Pratikkumar P. Gaikwad | 10 min read | Sep 09, 2020
Coming up with a product concept is just the start of a long but exciting path to developing your brand. The next move is to find out how you’re going to procure the goods you want to sell. There are several choices when it comes to procuring your new items, and each choice has its own benefits, drawbacks, and specific challenges.
The four most common approaches for the procurement and distribution of the goods are:
It is necessary to consider each of these approaches in order to make the best decision for your company. There are pros and cons of each process, and depending on the product, industry, and sector, one could be more suited for you and the company than the other.
Let’s take a closer look at each approach below.
Attempting to make the product is a common approach for a variety of hobbyists. Whether it’s clothing, accessories, or natural beauty products, producing your own products makes for direct control over the quality and brand but comes at the expense of constraints, time, and scalability.
The key costs of making your own goods include the procurement of raw materials, the handling of inventories, and labor.
However, the most important thing to note here is that not all products can be made by hand. Your product options are limited to expertise and resources.
Who is this for?
This choice is for the do-it-yourselfer, someone who has their own creative ideas, who can literally manufacture the goods themselves, and who has the money to do so. Creating your own goods is also for people who want to have complete ownership over the quality of the product and their name, along with a need to keep start-up manufacturing costs down.
- Small start-up expenses. Generally, when you produce your own goods, you don’t have to make a huge amount of units that you would have to do if you were manufacturing. This helps you to reap comparatively low manufacturing costs, which make up the majority of their start-up costs for many e-commerce firms.
- Management of the brand. Creating your own product means that you can build whatever brand you want without any restrictions.
- Regulation of profit. Going hand-in-hand with brand control is the freedom to price your goods as you see fit.
- Regulation of consistency. When you make your own products, you can closely track the quality of your goods and ensure that they fulfill both your standards and your buyers.
- Agility Making your own products will give you the greatest degree of agility for your business, allowing you to change the quality, functionality, and even the whole product on the fly.
- Time-consuming Depending on your specific product choice, producing your own products can be a time-consuming process, giving you less time to focus on actually building your business.
- It’s scalability. Creating your goods can be a matter of concern as your business starts. Although you have the option to look at the manufacturing company for assistance when you scale up, it may not be convenient or practical if your buyers have come to expect your goods to be handmade.
- Limited choices of product lines. As described above, your choice of potential products is limited to your expertise and the tools you have at your disposal. It will vary from person to person.
Profit capacity is typically greater because you produce a commodity and you have greater leverage of the costs and sales. However, you should take into account the time you spent making the product since this will lead to a drastic fall in your earnings if the items are complicated and time-consuming to produce.
Usually, producing your own goods is a low-risk choice. Since you make the goods yourself, there are no minimum requirements that you would face if you were selling a product or buying a bulk inventory. You will also be able to deliver the goods while you collect orders, allowing you to quickly get the company up and running and validate the concept before you spend too much time, resources, and money in it.
Finding a manufacturer to produce the product for you is another viable option for acquiring your product and inventory. You have the option to buy one domestically or from abroad while sourcing a manufacturer. As you would imagine, in general, a domestic producer would cost more than a producer from overseas countries such as China, Taiwan, or India.
If you’re looking to source an overseas manufacturer, you’ll probably end up on Alibaba at some point. Alibaba is one of North American buyers’ largest business-to-business marketplaces that connect (mostly) Asian manufacturers to. There are several other similar companies operating in this space that are smaller and catering to various manufacturers’ markets, such as IndiaMart.
Who is this for?
Manufacturing your goods is a smart thing for those people who have a new concept or a variation of an existing product that actually does not exist. It is also true that people who have tested the demand for their goods are reasonably sure that their product will be successful. This is critical because manufacturing would take the highest overall capital investment in the goods and inventory.
- Low cost per unit. It is not unprecedented for the manufacturing industry to have the lowest cost per unit, allowing you the highest margins on the commodity.
- Management of the brand. Getting your product made ensures that you can create your own identity for your product and not be limited by anyone.
- Regulation of profit. In addition to the freedom to create your own brand, there is the opportunity to set your own prices for your product.
- Regulation of consistency. Unlike drop-shipping or bulk sales, when you produce your own goods, you are in charge of the quality of the finished product.
Minimum order number, please. One of the main drawbacks of making your own goods is the start-up costs needed for initial orders. Depending on the quality of your goods and the vendor, the inventory investment will potentially hit thousands or tens of thousands of dollars.Potential for fraud on the part of overseas suppliers. Nothing is going to suddenly stop your business, like being scammed by an overseas manufacturer.
When you manufacture your product, your margins can differ greatly depending on the product, the manufacturer, and the quantity of the order. Typically, however, the manufacturing of your own goods gives you the greatest possible advantage over other approaches such as wholesale and drop-shipping.
A great deal of difficulty comes with great rewards. This makes manufacturing the riskiest choice in most cases. You must buy the product in advance without any assurance that it will be available. Manufacturers usually have a minimum order quantity (MOQ) so that you can start with thousands of units or more. Minimum orders will depend on the product and the manufacturer, so make sure you address early what MOQ manufacturers are, but remember that minimum order quantities can typically be negotiated.
Risk also comes in the form of fraud when you buy from a manufacturer overseas, especially from Asia. Business-to – business sourcing platforms like Alibaba do have protections in place to help deter fraud, but fraud is still a very real problem and no recourse if anything goes wrong.
