Click to Print

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.
February 2, 2007
URL: http://www.entrepreneur.com/article/174010

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.

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.

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

How Does It Work?

There are several product sourcing methods available. Many revolve around wholesale suppliers, but a couple don't, such as liquidation, closeout and overstock buying. The most successful retail operations use a variety of methods that complement one another to drive the highest profits.

First, we will talk about the product sourcing methods that are the most stable and reliable--the methods that involve wholesale suppliers directly, from the least expensive startup entry point to the most expensive.

1. Drop-shipping: A drop-shipper is a legitimate wholesale supplier who will deliver a product from the wholesale warehouse directly to your customer. You, as the retailer, never have to touch the product. You use the wholesaler's product literature, including images, description, pricing and warranty info, to make the sale, and then the drop-ship wholesaler delivers the product straight to your customer's door. You don't actually pay for a drop-shipped product until you make the sale to your customer, so you are never spending any money on inventory.

This method is best suited for e-commerce because customers who shop online expect to wait for a product to be shipped to them in the first place. The customer doesn't know (and probably doesn't care) if the product is shipped from your own in-house stock or from a wholesale supplier's warehouse.

However, many physical retail stores use drop-shipping as well. For example, high-end patio furniture stores might have display rooms full of expensive patio tables and chairs, but no physical warehouses. When you buy a patio set from these kinds of stores, they order it and have it delivered to your home. What they have done is purchased one of each of the items they want to sell for physical display purposes. They make the sale using the display model, then fulfill the sale through drop-shipping. That keeps their inventory cost extremely low.

There are many other physical stores that stock some of the products they carry and have display models of other products (usually the more expensive ones). That way, they quickly turn over their more inexpensive, in-house inventory, but take less risk by not pre-buying and holding the more expensive inventory in stock. Some physical stores that do this don't even bother carrying the more expensive display models. They simply have a catalog of the more expensive items available and have them drop-shipped to the customer when they make a sale from the catalog.

Although drop-shipping is an inexpensive product sourcing method in terms of upfront costs, it is important to remember that there is a back-end cost associated with drop-shipping. Because the wholesale supplier is doing all the work of picking, packing and shipping individual orders for you, they have to charge a little more for the products. It costs the wholesalers more to drop-ship individual orders for you than it does for them to sell products in bulk, and they have to recoup that cost somehow.

Some drop-shippers do this by charging a slightly higher wholesale price for the products that you have drop-shipped. Most do it by charging a drop-ship fee, which is a set fee per order. With small products, that fee can be anywhere from $1 to $5. With larger products, like high-end patio furniture, the charge can be higher.

Most retailers who use drop-shippers build that drop-ship fee into the handling part of the shipping and handling fees they charge their customers, so they don't have to raise their product prices.

Drop-shipping is a practical, low-cost product sourcing method that has been in use since long before the internet existed. It is basically the same concept as Sears' or Montgomery Ward's catalog shopping, which was popular for many years. If you use drop-shipping, it should be part of your product sourcing efforts, but not all.

2. Light bulk wholesale: In product sourcing, it's important to understand that most legitimate wholesale suppliers require considerably large minimum orders of their products. Generally, it's not cost-effective for a wholesaler to sell a single case of a product to a retailer. Wholesalers sell products in case lots, or minimum numbers of cases. Wholesale order minimums can range from $3,000 to well over $100,000, depending on the types of products. Usually, when a retailer orders from a wholesaler, the wholesaler will reduce the unit cost (cost of each product) on large orders as an incentive for the retailer.

However, there are wholesalers who will consider selling at reasonably low unit costs, even with a low ($500 or less) minimum order. These purchases are called "light bulk wholesale."

These light bulk wholesalers are a good intermediate-cost entry point into the world of bulk wholesale buying. You pay for your products upfront, but you'll pay less per unit than you would with drop-shipping (no drop-ship fee or percentage), and you won't have to place large minimum orders.

With an e-commerce business, a savvy entrepreneur will use drop-shipping to identify products that sell well, and then buy them in light bulk quantities to further reduce the cost of the product and help increase profit margins.

For physical stores, light bulk suppliers are a great way to test a product in the store without committing to a large, costly initial order.

3. Large volume wholesale: By far, the greatest number of available wholesale suppliers are large volume suppliers. Although many wholesalers are willing to work with retailers who want to start out with lower volume orders, there is only so much they can do. Most wholesalers do require significantly large wholesale orders.

Most large volume wholesalers will allow retailers to purchase a "mixed" order. The wholesaler may require a $5,000 minimum order but allow the retailer to include $500 worth of one product, $700 worth of another product and so forth.

Again, it's important to remember that the larger your wholesale order, the lower the unit cost, so buying in large volume can help increase your profit margin.

