Coming up with a product idea is just the beginning of a long but exciting road to building your business. The next step is to figure out how you’re going to acquire the products you want to sell. There are several options when it comes to acquiring your new products, and each option has its advantages, disadvantages, as well as unique challenges.
The four most common methods of acquiring your products and inventory are:
It’s important to understand each of these methods in order to make the right choice for your business. There are pros and cons to each of the methods, and depending on you product, market, and niche, one may be more suitable for you and your business than the others.
Let's look at each method in more detail below.
Making your product is a common approach for many hobbyists. Whether it be jewellery, fashion or natural beauty products, making products yourself allows for the precise control over quality and the brand but comes at the cost of limitations, time and scalability.
The primary costs associated with making your own products include the purchasing of raw materials, the storage of inventory and labor.
The most important thing to note here though is that not all products can be made by hand. Your product choices are limited to your skills and available resources.
Who's It For?
This option is for the do-it-yourselfer, someone that has their own unique ideas, can physically produce the goods themselves and has the resources available to do so. Making your own products is also for people that want to maintain full control over the product quality and their brand along with the desire to keep startup inventory costs low.
- Low Startup Costs - When you make your own products, you generally don’t have to produce a large upfront number of units like you would have to purchase if you were manufacturing. This allows you to enjoy relatively low production costs, which for many ecommerce businesses, make up the bulk of their startup costs.
- Brand Control - Making your own product means you can create any brand you wish with no limitations.
- Price Control - Going hand in hand with brand control is the ability to price your products as you see fit.
- Quality Control - When making your own products, you can closely control the quality of your products ensuring they live up to your expectations as well as your customers.
- Agility - Making your own products can give you the greatest level of agility for your business, allowing you to adjust quality, features and even the entire product on the fly.
- High Time Input (Time Consuming) - Depending on your exact product choice, making your own products can be a time consuming process, leaving you less time to focus on actually building your business.
- Scalability - Making your products can become an issue when your business takes off. Although you have the option to look to a manufacturer for help as you scale up, this might not be easy or possible if your customers have come to expect your products to be handmade.
- Limited Product Choices - As mentioned prior, your choices of potential products are limited to your skills and the resources you have available to you. This will vary from person to person.
Margin potential is usually higher when making your product because you have more control over your costs as well as pricing. However, you should factor in your time to produce the goods, as this can cause a dramatic dip in your profit if your products are complex and time consuming to produce.
Typically, making products yourself is a low-risk option financially. Because you're making the products yourself, there are no minimum orders like you would find if you were manufacturing your product or purchasing inventory wholesale. You may even be able to produce the products as you receive orders, allowing you to easily get the business up and running and prove your concept before investing too much time, energy and money into it.
Nayme makes necklaces that represent the meaning behind peoples names. The founders of Nayme started their business from their home and make all their own jewellery. Making their own pieces has given them the flexibility to create high quality pieces of jewellery and build their own unique brand without having to order massive quantities upfront. This strategy has kept their startup costs low and their business agile.
Co-founder of Nayme, Louise Henry said - “We design the pieces ourselves by sketch, then work with a local CAD designer to make our pieces. This was best for us starting out because we could control the quality and produce small amounts of inventory at a time."
Another viable option for acquiring your product and inventory is to find a manufacturer to produce the product for you. When sourcing a manufacturer, you have the option of sourcing one domestically or from overseas. As you might expect, a domestic manufacturer in general, will cost more than a manufacturer from overseas countries like China, Taiwan or India.
If you're looking to source a manufacturer from overseas, you'll likely end up at some point on Alibaba. Alibaba is one of the largest business-to-business market places that connects (mostly) asian manufacturers to North American buyers. There are several other similar companies that operate in this space that are smaller and cater to different markets for manufacturers, like IndiaMart.
Who's it For?
Manufacturing your product is a good idea for those people that have a unique idea or a variation of a current product that doesn’t exist currently. It's also for people that have validated the market for their product are fairly confident that their product will sell. This is important as manufacturing will require the greatest financial investment upfront into your products and inventory.
- Lowest Cost Per Unit - It’s not uncommon for manufacturing to garner the lowest cost per unit, giving you the greatest margins on your product.