Buying wholesale is a fairly easy and straightforward operation. You purchase your product inventory (usually other brands) directly from the manufacturer or the middleman supplier at a reduced wholesale rate that 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 working with brands that are already accepted on the market so you don’t run the risk of wasting time and money to create a product that nobody wants. Often, you don’t have to buy as much of a quantity as you have to buy your own stuff. Minimum orders may depend on the vendor and the product, but they are generally very fair and can even be as low as one unit.
Who is this for?
Buying wholesale products is a good option if you want to get up and running quickly or if you want to sell a wide range of products and brands. Wholesaling offers a wide range of options, as there are many products available for wholesale.
- Products already developed for sale. Since you’re selling already-established goods, it helps to reduce the cost of buying inventory.
- Familiarity with brands. Selling brands that have already been developed will help to position your brand by creating an aura effect on your brand.
- Items already developed on offer. The selling of goods already developed will work for you and against you. Since the goods are available from different retailers, you’ll have to fight hard to separate yourself and persuade customers to buy from you.
- Evaluating prices. To some degree selling other labels means you have to play according to their rules. Some companies are going to impose price limits to stop you from discounting their goods. This limits the opportunity to get any sales and deals.
- Managing inventories. When you buy wholesale you will have to buy a minimum order for each commodity. The minimum order will rely on the product and the vendor, but you will need to store and keep inventory and maintain the inventory for re-ordering.
- Dealing with partners for production. If you are bringing a variety of goods, it can become difficult to handle working with several supplier partners. Requirements can differ between supplier and supplier.
Wholesale margins are relatively strong as opposed to dropshipping, but not as lucrative as manufacturing. This approach may be regarded as a secure middle ground between fabrication and dropshipping. While each case is special, a 50 percent margin on wholesale products that are resold at retail prices is common.
Wholesale sales are a lower risk business model compared to manufacturing but also carry risk. Wholesaling would involve purchasing inventory without any assurance that you will be able to use it. Maybe the greatest risk comes from finding out how to separate yourself from the many other retailers that sell the same items.
The core principle of dropshipping is the sale of goods that you simply don’t own. Working with partners in dropship is not only a platform for product procurement but also involves order fulfillment. The method works by taking your online business orders and sending them to your supplier/dropship partner. On behalf of your company, they ship the product to your customer in exchange. The trick to making money with drop shipping is to make a profit on the difference in price between what you charge and what your dropshipping partners charge you.
The main advantage of dropshipping is the opportunity to deliver a broad product range without first buying upfront inventory and handling the inventory. Dropshipping can also be a fantastic way to help diversify your inventory and test items as it is simply a question of adding the latest product to your shop.
You can either work directly with manufacturers (who provide dropshipping) by contacting them directly when you go with a dropshipping business model or you can work with a dropship aggregator such as WorldWide Brands. An aggregator partners with hundreds of suppliers and makes it easy to sell thousands of product types without having to establish ties with each individual manufacturer yourself.
Bear in mind that while these aggregators make selling a range of items easier, they take a portion of your already slim dropshipping margins. Moreover, many would make you pay a few hundred dollars annually for “membership” or “sign up” fee. Typically, until you pay your charge, you can’t see the prices or profits on the goods they have to sell.
Who is this for?
By nature dropshipping is the cheapest way to get started. Dropshipping is also for those who want to keep start-up costs as low as possible, and who are less worried about margins. Learning how to start dropshipping is also a great choice for someone who has no intention of keeping and handling inventory.
- Low costs for entrepreneurs. Low startup costs are the key benefit of dropshipping. Since you’re never holding an inventory, you don’t have any shipping costs that are usually the most significant cost to a new e-commerce company.
- Low danger. Since you are not currently buying upfront your inventory you are not taking the risk of having things you can not sell.
- Selling streamline. Dropship partners will take responsibility for picking, packaging, and delivering the product to you. The dropship choice provides convenience and productivity so that from anywhere in the world you can manage your company.
- Strong competition. Since dropshipping has such low entry barriers, you can bet a lot of people are doing this. This makes it harder and harder for the competitor to set itself apart from the crowd.
- Low margins. The very low margins are probably one of the main drawbacks of dropshipping. This makes it incredibly difficult to compete in the paid advertising space and means you will need to focus more on content creation, service, etc. Low margins also mean that to make a decent profit you have to sell at a large amount.
- The synchronization of the inventory (out of stock). A second big downside to dropshipping is backordering. Since you depend on the inventory of someone else, the situation can occur when you apply to the wholesaler for a shipment, however the product is sold out. This has a longer-than-normal impact on delivery times and therefore reflects negatively on retailers.
Your profit is the difference between what the customer pays and the price that the dropshipper charges you. Usually, the profit margins are small with dropshipping, about 20 percent.
Dropshipping is a relatively low risk in terms of possible financial loss because you don’t have to buy inventory up front or worry about shipping items. Yet risk comes in the form of very slim margins and strong competition. Slim margins mean that you need to transfer more units to make a decent profit. Compounding that, the thin margins diminish the ability to take on such marketing practices in a lucrative manner such as pay-per-clicking to gain new clients.
6. Which way is right for you?
Most products fall into one of those four types of product acquisition. You do not have the choice of which e-commerce business model you prefer, depending on your chosen product or niche. Much depends on what sort of product you’re trying to market. Naturally, some products fall under certain categories. The model in which you end up selling will also partly describe and shape your entire business strategy for the future. Understanding the benefits, as well as the drawbacks of each is crucial so you can make the right choice for your company.