Lessons Learned In Business

Differences Between Product Sourcing Methods – Wholesale Course Module 1 Part 2

Wholesale Training Course

This Post is part of the “FREE Wholesale Training Course”.  You can view the entire course listing and introduction to the course here.

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Module 1: Wholesale Mindset

You can click on each of the links above to go directly to the area of the module the best interests you.  That being said, lets get right into the content!

Want to skip reading the massive wall of text?  After the entire course is released, I will make videos for each of the sections for easier consumption.  Make sure you are on our mailing list to be notified when it’s released!

Differences Between Sourcing Methods

There many different ways to find products to sell online, but here are the most common methods:

  • Arbitrage (retail / online)
  • Wholesale
  • Private Label
  • Liquidation / Closeout

There are a lot of similarities and differences between each of these methods.  There are pieces from each method that work extremely well with wholesale sourcing, so if you do one of these other methods currently, you will have a leg up on wholesale sourcing.  Let’s dig into each method:

Arbitrage (retail / online) Sourcing Method

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The basic definition of arbitrage is “capitalizing on the price differences between two markets”.  In layman terms, it means “buy stuff from online or brick and mortar retailers low, and sell high on Amazon”.  A lot of Amazon sellers start out selling using the retail arbitrage sourcing method because it’s the absolute cheapest way to start selling on Amazon.  Usually a “step up” from arbitrage is selling items wholesale, or jumping into private labeling items.

Pros and cons for arbitrage sourcing

Pros:

  • You can get the product cheaper than wholesale pricing at times, which increases your margins.
  • It allows you to start selling online with minimal costs.
  • Lead times are better than other options.
  • Cash back and credit card reward opportunities can be an incredible somewhat tax free incentive. (Here’s more info about legalities on taxing credit card rewards.)
  • Selling during the 4th quarter, you can take advantage of quick fluctuations in demand and pricing.

Cons:

  • Typically quantities are severely limited, which makes it hard to find replenishments.
  • Extremely difficult to scale
  • Pricing fluctuates rapidly, which can make profits unpredictable.
  • Brand Gating Issues, which could potentially leave you with product that you can’t sell.
  • Potential inauthentic claims that are difficult to provide accurate documentation.
  • More prep work for Amazon FBA, as a majority of the items will need to have labels removed.  In addition, sending single items takes more time during the shipping process.
  • Acquisition costs can be high, as you either need to drive to physical locations, or pay people to do the work for you.
  • Your sources can easily cut you off – specifically when doing online arbitrage

Things that will help you with wholesale sourcing if you already do arbitrage sourcing:

  • You likely already know how to gauge demand for products.  This is important for the research phase of wholesale sourcing.
  • You likely already understand how pricing impacts sales.  You may even already have a re-pricer setup.
  • You likely already understand how to ship items to Amazon FBA.
  • You likely already understand how to do extended research for products if you do Online Arbitrage.  This can help you with niche sourcing methods.

Wholesale Sourcing Method

wholesale

The basic definition of wholesale sourcing is to “purchase goods in a business to business relationship”.  In arbitrage, since the companies you are buying from are selling the items at the retail level, it’s not a true business to business relationship.  A true business to business relationship for purchasing product generally includes opening an account with the other business and sending them purchase orders when you want to purchase product from them.  There are two different levels of wholesale relationships – distributor and brand owner, which we will dig into deeper in Module 2.

Pros and cons for wholesale sourcing:

Pros:

  • Very easy to scale and grow quickly.
  • You can develop relationships with brands to eliminate competition on some items
  • You open the door to offering other services to brands that can increase your overall profitability.
  • Typically easy to prepare for Amazon FBA. In some cases, you don’t even have to open up case packs to prepare items for Amazon.
  • Acquisition costs can be low, as reordering items with software can take minimal labor.
  • Easier to forecast potential profits, as they are much more stable.
  • Building relationships with brands can lead to information about the industry or upcoming products.
  • You have specific approval from the brand to sell the items, which makes it much easier to stay out of brand gating issues.
  • You can receive credit directly from suppliers, which can increase the amount of potential product you can buy.
  • In some cases, you can buy the item cheaper than Amazon themselves.

Cons:

  • Profit margins can potentially be smaller than other sourcing methods.
  • Some brands have clauses in their contracts stating the items can’t be sold on online marketplaces such as Amazon.
  • Amazon works hard at finding every possible wholesale company and poaching them.
  • Competition can come from unknown sources at times.  A retailer may put an item on sale as a loss leader, which leads retail arbitrage sellers to start selling your products and undercutting you on price.
  • Lead times for products can be longer, which can cause some cash flow issues.  In addition, it makes it more difficult to adjust quickly to emerging market conditions.

