Take a look at any industry publication. You will see that the e-commerce industry is booming. Global e-commerce revenues are expected to reach $6.54 trillion within the next two years.
Unfortunately, the hype about the growing e-commerce industry has led some entrepreneurs astray. They believe that the fact the industry is growing so quickly means that their odds of success are high. This is sadly not true. Many experts estimate that the failure rate of e-commerce companies is 80%. Others estimate that it is as high as 97%.
Regardless which of these statistics is correct, it is clear that e-commerce is just as competitive as it is profitable. New online stores need to really bring their game if they want to succeed. They need to refrain from making bad decisions that could jeopardize their livelihoods.
One of the biggest mistakes that entrepreneurs make is choosing the wrong level of diversification. You need to know how many products to push if you really want to succeed in the space. You also need to make sure your site is easy to navigate if you have lots of products, which is why instant search features can be so useful.
What is the right level of product diversification for online stores?
Product diversification is an important concept in e-commerce that gets surprisingly little attention in most business discussions, entrepreneurial books and business blogs. What is product diversification? It is defined by the range of products that a company sells. You can measure a company’s level of diversification by both the total number of products that are sold, as well as the breath of categories they carry. An online store that sells 25 different products across several categories is going to be more diversified then one that sells only four products in the same category.
One of the biggest challenges that online stores face is determining the right level of diversification. There are both pros and cons with diversification, so it is important to find the right balance.
Here are some factors that need to be taken into consideration.
Navigation of your site
You need to consider the ease of navigation of your site. If your site isn’t structured to handle a lot of pages, then you need to improve on it before diversifying more. This is one of the reasons that instant search tools can be so useful.
Many online stores try to cast a wide net and attract as many customers to their sites as possible. Unfortunately, this approach usually does not work very well.
When you are trying to convert potential customers, it is best to have a clear idea of their needs. You should try to attract people looking for a specific product to the relevant landing pages.
You will generally need to pay for digital advertising to get this kind of targeted traffic. You might want to pay for PPC traffic from Google AdWords, Facebook or other digital advertising platforms.
The cost of advertising is going to increase with the number of products that you are promoting, since you need to spend enough money to collect enough data to test them properly. As a rule of thumb, you should plan on spending between two and three times your gross profit on testing for each product to see whether customers are interested. You will need to spend even more if you need to test alternative landing pages.
As you can see, testing lots of different products will be expensive. You need to make sure that you have enough of a budget.
Tolerance for risk
The key benefit of diversification is that it reduces risk. You will have less risk exposure if you sell a wider range of products. However, it is a good idea to sell products in different categories. You should carry some products that are in high demand during economic slowdowns, as well as other products that are greater demand during a booming economy.
There are a number of variables that influence your brand image. The types of products that you sell are among the most important.
Some e-commerce companies unintentionally tarnish their brand image by carrying products that give conflicting messages about their company. It is a good idea to be diversified. However, you don’t want to be diversified by purchasing products that gift contrasting messages about the nature of your company.