- Brand Control - Having your product manufactured means you can build your own brand around your product and aren't constrained by others. Price Control - Along with the ability to build your own brand comes the ability to set your own prices for your product.
- Quality Control - Unlike dropshipping or purchasing wholesale, when you manufacture your own product you're in control of the quality of your final product.
- Minimum Order Quantities - One of the biggest disadvantages of manufacturing your own product are the startup costs required for initial orders. Depending on the costs of your product and the manufacturer, your inventory investment can reach thousands or tens of thousands of dollars, easily.
- Potential for Fraud from Overseas Manufacturers - Nothing will bring your business to a halt like being scammed by an overseas manufacturer.
- Time To Get Up and Running - Manufacturing a product will likely take you the longest to get up and running. Manufacturing can be a long process of prototyping, sampling, refining and production. The difficulty of this process can be amplified, even extended if you plan on using a overseas manufacturer where language, distance and cultural barriers can arise.
When you manufacturer your product, your margins can vary greatly based on the particular product, the manufacturer and order quantity. Usually however, manufacturing your own product gives you the greatest margin potential over other methods like purchasing wholesale and dropshipping.
With great rewards comes great risk. This makes manufacturing the highest risk option in most cases. You must purchase inventory upfront with no guarantee it will sell. Manufacturers generally have a minimum order quantity (MOQ) so you may be starting out with thousands of units or more. Minimum orders will depend on the product and manufacturer so make sure you discuss early what the manufactures MOQ is but note that minimum order quantities can usually be negotiated.
Risk also comes in the form of fraud if you're purchasing from a manufacture overseas, particularly from Asia. Business-to-business sourcing sites like Alibaba do have safeguards in place to help prevent fraud, but fraud is still a very real issue with little recourse if something does go wrong.
Cole & Parker is a great example of entrepreneurs that chose to go the manufacturing route. Cole & Parker manufacturers bold, colourful premium mens socks. They partnered with a designer and designed all their own socks in Canada but have their socks manufactured in China, likely providing them with the greatest margin potential.
Buying wholesale is a fairly simple and straight forward process. You're buying your product inventory (usually other brands) direct from the manufacturers or from a middleman supplier at a discounted wholesale rate, which you in-turn, resell at a higher price.
Buying wholesale is a lower risk business model compared to manufacturing for a few reasons. First, you're dealing with brands that are already validated on the market so you don’t run the risk of wasting time and money developing a product no one wants. Also, you don’t have to purchase as nearly as high of a quantity compared to manufacturing your own product. Minimum orders will depend on the manufacturer and product, however they're usually pretty reasonable and can even be as low as one unit.
Who's It For?
Purchasing products wholesale is a good option if you want to get up and running quickly or if you want to sell a variety of products and brands. Wholesaling provides a wide range of opportunities as there are many products available for wholesale.
- Selling Already Established Products - Because you’re selling already established products helps to lessen the risk associated with purchasing inventory.
- Brand Familiarity - Selling already established brands can help position your brand by creating an aura effect on your brand.
- Selling Already Established Products - Selling already established products can work for you as well as against you. Because the products are available from multiple retailers, you will need to fight extra hard to differentiate yourself and convince consumers to purchase from you.
- Price Control - Selling other brands means to some extent you have to play by their rules. Some brands will enforce price controls to prevent you from discounting their products. This limits you ability to have certain sales and offers.
- Inventory Management - When purchasing wholesale you will likely have to purchase a minimum order of each product. The minimum order will depend on the product and manufacturer, however you will have to stock and hold inventory as well as manage that inventory for re-order.
- Dealing With Supply Partners - If you're carrying an array of products, dealing with multiple supply partners can become difficult to manage. Requirements may vary from supplier to supplier.
The margins for wholesale are typically good compared to dropshipping, but not as profitable as manufacturing. This method might be considered a safe middle ground between manufacturing and dropshipping. Although each case is unique, it’s typical to see a 50% margin on wholesale goods resold at retail pricing.
Buying wholesale is a lower risk business model compared to manufacturing but still carries risk. Wholesaling will require the purchase of inventory with no guarantee that you can see it. Perhaps the greatest risk come from figuring out how to differentiate yourself from the many other retailers selling the same products.
