Lessons Learned In Business

How I Cut My Sourcing Costs Up To 50%

How I Cut Sourcing Costs Up To 50%

The age old rule of thumb is “Buy Low, Sell High”.  In order for that to work properly, you need to come up with a fool proof way of always buying low.  Depending on how you source items, there are many ways to do this.  Over the next five posts, I’m going to share the ways I knock down my sourcing costs by up to 50%.  I can guarantee using just one of the methods I will be sharing in this series will increase your margin so high your eyeballs will pop. Here’s what I’ll be covering over the next three posts:

Buckle up, hold on tight, and lets start saving some money!

 

The Wholesale Discount Master Game Plan

Wholesale is a totally different beast compared to retail arbitrage.  It’s not like you can do a search on google for a coupon code to get a discount with a wholesaler.  But, there are many discounts you may not have even thought of when working directly with wholesalers.  Let’s discuss them, shall we? Back in 2010, there was a supplier that had a new product come on the market that I knew would go absolutely gangbusters.  We had been carrying multiple products from this particular supplier for years, so I had a pretty good relationship with them.  I gave them a call about the new product.  Here’s how a conversation with that supplier went (as much as I can remember from four years ago):

Me: This new product looks like its going to take off.  If I want to buy a decent amount, what kind of discount can you give me?

Wholesaler: Well, I don’t think I can give you much of a discount at all.  It’s going to be a really hot product, and I have limited quantities.

Me: Ok.  What products do you have that you have a lot of in stock that you want to move?

Wholesaler: Here’s a few items that we are overstocked on. At this point, I do some research on the items they are overstocked on.  I find one that looks to be a really good winner, even at the existing price.

Me: How about this.  If you can give me a package deal with x product, and the new product, I’ll take some of that dead inventory off your hands.  I’ll buy 100 pieces of x product, and 300 of the new product.

Wholesaler: I do really want to move that product.  How about if I give you 25% off both.

Me: Make it 30%, throw in free shipping, and I’m sold.

Wholesaler: Done deal.

Just like that, I got 30% off a hot item they weren’t willing to give a discount on – AND free shipping.  In addition, I picked up another potentially good seller that I probably would have bought anyways.  What are the lessons learned here?

“Find a pain point for the wholesaler.”
  • Find a pain point for the wholesaler.  If you can find a way to solve that pain point, they will be willing to budge on price.  In this example, I took 100 units of a product they were having a tough time moving.
  • Negotiate, Negotiate, Negotiate. Take an example from Pawn Stars here.  Ask for a discount – the worst thing they will say is no.
  • Always use “free shipping” as a value add.  Depending on the shipment, just asking for free shipping could save you hundreds or thousands of dollars.
  • Try to buy in bulk if possible.  You’ll have a lot more leverage if you are throwing larger dollars to the supplier.

 

There Are Many Types of Discounts Out There…

When I used to purchase Halloween Costumes at wholesale rates, you would get price lists that would look something like this: costume-wholesale-pricing-example If you take a look at those prices, the margins potentially look a little thin if you are selling on a third party marketplace such as Amazon or eBay.  If you go by the “rule of 3” (where you want the selling price to be 3 times the cost of the item), it doesn’t seem to make sense to buy any of those items.  Of course keep in mind those margins are before any 3rd party fees such as commission, FBA fees, paypal fees, etc.  You would like to see those numbers closer to 65% or higher.  What you may not know is that some of the Halloween suppliers offer massive discounts for many reasons.  Here’s a list of the types of discounts that we were offered from suppliers:

  • Volume discounts.  Of course the more you buy, the larger the discount.
  • “Early Buy” discounts.  These were designed to have you place your orders in January or February before they even make the costumes.  It’s more like pre-ordering.
  • Defective allowance.  They would just give us a flat percentage discount off all of the purchases we make for the year.  In exchange, they didn’t accept any returns.
  • Category discounts.  At times, there were discounts on specific categories.  In most cases, these were generic (think private label) costumes they were trying to move.
  • Association Member Discounts.  There are a few associations that catered the Halloween industry.  If you were part of one of them, you would receive a discount.
  • Prepaid Shipping.  Some suppliers gave us prepaid (free) shipping. What a score that was.
  • Direct Import.  If your volume is high enough for specific items, you can do what’s called a “direct import”.  They will directly import a pallet or more directly from overseas to you.  It never even hits the manufacturers warehouses.

Now that we’ve seen all the possible discounts, let’s take a look at an example of how one of the suppliers would stack the discounts:

  • 20% Early Bird Discount
  • 5% Volume Discount
  • 1% Defective Allowance
  • 15% additional Discount for Sexy Costumes

Wow, that’s a lot of discounts.  Let’s take a look at how much margin those same items have after discounts: costume-wholesale-pricing-example-2 All the sudden, those costumes look a lot more attractive.  The margins are much closer to where we need to be to make this happen. The lessons learned?

  • The wholesale list price isn’t always the price you’ll buy it for.  Ask for any sort of discounts the niche you are purchasing in may have.  You may be surprised.
  • It pays to be an association member.  It cost us about $400 per year to be a member of the association.  That $400 was a wise investment, as we received over $15,000 in discounts from it.

