If your online business is an e-commerce store, one of the most important elements in starting your venture is finding the products you wish to sell. In this article, we’ll look at the four main ways of obtaining stock, making, manufacturing, wholesale and drop shipping, in order to give you a better understanding of the advantages and disadvantages of each.
1) Making your own products
Many successful businesses have grown out of people’s hobbies and for those who love creating things, making you’re your own products is the ideal way to stock your online store. Whether you make cakes, clothing or candles, you can carry on doing what you have a passion for whilst supplying your business at the same time.
Making your own products also enable you to have full control over the quality of your stock and this can be very useful when creating a new brand where attention to detail is what sets you apart from the competition. It is also a way for you to start small and build your business as demand grows; if you are selling what you make as a hobby, the chances are that you can do it from home with relatively small start-up costs. You may have already acquired much of the equipment you need and have the skills in place to ensure good quality, saleable products.
There are, however, some considerations which need to be made. Once your hobby becomes a business, it may not stay as enjoyable when you have to complete products to order. In addition, being involved in the manufacture and the selling side of your business can be very demanding. As your business grows, you may no longer have the capacity to do all the tasks you need to do and might need to outsource some of the work or take on employees to do the work for you.
In addition, many homemade products have health and safety considerations. If you make anything edible, for example, there will be strict hygiene, safety and labelling rules which need to be adhered to before they can be sold to the general public. This adds another layer of bureaucracy to your business and increased administrative responsibility.
Of course, this type of product sourcing is not suitable for every type of business. Some products cannot be manufactured by hand and need specialist technology. However, even hi-tech products can be made at home – there are plenty of computer geeks out there making a living selling bespoke made computers.
2) Have your products manufactured for you
One method used by many online businesses is to have their products manufactured for them. You would be surprised at how many famous brands use another manufacturer to make products on their behalf. It usually makes good business sense – provided you find the right manufacturer.
Having your products made by another company means you do not need to invest in building your own production operation or have to run that side of the business. On the downside, this can reduce the control you have over the quality of the products as you are putting the manufacture into the trust of another business. You will need to ensure that the manufacturer can create the products exactly to your quality requirements.
Another benefit of using a manufacturer is that it can help you increase the capacity of your business, enabling you to sell more products with improved economies of scale. If you were previously making your own products, but have expanded beyond your own manufacturing limits, then this is the obvious next step in your development. You do need to make sure that the manufacturer has the capacity to produce the quantity of goods you require – and on time. Running out of stock can have dire consequences for both cash flow and business reputation.
Sometimes, having your products manufactured for, you can actually work out less expensive than making them yourselves. Manufacturers often have the infrastructure in place to ensure they can compete competitively, producing goods with low overheads by utilising the latest technology and production methods. They are also likely to have better purchasing power, enabling them to source raw materials cheaper than you can.
By choosing this method of finding stock, you also open yourself up to the potential of the world-wide market. Importing products from abroad can massively reduce the costs of manufacturing, helping you to increase margins further. However, importing is not straightforward – there can be issues with language barriers, problems with shipping and the need to pay import duties. There have also been quite a few problems with people being defrauded in scams involving bogus foreign companies. You should always use a company with a proven track record of working with UK companies.
3) Purchase your products from a wholesaler
If you want to sell other products instead of your own brand, then the main method of sourcing them is to buy them from a wholesaler. Usually in retail, manufacturers sell products in very large numbers to wholesalers who, because of the size of their orders, get them at huge discounts. Acting as the middleman, the wholesalers then sell them on, in bulk, to retailers. Again, because retailers buy in bulk, they get a discount which allows them to sell to the general public with a reasonable margin. Often, the more a retailer buys, the cheaper they will get the products, enabling them to have higher margins or to be more competitive on price.
Although the process of using a wholesaler is straightforward, there are risks involved. Buying in bulk can have an impact on cash flow. If much of a company’s money has been tied up buying inventory then there can be little room for manoeuvre if anything goes wrong. This can be exacerbated if the company buys products which it cannot sell enough of. If you have to buy one hundred products to get them cheap enough to sell at a profit, but you only sell 50 of them, then your business is in trouble. One way out of this is to cut your losses and sell the products off at the same price you bought them for, just to get your money back. This is why we see so many sales in retail – businesses are flushing out unsold stock so they can buy newer, more saleable products.
The other difficulty with selling another company’s products is competition. When you sell your own products you can set your own prices because no one else is selling them; when you sell other branded products, you are in competition with lots of other retailers – and it is easy for shoppers to search for the best price. Smaller companies can have real difficulty here as larger competitors can sell cheaply and back this up with fast and free delivery and first class customer service. To have a chance, smaller companies should focus on niche market sectors where they can position themselves as expert providers. By becoming a specialist in a small range of products, they can gain the trust of the customer and this can be a way of overcoming having to charge more for the products.
4) Use a drop shipper
An increasing number of wholesalers now offer online retailers a drop shipping service. Drop shipping is an ideal product sourcing method for start-up businesses with limited cash flow because they don’t have to pay for stock until they have taken an order from a customer. Only when they have sold the product do they order it and, thereby, remove any risk of buying stock that doesn’t sell.
What makes drop shipping even more attractive is that the wholesaler takes care of the product fulfilment; delivering it, on the retailer’s behalf, directly to the customer. As a retailer, you are left with the simple task of selling the products. No cash flow worries, no stock handling, no need for stock insurance and no delivery expenditure – nor any need to pay people to undertake these jobs.
In an ideal world, every online retailer would choose drop shipping, however, there are a number of downsides which need to be considered. Firstly, not every wholesaler is prepared to offer drop shipping, which can limit the choice of products you can sell. Secondly, the service that wholesalers offer comes at a price, usually in the form of much reduced margins. Whilst a traditional retailer, buying in bulk might get the products with a 35% discount off the RRP, a retailer using the drop shipping service might only get a 10% discount. Overall it’s a balancing act; you make less per product but make dramatic savings on overheads and won’t have to write off any unsold stock.
Another area of concern is in choosing the right drop shippers. In the US, drop shipping is a well-established business technique with many wholesalers and manufacturers seeing it as a real way of building business with smaller, online traders. In the UK, the practice is just taking off and whilst there are a growing number of wholesalers discovering the benefits of offering the service, there are also a few unscrupulous wholesalers who charge you just for opening a drop shipping account and then offer margins so poor that there is no real way of making a profit. The worst of these companies then have their own retail arms that will undercut their own customers in the market place. As a rule, you should avoid using these companies.
Many wholesalers and retailers who do offer drop shipping services don’t advertise the fact, so sometimes the only way to find out is to contact them and enquire. If you find a reputable company that will do this for you and which offers reasonable margins, then you have the perfect opportunity to build a relatively risk-free, online retail business.
Finding the best way to stock your online store can be a difficult decision. Hopefully, this article will have explained each of the four main ways and given you an insight into the pros and cons of each.
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