think, really, when you boil down what EcomCrew is all about, we’re not about retail arbitrage. We’re not about skimming the top and trying to be some kind of junky middle man that’s always schlepping around. That’s my word for the day apparently: schlep. I used “schlepping around wares” and “being a peddler.” There’s no glory in being a peddler. A peddler’s always peddling. There’s no skill involved. It’s just a menial task and it’s a crappy business. What we’re trying to do is create our own brand, and in doing so, you can charge whatever price that you dictate. And I think there’s a lot more interesting areas that you can really get to when you source your own product, design it, and then you could charge what you want to.
And, like you said, now that I’m getting a lot of product on my own, I’m no longer going through any middle men. I mean I’m getting stuff directly from all these various countries: Tunisia, Vietnam, China, Brazil, Italy, you know, all over the place, Japan. I can mark up my items much more than 100%. I’m very happy to mark up my items 200%. Some of them are even 250%, 200% markup. In the clothing business and shoe business and fashion business, alcohol, I mean those are like great examples, just look at whiskey or a wine.
I mean, cost of goods on an expensive wine? It’s ridiculous. I mean it’s grape juice. Grape juice with time added. So you’re paying for some warehouse spacing and some scientist to come in every once in a while and do some chemical testing on your wine, and suddenly you have something that costs you maybe 50 cents a liter, now you’re selling it for $100 a liter. So you’re going through a lot of markup that’s completely arbitrary. Now, wine is obviously an extreme example but you get the branding involved. You could do the same thing to clothing, you know, Louis Vuitton and all that. They’ve got great leathers I’m sure, but I know how much full-grain leather versus half-grain leather costs and I can tell you a wallet made of full-grain leather shouldn’t cost $400. But you add the brand on there and suddenly you get to add that amount of markup.
Mike: I saw a great thing on Facebook today, Grant. It was two cups of coffee next to each other and it was like a cup of coffee in a white paper cup. It’s like $1.50. The same cup of coffee in a Starbucks cup: $3.50.
Grant: Right. Exactly. And so, really, that’s our end goal. Our end goal is to be able to markup as much as you humanly can and get away with it, like you do that with your IceWraps products and ColorIt. That’s a perfect example. Nobody’s running your product around. I’ve got my own branded products that I have on Amazon and CuttingBoard, though I can’t really markup a cutting board to stupid prices. I mean there’s a limit, but I don’t want to pay another vendor because at the very most, I can markup 100% for the vendor's products. And the reality is that their goals and my goals are not aligned because my vendor or distributor’s goal is to sell as much product to everyone else as possible. And then there’s going to be, guess what? Peddlers buying their crap, peddling it for a lesser margin than I am, and I don’t want to fight their stupid game with them. So I completely agree with you. You should always be getting into a higher-margin business and clothing is one of the highest-margin businesses that you can be in because once you have a design, it’s very hard for another guy to copy you unless you’re in the T-shirt business. Then, well, God help you because there’s just nothing but copycats in that business.
Mike: Mm-hmm. Yup. Interesting. Well, I think it’s been a good conversation. I definitely wish we got more interesting questions like this, so if you do have questions, feel free to head over EcomCrew.com. Head over to the contact form, send us a message. We’d be happy to get your question on the air. We love stuff like this. It gives us stuff to talk about and Grant and I don’t have to sit here before the show and come up with topics, which is always a fun thing. But one of the things that we were talking about, which we’re going to do in the future just so you guys know, is doing a follow-up episode probably in the next six to eight weeks on the “Cash is King.” We got a lot of comments on that and we had some other ideas to talk about for that. So we’ll be doing a follow-up on that. And, as I mentioned, we’re in the process of getting ready to move from BigCommerce to Shopify for IceWraps.com so that’ll be a fun episode or two when we get to that point. So those are some upcoming topics that we’ll be talking about. And besides that, Grant, have a great week and we’ll chat next week and talk to everybody then.
Grant: All right. Take care, everybody.