Make, Manufacture, Wholesale or Dropship
Coming up with, evaluating and validating a product idea is just the beginning of a long but exciting journey to building your online business. The next step is to determine how you’re going to acquire the products you want to sell.
There are several options when it comes to acquiring your new products, and each option has its advantages, disadvantages, as well as unique challenges.
The four most common methods of acquiring your products and inventory are:
It’s important to understand each of these methods in order to make the right choice for your business. There are pros and cons to each of the methods, and depending on you product, market, and niche, one may be more suitable for you and your business than the others.
Let's look at each method in more detail below.
Making Your Product Yourself
Making your product is a common approach for many hobbyists and do-it-yourselfers. Whether it be jewellery, fashion or natural beauty products, making products yourself allows for the most control over quality and the brand, however, this control comes at a cost. Making products yourself ties you deeply into the business and can present challenges when it comes to the amount of time it takes you to produce each product as well as being able to scale your business as it grows.
The primary costs associated with making your own products includes the purchasing of raw materials, storage of inventory and labor time involved in producing your product.
The most important thing to note is that not all products can be made by hand. Your product choices are limited to your skills and your available resources.
Who's It For:
This option is best suited for the do-it-yourselfer, someone that has their own unique ideas, can physically produce the goods themselves and has the resources available to do so. Making your own products is also for people that want to maintain full control over the product quality and their brand along with the desire to keep startup inventory costs relatively low.
- Relatively Low Startup Costs - When you make your own products, you generally don’t have to produce a large upfront number of units like you would have to purchase if you were manufacturing or wholesaling. This allows you to enjoy relatively low production costs, which for many ecommerce businesses, makes up the bulk of their startup costs.
- Brand Control - Making your own product means you can create any brand you wish with no limitations.
- Price Control - Going hand in hand with brand control is the ability to price your products as you see fit. Through your brand, you can position and charge what you like for your product.
- Quality Control - When making your own products, you can closely control the quality of your products, ensuring they live up to your expectations as well as your customers.
- Agility - Making your own products can give you the greatest level of agility for your business, allowing you to adjust quality, features and even the entire product on the fly.
- High Time Input - Depending on your exact product choice, making your own products can be a time consuming process, leaving you less time to focus on actually building and marketing your business.
- Scalability - Making products yourself can pose an issue if and when your business takes off. Although you have the option to look to a manufacturer for help as you scale up, this might not be easy or possible if being handmade is built into your brand.
- Limited Product Choices - Your choices of potential products are limited to your skills and the resources you have available to you. This will vary from person to person.
Margin potential is usually on the higher side versus the other three models when you make the product yourself because you have more control over your costs as well as pricing. However, you should carefully factor in your time to produce the goods, as this can cause a dramatic dip in your profit if your products are time consuming to produce.
Typically, making products yourself is generally a low-risk option financially. Because you're making the products yourself, there are no minimum orders like you would find if you were manufacturing your product or purchasing inventory wholesale. You may even be able to produce the products as you receive orders, allowing you to easily get the business up and running and proving your concept before investing too much time, energy and money into it.
Manufacturing Your Product
Another viable option for acquiring your product is to find a manufacturer to produce the product for you. When sourcing a manufacturer you have the option of sourcing domestically or from overseas. As you might expect, a domestic manufacturer in general will cost more than a manufacturer from overseas countries like China, Taiwan or India.
If you're looking to source a manufacturer from overseas, you'll likely end up at some point on Alibaba. Alibaba is one of the largest business-to-business market places that connects (mostly) asian manufacturers to North American buyers. There are several other similar companies that operate in this space that are smaller and cater to different markets for manufacturers, like IndiaMart.
Who's it For:
Manufacturing your product is a good idea (and maybe the only option) for those that have a unique product idea or a variation of a current product that doesn't exist currently. It's also for people that have validated the market for their product and are very confident that their product will sell. A strong level of confidence before choosing manufacturing is important as manufacturing will require the greatest financial investment upfront for designing, prototyping and purchasing minimum quantities.
- Lowest Cost Per Unit - It's not uncommon for manufacturing to be the best options for the lowest cost per unit, giving you the greatest margins on your product.