The Lodge is a great example of a store that buys a curated selection of men's goods wholesale from American manufacturers and resells them at retail pricing on their online store. Purchasing wholesale allows them to carry a wide variety of products in their niche.
The main concept of dropshipping is selling products you don’t actually own. Working with dropship partners is not only a product acquisition model, but also includes product fulfillment. The process works by taking orders from your online business and forwarding them to your supplier/dropship partner. They in return, ship the product to your customer on behalf of your company. The key to making money with drop shipping is making a profit on the price difference between what you charge and what your dropshipping partners charge you.
The biggest benefit to dropshipping is the ability to offer a large selection of product without purchasing inventory upfront and managing that inventory. Dropshipping can also be a great tool to help diversify your inventory and test products since it's just a matter of adding the new product to your store.
When going with a dropshipping business model, you can either work directly with manufacturers (who offer dropshipping) by contacting them directly or you can work with a dropship aggregator like WorldWide Brands. An aggregator works with hundreds of manufacturers and makes it easy to sell thousands of types of products without the need yourself to maintain relationships with each individual manufacturer.
Keep in mind, that although these aggregators make it easier to sell a variety of products, they take a cut of your already slim dropshipping margins. Additionally, many will make you pay a yearly “membership” or “sign up” fee of a few hundred dollars. You usually can’t even see the products or margins on the products they have to offer until you pay that fee.
Who's It For?
Dropshipping is by nature, the cheapest option to get started. Therefore, dropshipping is for people that are would prefer to keep startup costs as low as possible and are less concerned about margins. Dropshipping is also a great option for someone that doesn’t want to hold and manage inventory.
- Low Startup Costs - The biggest advantage of dropshipping is the low startup costs. Because you're never carrying inventory you have no inventory costs which generally are the most substantial cost for a new ecommerce business.
- Low Risk - Since you don’t actually purchase your inventory upfront you aren’t taking the risk of having items you can’t sell.
- Streamline Sales - Dropship partners will take on the tasks of picking, packing and shipping your product for you. The dropship option provide convenience and efficiency, so you can manage your business from anywhere in the world.
- High Competition - Because dropshipping has such low barriers to entry, you can bet that a lot of people are doing it. This makes competition stiff and harder to set yourself apart from the crowd.
- Low Margins - Maybe one of the biggest disadvantages of dropshipping are the very low margins. This makes it extremely difficult to compete in the paid advertising space and means you’ll have to rely more on building content, service etc. Low magins also means you have to sell at significant volume to make decent profit.
- Inventory Syncing (Out of Stock) - One of the other major disadvantages of dropshipping is backordering. Because you’re relying on someone else’s inventory, the occasion may arise where you place a shipment request to the wholesaler, but the product is sold out. The effect of this is longer-than-normal delivery times and maybe reflect badly on the retailer.
Your profit is the difference between what you charged the customer and the price the dropshipper charges you. Typically with dropshipping your profit margins are slim, around 20%.
Dropshipping is pretty low risk in terms of potential financial loss because you never buy inventory up front nor do you have to worry about shipping product. However, risk comes in the form of very slim margins and high levels of competition. Slim margins means you have to move a lot of units to make decent profit. Compounding that, the slim margins diminishes your ability to profitably carry out certain marketing activities like pay-per-click to acquire new customers.
Andrew Youderian from Trolling Motors started his dropshipping business three years ago, focusing on high-end boat motors. Because of the high cost of the products he was selling, dropshipping was a natural route to take. Instead of holding hundreds of thousands of dollars in inventory he could instead just list all the products he wanted to carry and have his dropshipping partners carry the inventory. In three years, Andrew built Trolling Motors to a $600,000 yearly revenue business.
Which method is right for you?
Most products will fall into one of these four product acquisition models. Depending on your chosen product or niche, you may not have the option of which business model you choose. Much of it depends on the type of product you plan to sell. Some products will naturally fall under certain categories. However, the model you end up selling under will partially define and shape your entire business going forward. It’s important to understand the advantages, as well as the disadvantages of each so you can make the right choice for your business.
About The Author
Richard Lazazzera is an ecommerce entrepreneur and Content Strategist at Shopify. Get more from Richard on Twitter.
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