Finding Products for Your Business

Startups are full of challenges. Our guide tells you everything you need to know to make sure you've got the right stuff.

The idea of product sourcing may seem overwhelming to you as a new business owner, but it's really very simple: It just means finding products at a wholesale price that you can resell at a retail price.

Whether you're starting an e-commerce site or a physical retail business, you need a steady, reliable source of inventory. Otherwise, you are going to end up disappointing your customers through lack of product variety, back orders and more. For the vast majority of retail entrepreneurs, the main source of products will be a factory-authorized wholesale supplier.

In this step-by-step guide to product sourcing, we'll help you through the process. And the first thing to understand about product sourcing is who wholesale suppliers really are and why you must work with them.

Buying Wholesale
Many startup business owners have the false impression that buying at wholesale means they should be able to source their products directly from the product manufacturer. A manufacturer's job is to make products. They are not interested in selling their products a few cases at a time to thousands of retailers.

Wholesale suppliers operate in a service industry consisting of warehouses, sales forces, support and logistics offices, merchandising teams, delivery mechanisms and much more. The wholesale industry is the infrastructure that bridges the gap between the manufacturer (who makes very large numbers of products) and the retailer (who sells the product one unit at a time to the end consumer).

Wholesalers turn very large numbers of products into smaller, more easily distributable numbers of products. As a rule, wholesalers are the source from which large manufacturers require you to obtain your products.

Exceptions to the Rule
When sourcing products for your business, you will occasionally find a manufacturer who sells directly to retailers. There is a reason for this and a potential downside.

Wholesale suppliers are very aware of how much money every single square foot of their warehouse space costs them. Wholesale itself is a low-profit, high-volume industry. Because wholesalers make their money by selling a lot of products very quickly, fast turnaround on the warehouse floor is critical.

For that reason, wholesalers don't like to fill their warehouses with products that don't have much brand awareness or are relatively unknown to consumers. Those unknown products sit on a wholesaler's warehouse floor far too long, and the wholesaler isn't turning a profit on that floor space. Some small manufacturers of lesser-known products have a hard time getting wholesalers to distribute their products, so they may sell directly to retailers.

As a retailer, you have to be careful if you work directly with small manufacturers. They have a tendency to run out of stock unexpectedly, especially during the holiday season, and can also go out of business with little or no notice. If you base your product sourcing on direct relationships with small manufacturers, stay in touch with them, make sure you are well-stocked on products that sell well and do your best to forecast large orders well ahead of the holiday buying season.

Factory-Authorized?
When a wholesale supplier is factory-authorized, that means it has been chosen by the manufacturer to have a direct relationship and certain exclusive rights to wholesale that manufacturer's products. Becoming authorized as a wholesaler for well-known, brand-name products isn't easy. Wholesalers sometimes spend years working toward authorization to sell big brand names.

Most manufacturers will choose only a relatively small, strategically located number of wholesalers to sell their products because it's more cost-effective for them. When you're looking for factory-authorized wholesalers of particular products, there may not be many choices available.

As a retailer, you must make sure you're working with genuine, factory-authorized wholesale suppliers. For the vast majority of physical products, brand name or not, that's as close to a manufacturer-direct relationship as a retailer can get. Because the factory-authorized wholesaler is connected directly to the manufacturer, that is also where you will get your best pricing.

Brad Fallon, who started out as a retailer, founded Atlanta company Kate Aspen, a $15 million manufacturer and wholesaler in the wedding favor market. Fallon offers the following advice for doing business with wholesalers.

  • Be unique to distinguish yourself from less professional retailers. "Some manufacturers and wholesalers don't want to deal with online retailers at all," says Fallon, 38.
  • Seek resources like OneSource, which vets suppliers so you know whom you're dealing with.
  • Avoid fees. Fallon says drop-shippers or wholesalers who understand startups don't charge setup fees, add-on drop-ship fees or per-item fees (except for item costs) and don't apply high markups on UPS shipping fees.
  • Use product visuals and descriptions, which a good wholesaler or drop-shipper typically offers.

Sourcing Scams
We've established that it's very important to your business's profit margin to only work with factory-authorized wholesale suppliers. However, there is more to it than simply taking a supplier's word that it is a genuine wholesaler.

Whether your entrepreneurial endeavor is online or in a physical retail space, chances are you will spend most of your time looking for wholesale suppliers on the internet. That's becoming a more dangerous place to search for wholesalers virtually every day. An entire cottage industry has sprung up around fooling entrepreneurs into thinking they are buying products from real wholesale suppliers when, in fact, they are buying from scam artists and middlemen and paying wholesale prices that have been marked up dramatically.

Fake wholesalers have gotten very good at looking like real wholesalers on the internet, and search engines have become a prime location for these scammers to hang out. As many as 8 out of every 10 natural and pay-per-click search engine results on keywords such as "wholesale," "wholesale product" and "drop-shippers" lead to wholesale middlemen, useless information and scam operations. They cheat thousands of retailers out of tremendous amounts of money on a regular basis.

There are many ways in which product sourcing scammers operate, but their goal is always the same: They want to get between you and the real supply of wholesale goods and make a profit by simply taking your order and forwarding it on to the real wholesaler. In the process, they mark up the price you pay and cut into your profit margin.

Here are some danger signs that indicate you're probably looking at a middleman (fake wholesaler) on the internet or elsewhere.

  • Any wholesaler who charges you a sign-up fee or a monthly fee
  • Any wholesale website that does not give you full contact information
  • Any wholesaler who does not ask you for your Sales Tax ID
  • Any wholesaler who makes claims about how much money you can make using their services
  • Any wholesaler who tries to sell you other services besides strictly wholesale products (such as a website)
  • Anything that sounds too good to be true

When you come across wholesalers you're not sure about, use these methods to help you decide if they are legitimate.

  • Call them. If someone answers and just says "Hello," you're not talking to a real business. You should be able to get a hold of a receptionist who can direct you to an account representative.
  • Go to www.Whois.net and do a search on the company's website domain name. If the site is registered under an individual's name, chances are you're dealing with a middleman.
  • Search the internet using the company name. If anyone has had trouble with it, you'll find out quickly.
  • Search the Better Business Bureau website for a complaint history.
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This article was originally published in the February 2007 print edition of Entrepreneur's StartUps with the headline: Straight to the Source.

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