- Brand Control - Having your product manufactured means you can build your own brand around your product and aren't constrained by another brands rules.
- Price Control - Along with the ability to build your own brand comes the ability to set your own prices for your product.
- Quality Control - Unlike dropshipping or purchasing wholesale, when you manufacture your own product you're in control of the quality of your final product.
- Minimum Order Quantities - One of the biggest disadvantages of manufacturing your own product are the startup costs required for designing, prototyping and initial inventory orders. Depending on the costs of your product and the manufacturer, your inventory investment can reach thousands or tens of thousands of dollars quite easily.
- Potential for Fraud from Overseas Manufacturers - If you don't properly protect yourself when you're dealing with overseas manufacturers, you run the risk of being scammed. This can happen a number of different ways, either for your money or, almost just as bad, the final product you receive won't be the expected or negotiated quality.
- Time To Get Up and Running - Manufacturing your product will likely take you the longest amount of time from start to finish. Manufacturing can be a long process of prototyping, sampling, refining and production. The difficulty of this process can be amplified if you plan on using a overseas manufacturer where language, distance and cultural barriers can arise.
When you manufacturer your product, your product margins can vary greatly based on the particular product, the manufacturer and order quantity. Usually however, manufacturing your own product gives you the greatest margin potential over other methods like purchasing wholesale and dropshipping.
With great rewards comes great risk. This makes manufacturing the highest risk option in most cases. You must purchase (usually) larger amounts of inventory upfront with no guarantee it will sell. Manufacturers generally have a minimum order quantity (MOQ) so you may be starting out with thousands of units or more. Minimum orders will depend on the product and manufacturer so make sure you discuss early what the MOQ is but remember, minimum order quantities can usually be negotiated.
As mentioned previously, risk also comes in the form of fraud if you're purchasing from a manufacture overseas, particularly from Asia. Business-to-business sourcing sites like Alibaba have safeguards in place to help prevent fraud, but fraud is still a very real issue with little recourse if something does go wrong.
Purchasing Your Product Wholesale
Buying wholesale is a fairly simple and straight forward process. You're buying your product inventory (usually other brands) direct from the manufacturers or from a middleman supplier at a discounted wholesale rate, which you in-turn, resell at a higher price.
Buying wholesale is a lower risk business model compared to manufacturing for multiple reasons. First, you're dealing with brands that are already established to some extent and validated in the market so you don't run the risk of developing a product no one wants. Also, you usually don't have to purchase nearly as high of a minimum order compared to manufacturing your own product. Minimum orders will depend on the manufacturer and product, however they're usually pretty reasonable and can even be as low as one unit per SKU if you're dealing with other smaller brands.
Who's It For:
Purchasing products wholesale is a good option if you want to get up and running quickly or if you want to sell a variety of products and brands. Wholesaling provides a wide range of opportunities as there are many products available for wholesale.
- Selling Already Established Products - Because you're selling already established products helps to lessen the risk associated with purchasing inventory.
- Brand Familiarity - Selling already established brands can help position your brand by creating an aura effect on your brand.
- Selling Already Established Products - Selling already established products can work for you as well as against you. Because the products are available from multiple retailers, you will need to fight extra hard to differentiate yourself and convince consumers to purchase from you.
- Price Control - Selling other brands means that to some extent you have to play by their rules. Some brands will enforce price controls to prevent you from discounting their products. This limits your ability to have certain sales and offers.
- Inventory Management - When purchasing wholesale you'll likely have to purchase a minimum order of each product. The minimum order will depend on the product and manufacturer which will depend partially how big the brands are you plan on stocking.
- Dealing With Supply Partners - If you're carrying an array of products, dealing with multiple supply partners can become difficult to manage. Requirements, contracts and rules will vary from supplier to supplier.
The margins for wholesale are typically good compared to dropshipping, but not usually as profitable as manufacturing products yourself. This method can be considered a safe middle ground between manufacturing and dropshipping when it comes to margins. Although each case is unique, it’s typical to see a 50% margin on wholesale goods resold at retail pricing.
