The acquisition of the product you’re planning to sell on your eCommerce shop is probably one of the biggest factors when it comes to determining the success or failure of an online business. Let’s have a look at the four most common options of acquiring products and go over their advantages, disadvantages, and what makes each of them unique in terms of margin and risk.
Making Your Own Product
Making the product is a very common approach employed by solopreneurs, hobbyists, and DIY enthusiasts. This option is also most ideal for people who are the only ones who can create (and/or recreate) the product – like art, crafts, literature, and such.
The best part about making your own product is that you will have full control over its quality and quantity – being able to personally determine how much supply can be provided to the customers.
Margin-wise, potential is high because you control most of the costs and you can solely dictate the pricing of the product. There is also minimal risk as this will require a smaller capital as compared to wholesaling or manufacturing. You can even supply products on a per-order (or even pre-order) basis.
Making your own product is quite advantageous; especially if you are looking to start with very minimal capital. Since most of the work is done and the quantity of stock is dictated, usually by you - the owner, there are relatively very low associated startup costs.
Another advantage is that aside from dictating volume, making your own also gives you control of branding, pricing, and quality of your products. And with such control, also comes agility. Changes in the creation process can be adapted very quickly and refinements can be done on-the-fly.
This option’s biggest strength can also be its biggest drawback – YOU. Making the product yourself might require you to put more time on the creation process rather than on growing the business. Scalability and having very limited product choices can also be big disadvantages especially for very specialized products that you are the only person capable of creating (or recreating).
Manufacturing the Product
Another option is to find a manufacturer of your product. This option somehow takes the option of ‘making your own product’ a step further. You can now get other people (or a factory production line) to make the product for you, so you can produce more wares while also focusing on growing the business.
This type of product acquisition will work best for you if you have a unique product idea that’s still non-existent. Another scenario where you might opt for this is when you’re ready to scale your already validated product.
For example, let’s say you won’t be able to further accommodate your customers’ demand for your product if you continue making it on your own. For cases like these, finding a manufacturer will be a great way to capitalize on those opportunities, make more sales, and fulfill customer demands.
Having a manufacturer make your product will give you a lower cost per unit as compared to making it on your own. This is due to the fact that a production line can produce more units, with more efficiency, at even lower production costs. To add, you still hold the reins when it comes to branding, pricing, and quality, you just need to make sure that your manufacturer stays consistent.
Outsourcing production to a manufacturer gives you a higher margin for each product because of lower production costs. This option, however, is quite risky because you will be required to pay for a certain minimum order quantity with no guarantee of the product selling. As a result, you will definitely need a bigger amount of capital and open yourself to bigger financial risks when you decide to take on this option.
Another drawback is that finding a manufacturing partner and setting up production takes a lot of time. The process of prototyping, refinement, and producing is already a long process in itself. Pair these up with language, distance, and cultural barriers from overseas manufacturers, then it might take a while to get the ball rolling.
This is the most straightforward and least complicated option of acquiring products for your eCommerce shop. You buy a bulk of product inventory at a discounted wholesale rate, then sell those at a higher price. Wholesale products are usually bought from the manufacturer itself or from other distribution channels.
Your margin depends on how much you can get the product for. A higher volume usually means less cost per unit; thus, a higher margin. While your margins may be less than manufacturing, wholesaling carries a lower risk factor though. Usually, you will still be asked to purchase a minimum order quantity and there may still be no guarantee of sales. This time though most of the products are usually already well-established brands, so they definitely do sell – the challenge on your end is finding a way to sell them effectively.
The biggest advantage of wholesale purchasing is that you are already selling already established brands and products. There is no need to validate both the product and the market, and your only concern is selling your entire inventory.
Selling established brands, while an advantage, is a stumbling block in itself too. Competition will be fierce since you’re not the only eCommerce business that carries these products. Moreover, price control is also a challenge because aside from the market and competitors defining prices, most brands also enforce price controls. This limits both your margin and the ability to give discounts.
Another important consideration is that your inventory is largely dependent on your suppliers. Dealing and managing suppliers can also be a challenge especially if you have multiple supply partners each with their own different terms and processes.
Selling products that you do not own, have no inventory of, or don’t create or manufacture is called dropshipping. The process still involves selling products from your eCommerce store, but the main differentiator is that while you sell and fulfill orders, another dropship partner will be the ones handling inventory and shipping. Think of it as your business being a ‘middle man’ of sorts between the customer and the distributor/manufacturer.
This approach is a great option for you if you’re starting out in eCommerce because it involves very minimal capital. While margins may be low (usually only around 15-20%, depending on how much dropship partners charge for their products and how much you charge the customer), risks are also low because you don’t need to have on-hand inventory.
Low setup costs and low risks are the main selling points of this option. No on-hand inventory means that you don’t have to purchase anything up-front. Furthermore, it also means that you don’t have to take the risks for items that don’t sell.
You can also manage your business from anywhere as long as you have a device and internet connection because your dropship partners do most of the work for you. The only task that you need to focus on is to have customers click on ‘BUY’ and fill their online shopping carts at your eCommerce store.
Since startup costs and associated risks are fairly low, you can expect high competition in your product category. And with fierce competition comes lower margins; and this is due to the fact that you need to make sure that your price stays competitive. And having slimmer margins mean that you only have a small leeway when it comes to differentiating yourself from the competition through marketing activities, discounts, and offers.