Private Label Sourcing Method

The basic definition of private label sourcing is to “purchase non-branded items from manufacturers, and put your own brand name on it”.  There is obviously a lot more to this, as many companies using private label as a sourcing method are making changes to existing products, and solving problems that customers are having with existing products on the market. You can also potentially build a brand by releasing similar products and marketing to a specific audience.

Pros and cons for private label sourcing:

Pros:

  • Profit margins are typically higher.
  • You are the source of the product, so you can control the distribution of the product.
  • You can continuously make products that sell well.
  • You can build a brand that can be sold off later on.
  • You can build a brand where the products can be sold in retail locations.  You become the wholesaler!

Cons:

  • Since you are the manufacturer, you can potentially be held liable if the product causes damage to people.
  • You’ll generally need more working capital than any other sourcing method.
  • You have to create demand for the products, which means you have to market them yourself.
  • There is a longer time frame to bring products to market.  Sometimes 60-90 days.
  • It’s difficult to sell off a slow moving product if the brand is not well known.
  • You may run into legal issues if you don’t realize you are breaking a trademark or patent.

Things that will help you with wholesale sourcing if you already do private label sourcing:

  • You likely already know how to gauge demand for NEW products.  This makes it easier to bring new wholesale items to the market as a value proposition.
  • You likely already know how to generate reviews and demand for new products.  Another great value proposition.
  • You likely already understand how to ship items to Amazon FBA.
  • You likely already know how to create and optimize listings on Amazon. This allows you to find hidden wholesale items that don’t have demand now, but should.

Liquidation / Closeout Sourcing Method

liquidation

The basic definition of liquidation / closeout sourcing is to “purchase items where another company is trying to turn assets into cash”.  In most cases, these are companies that have excess inventory, and they need to sell the product quickly to free up cash to buy new product.  Companies selling this product offer steep discounts that you rarely can find anywhere.

Pros and cons for liquidation / closeout sourcing:

Pros:

  • Profit margins are typically extremely high.
  • You can compete against Amazon, because you are usually buying the item cheaper.
  • You can find items that have very minimal competition, but are still in demand.

Cons:

  • Risk.  Unless you know the exact sourcing chain of the product, you run the risk of purchasing counterfeit product.
  • Brand Gating Issues, which could potentially leave you with product that you can’t sell.
  • Potential inauthentic claims for Amazon that are nearly impossible to defend.
  • You may receive product that isn’t in pristine condition.
  • You may not be able to cherry pick good selling items.
  • Once the stock runs out, it’s out.  It’s usually impossible to replenish good selling items.

Things that will help you with wholesale sourcing if you already do liquidation / closeout sourcing:

  • You likely already know how to gauge demand for products. This is important for the research phase of wholesale sourcing.
  • You likely already understand how pricing impacts sales. You may even already have a re-pricer setup.
  • You likely already understand how to ship items to Amazon FBA.

Understanding the supply chain

There is a specific supply chain that happens no matter which way you source product.  It’s important to understand the difference between each step of the supply chain, because it can make a huge difference on price when buying wholesale.

This is what a typical supply chain looks like for a brick and mortar retail location:

Typical supply chain

The end consumer generally buys from a retailer, or an off price retailer (such as Big Lots, Ross, TJ Maxx, etc).

In retail arbitrage, resellers typically will buy items from retailers, and off price retailers to sell directly to the end consumer as a retailer.  Here’s what that looks like:

retail arbitrage supply chain

In Private Label, this would be a typical supply chain:

private label supply chain

In Wholesale sourcing, a lot of the times, you’ll see this as a supply chain, especially for larger brands:

wholesale distributor supply chain

In some cases, you’ll even run into this scenario as a supply chain:

secondary distributor supply chain

Now why are there all these different layers?  Well, in the wholesale world, there are a ton of different people that label themselves as “wholesalers”, who are really just distributors or secondary “wholesalers”.  Why is this important to know?  The more layers there are between you and the manufacturer, the higher the price for you will be, which ultimately makes you less competitive.

As we all know, Amazon is an extremely competitive environment, which means we need to have the absolute best pricing, and every competitive advantage possible.  That’s why you ultimately want your supply chain to look like this for wholesale:

private label supply chain

Yes, that looks exactly like private label.  That’s effectively what you want.  You want to be in contact with the manufacturer / brand owner as much as possible.  When we get into research and contact mode, our goal should be to figure out who exactly the brand owner is, and how we can reach out to them.

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Continue on to Module 1 Part 3: Skill Sets Needed To Succeed In Wholesale Sourcing

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Chris Potter

Chris Potter is an internet entrepreneur that loves working on businesses and helping others with their businesses. He has operated businesses that have sold over $25 million in retail sales, bought and sold a blog design business, and started websites from scratch. Skyrocket your business by joining his Mentoring Program!

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