Buying wholesale is a lower risk model versus manufacturing but still carries some risk. Wholesaling will require the purchase of inventory with no guarantee that you can sell it. Perhaps the greatest risk comes from figuring out how to differentiate yourself from the many other retailers selling the same products from the same brands. If you're planning on wholesaling, you'll need to consider how you can set yourself apart and add value that will convince customers to order from you.
Dropshipping Your Product
The concept of dropshipping is selling products you don’t actually own. Working with dropship partners is not only a product acquisition model, but also includes product fulfillment. The process works by taking orders from your online business and forwarding them to your dropship partner. They in turn, ship the product to your customer on behalf of your company. The key to making money with drop shipping is making a profit on the price difference between what you charge and what your dropshipping partner charges you. Although it's not set in stone, typical dropshipping margins are usually around 15%-20%.
The biggest benefit to dropshipping is the ability to offer a large selection of products without purchasing inventory upfront or managing that inventory. Dropshipping can also be a great tool to help diversify your inventory and test products since it's just a matter of adding the new product to your store.
When going with a dropshipping business model, you can either work with manufacturers (who offer dropshipping) by contacting them directly or you can work with a dropship aggregator like Oberlo. An aggregator works with hundreds of manufacturers and makes it easy to sell thousands of products without the need for you to maintain relationships with each individual manufacturer.
Keep in mind, that although these aggregators make it easier to sell a variety of products, they take a cut of your already slim dropshipping margins. Additionally, many will make you pay a yearly “membership” or “sign up” fee of a few hundred dollars.
Who's It For:
Dropshipping is by nature, the cheapest option to get started. Therefore, dropshipping is for people that are would prefer to keep startup costs as low as possible and are less concerned about margins. Dropshipping is also a great option for someone that doesn't want to hold and manage inventory. It's also a great option for people starting out in ecommerce as it allows you to get started for almost nothing and to start understanding the world of ecommerce and various aspects of online marketing.
- Low Startup Costs - The biggest advantage of dropshipping is the low startup costs. Because you never purchasing and carrying inventory upfront, you have no inventory costs.
- Low Risk - Since you don't actually purchase your inventory upfront you aren't taking the risk of having items you can't sell.
- Manage Your Business From Anywhere - Dropship partners not only supply your product, but they also fulfill orders for you. That means you can easily manage your business from anywhere in the world, provided you have a laptop connection.
- High Competition - Because dropshipping has such a low barrier to entry, you need to be prepared for a high level of competition in your product category.
- Low Margins - Maybe one of the biggest disadvantages of dropshipping are the very low margins. This makes it extremely difficult to compete in the paid advertising space and means you'll have to rely more on adding value through superior customer service and building better content. Low margins also mean you have to sell a significant volume to make a decent profit.
Your profit is the difference between what you charged the customer and the price the dropshipper charges you. Typically with dropshipping your profit margins are slim, around 15%-20%.
Dropshipping is fairly low risk in terms of potential financial loss because you're not buying inventory upfront nor do you have to worry about shipping product. However, risk comes in the form of very slim margins and high levels of competition. Slim margins means you'll have to move a lot of units to make decent profit. Compounding that, the slim margins diminishes your ability to profitably carry out certain marketing activities like pay-per-click to acquire new customers as well as running sales and offers.
Which method is right for you?
Most products will fall into one of these four product acquisition models. Depending on your chosen product or niche, you may not have the option of which business model you choose. Much of it depends on the type of product you plan to sell. Some products will naturally fall under certain categories.
- If your product idea doesn't exist: Make or Manufacturer
- If you have almost no money to get started: Dropship
- If You want to sell other brands: Wholesale or Dropship
- If you want to hand produce your product: Make
- If you want the highest possible margins: Manufacture
- If you want to take the least risk possible: Dropship
- If you want to take the most risk possible: Manufacture
- If you want to take some risk: Make/Wholesale
The model you end up selling under will partially define and shape your entire business going forward. It's important to understand the advantages, as well as the disadvantages of each so you can make the right choice for your business.
In the next chapter, we'll show you how and where to look for a supplier for your products.