Nobel Prize-winning economist Harry Markowitz coined the phrase "diversification is the only free lunch." Markowitz's pioneering work involved, among other things, the benefits of diversification in investment portfolios. That may seem far removed from the world of retail, but your inventory products are just as important investments to you as stocks are to a Wall Street wheeler-dealer. Being well-diversified in product options will help you weather challenges throughout your business cycles.
Diversification is a risk mitigation tool that should be applied to multiple aspects of your business. Weāve all heard the story of that Amazon FBA seller whose promising business fell apart because it hinged on one product. She designed a product, had it manufactured in China, and made a big splash when it hit the Amazon market with sales blowing through the roof and garnering several thousand 5-star ratings within two months. But copycats saw that success and began competing with a cheaper knock-off version, sometimes even getting a cheaper supply from the very same manufacturer who produced the original! The original product creator has her sales plummet and if that wasnāt bad enough was herself subjected to false claims of counterfeit products by underhanded competition. Amazon account suspended and tens of thousands of units filling her garage; her business was finished just as it looked to be taking off. Her main problem was simple: no product diversity.
Even if you donāt design your own products, similar catastrophes can affect your business if you are too invested in a small number of products. Suppose you put too much stock in a single product and one of the following occurs:
- Consumer tastes change to favor a different brand
- A competitor undercuts you on price and you canāt go lower
- Amazon suddenly removes your privilege to sell the product
That final case occurs frequently. Amazon and other online marketplaces continuously change which brands and products are sellable by their online partners. This may be due to a customer complaint about a product, a new exclusivity contract with a brand, or just their algorithm determining that allowing you to sell it just isn't good enough for their bottom line. Prepare against these inevitabilities with a diverse product selection.
Understanding the value of diversification has helped us weather storms many times. As we grew my Amazon business from a basement to a 100,000 square foot warehouse, we faced many challenges. Fake product authenticity complaints leveled by scammers and unscrupulous competitors were common. These complaints usually sparked temporary selling freezes on the product in question. It was a godsend having a diversified inventory, spanning 5000 ASINs, that we could continue to sell under while we gathered evidence to defend ourselves over the suspended products. (By the way, Wholesale Ninjas provides such evidence to all of our customers in the form of product manifests and sales receipts.) Even if eventually reinstated to sell the product, the downtime would have been a deathblow for our business were we not selling other items in the meantime.
Implementing the idea of diversity is simple: donāt put too much risk into a single product at one time. Firstly, spread out your inventory purchasing into small quantities of a variety of goods rather than stocking up on a handful of āhotā items. Having a large inventory of a single item on an online marketplace can result in saturating the market and is likely to instigate a price war with competing merchants causing a race to the bottom. Rather, you should get into the market for a SKU, sell a few units, and then get out before the market adjusts. This applies no matter what your selling channel is but is especially true when selling through Amazon FBA. Resist the urge to ship your entire stock of an item into an Amazon warehouse. Between the costs of packing and shipping, along with FBA storage fees, putting stock into an FBA storage facility is a risk. You should throttle your FBA inventory because Amazon is a dynamic market where conditions change rapidly and without warning. If you were to be removed from selling a product, your only options would be to have Amazon dispose of them for $0.15/unit or send them back to you for $0.50/unit. Disposal is obviously wasteful but so is the return option for low-ticket merchandise. Beyond the per-unit cost thereās the added risk of product damage from handling, not to mention the extra labor of unpackaging and reintegrating the returns into your stock. To mitigate these risks and more, you should send to FBA just a fraction (say 15%) of your total inventory at any one time and only send in the next batch when your FBA inventory level for that item is at 20% or less.
Beyond diversifying across individual products, you should also diversify across product categories. Every sale made establishes trust between a buyer and your business. This trust is a true asset since loyal, repeat customers are quite valuable. Once trust has been established with a buyer in one category of your products -- in which you perhaps made an investment by marketing -- it extends easily by name recognition to other categories you may sell. Those are sales for which you didnāt have to spend time and money marketing. Itās also important to diversify across product categories since the demand for products is cyclical. The holiday season is approaching during which demand will go up for general merchandise: toys, kitchen gadgets, electronics and appliances. Interest in these products will go back down after the holidays, but you will likely have some leftover stock. That leftover stock will sell eventually but slower than during peak demand. While waiting for it to sell, youāll need other products: personal hygiene products which have steady demand and winter products like cough & cold remedies and preventative supplements/vitamins. The same thing will then occur in the spring as cosmetics demand increases and the flu season products sell slower. Staying profitable during all ebbs and flows of the seasonal cycles requires a wide selection of products.
Look at your inventory as a stock investment portfolio with each of your products a companyās stock. If you invest too much in a single asset then you create your own bubble and we all know what happens to bubbles -- pop! On the other hand, purchasing a highly diversified set of inventory is similar to investing in an index fund like the S&P 500 (which has averaged an annual return of 11.01% since it was started in 1976). A highly diversified set of inventory distributes risk across many assets and minimizes risk with each additional SKU. The simple strategy of product diversity will help you be Ā like the legendary investor Warren Buffet who said, "It is not necessary to do extraordinary things to get extraordinary results."