For an e-commerce business, large volume wholesale only makes sense once a certain product has been identified as a very good seller. Purchasing a large number of those hot-selling products can reduce the unit cost to a level that makes the investment worthwhile. E-business owners have to be careful, though, not to buy more of the product than they can reasonably sell in a short period of time. The last thing you want to do is get stuck with inventory you've paid for but can't sell.

For physical store retailers, larger volume makes more sense. Most physical store owners have a business plan and have done the research that provides evidence for which products will sell well. So buying mixed orders in larger volume can be a good solution for physical retailers.

4. Variable-cost methods: Variable-cost methods include liquidation, closeout and overstock buying. These methods are described as variable cost because the retailer will never pay the same amount more than once, which is vastly different from direct wholesale buying.

Liquidated products are usually sold at rock-bottom prices. Most people think that's good. It's important to remember, though, that if products are being liquidated, it means whoever owns them now wants to get rid of them so badly, they are willing to lose money on them through liquidation. This may mean there is little or no market for the items.

It is also important to remember that liquidated products can show up damaged, missing parts, dirty, out of the box and so forth, even if the seller claims they're in good condition.

Closeout products are generally products that are no longer made. Older-model products left over in wholesalers' warehouses become closeout merchandise. Closeouts can be a good strategy to augment your product sourcing by creating "loss leaders." Offer a closeout product at a cheap price (break-even or less) to get customers into your physical or online store, then immediately show them the newer, more expensive models you sell. This is a time-tested technique employed in the retail world, and even if your customer buys the loss leader and nothing else, you have earned a customer you can market to in the future. The same caution about liquidations applies to closeouts: Be very careful about whom you deal with, otherwise you could end up with a pile of junk.

Overstock products are products that manufacturers and wholesalers simply have too many of and need to get rid of at reduced prices. Again, keep two things in mind: First, these are products that wholesalers and other retail stores can't sell. Do you really want to try? Second, if you are not careful about whom you deal with, you might end up with products that belong in a junk pile, not in a warehouse.

Importing products directly is another product sourcing method, but one that is generally not practical for the startup entrepreneur. Importing is very expensive, risky for the individual entrepreneur and involves delivery times that average three months or more. Startup entrepreneurs, and even many experienced entrepreneurs, are much better off sourcing from established wholesale suppliers. Importing is something to consider once your business is established, strong and able to take greater risks.

Is It Legit?

When it comes down to it, there is only one good way to research genuine wholesale suppliers: Ask the manufacturers. Contact the manufacturer of the products you want to sell, and simply ask them who their authorized wholesalers are. They know. They'll tell you, and you'll be sure you're not being scammed.

To find a product manufacturer:

  1. Buy a sample of the product, or look at a display model. Somewhere in the box or on the product you'll find the name of the manufacturer.
  2. Call the corporate headquarters of the manufacturer, and ask for the sales department.
  3. Tell the sales representative you are a retail business owner, you want to sell their products in your store and you need to know who their factory-authorized wholesale suppliers are.

It's as simple as that.

However, this research process does take time, especially if you want to locate drop-ship and light bulk suppliers, which are fairly rare. If you're going to do the research yourself, you should start now, and continue doing a little research each day.

Sourcing Success
Frank and Teresa Solano, 45 and 44, respectively, understand the importance of product sourcing. As an airline pilot affected by cutbacks in that industry, Frank launched BestHealth-andBeautyStore.com with his wife, Teresa, in 2006.

"We launched the site in March 2006, and by June, we were profitable," says Frank, whose 2006 sales hit $30,000. "By October we doubled our sales. Our success with Best-HealthandBeautyStore.com has prompted us to launch our second site, Way2GoGPS.com, selling products for all kinds of air, land and sea GPS needs. As an e-commerce merchant, the number-one thing you have to take care of right away is where you're going to get your product and how much it's going to cost. That's the bottom line." The Solanos have other e-commerce sites in the works, such as PetsHealthMart.com, HotDivaShoes.com and TheBestGroceryStore.com.

Startup retail entrepreneurs who take the time to understand product sourcing have won half the battle before they even begin selling. Take that time, and you'll be doing the best you can to ensure your success.

What to Sell
It's not enough to simply know where to get inventory--you need to know what products people are buying. Market research is a critical part of product sourcing, and these resources can help.

The Real Deal
There is a small number of truly legitimate internet sources offering information on genuine, factory-authorized manufacturers and wholesalers. Here are three.

Info to Grow
Product sourcing isn't just something you do once and forget about--it's an ongoing process that continues throughout the life of your business. You must take the time to learn what you're doin gin this critical process if you truly want to succeed.

Chris Malta is host of The Entrepreneur Magazine Product Sourcing Radio Show, product sourcing editor of The eBay Radio Show, and founder and CEO of WorldWideBrands.com.