More Than One Way To Get Massive Discounts

With some of our other non Halloween suppliers, the discounts you see above are very similar. The most common discounts were volume discounts and prepaid shipping.  There were also a few other types of discounts:

  • Cash Discount.  We would receive a discount for paying with cash or check upfront instead of paying with credit card, or using their credit.
  • NET Terms.  Some suppliers offer NET terms.  The supplier would send you product, and you wouldn’t need to pay it in full for 30,60, or 90 days.  This isn’t exactly a direct discount off the purchase price of the items, but it is a huge advantage.  I’ll discuss the advantage of NET terms a little later.
  • Competitive Discount.  This one works well when you have more than one supplier that sell the same item (or very similar item).
  • Month End / Year End Discount.  Just like us, suppliers want to hit sales numbers.  When they are at the tail end of a month, quarter, or at the end of the year, they may need that extra sale to get them over their sales quota.  Make sure you are that extra sale.  Make it a habit to catch up with your favorite suppliers at the end of the month.  You never know what you’ll get.
  • Package Discounts.  I mentioned a deal earlier where I helped a supplier move a product they were having a tough time moving.  At times, suppliers will offer package discounts when you buy certain items together.

Remember, you can always stack these discounts on top of each other.  All it takes is to ask!  The lessons learned?

  • There are more than one way to receive wholesale discounts.  Don’t pigeon hole yourself into specific lines of thinking when it comes to pricing with suppliers.
  • Suppliers want to move product just as much as you do.  Help them move it, and line your pockets with much needed cash.

 

How to Use NET Terms to Your Advantage

Have you ever heard of NET terms?  If not, you are missing out on what I like to call my “secret weapon”.  What are NET terms?  Great question, young grasshopper.  In short, it’s free credit from your supplier.  In a lot of cases, supplier payments are considered “due on receipt”, which means you are required to either pay for the items before they ship, or pay for them when they are delivered.  NET terms means you receive the items, but you don’t have to pay the supplier for those items until a later date.  Commonly you’ll see things like “NET 15”, “NET 30”, “NET 60”, or “NET 90”.  The number means the amount of days you have to pay for the items you received.

“NET Terms can heavily increase your ROI.”

How do NET terms save you money?

The real way to look at using NET terms are in ROI.  I’m going to use a crude example below to help explain why using NET terms can be more advantageous than actually receiving a discount on goods up front.

Let’s say you are purchasing $5,000 worth of product in this example.  Your supplier gives you two payment options: 5% off if paid up front, or NET 60 terms with no discount.  Seems like a no-brainer, right?  Take the $250 discount!  Well, not so fast.

In this example, lets assume it will take 4 months to sell through all of the product you purchased.  That means you sell through 25% of the inventory each month.  We will also assume you make a 15% profit on all the items after fees and expenses are taken out.  Keep in mind, this is a crude example, and there are many other factors that can come into play.  But stay with me..

Option 1: You took the $250 up front discount.

You immediately pay $4,750.  It took four months to sell through your inventory.  Your overall profit on the deal was  $750 (15% margin on $5,000 of product).  Your annualized ROI is  47.36%, with an annual profit of $2,250.  Much better than putting that cash under your bed mattress.  Yes, I’m talking to you Uncle Larry.

ROI: 47.36%  Profit: $2,250

Option 2: You took the NET 60 terms.

The biggest difference with NET terms is you still have your $5,000 for 60 days.  Effectively, that doubles your buying power for 60 days and gives you options.  The day after you buy that $5,000 of product, you find a deal on some amazing fast turn product for $3,000.  The margin is terrible at 8%, but you know you can turn it within 30 days.   So, you pick it up.  During that 30 day time span, you profit $240.

Now, here’s where the power of NET terms comes into play.  Your payment is due on day 60.  You’ve paid nothing out of pocket, but you already have received the $240 profit from your side deal.  You’ve also already sold through half of your product, which means you’ve already received $2,500 of cash back from sales of the product, plus the 15% profit of $375.  So, you owe $5,000, but you already have back $3,115 of it.  In reality, you now only have to put out $1,885 of your own working capital to pay off the $5,000.  Just for the sake of this example, since we did have to tie up $3,000 for 30 days out of the 60, we’ll base our ROI off that $3,000 number.  Overall, we would profit $2,970 over a year time span, which is a stunning 99% ROI.  Could “The Donald” trump that ROI?

Can you Trump his ROI?

ROI: 99%  Profit: $2,970

NET Terms are a clear winner.

Even if you pull out that side deal, the ROI on the NET option is 75% annualized.

Caution: Using any credit (including NET terms) improperly can lead to your business collapsing.

One of the biggest tools I used in the Halloween business was NET terms.  It was one of the largest reasons I was able to bootstrap the company from $850k in revenue to $3.5 million in a two year time span. However, when using other peoples money, it can lead you to make poor decisions you otherwise wouldn’t make when it’s your own money.  It’s one of the many reasons my Halloween business collapsed.

Pro tip:  Make sure you aren’t changing your decision making process on purchasing when using terms vs. cash.

Lessons learned:

  • NET terms can heavily increase your ROI.  Use your money wisely, and watch it grow.  Like a Chia Obama.Chia Obama
  • NET terms can collapse your business if not used properly.  Use your money poorly, and watch it flush down the drain.  Like the brussels sprouts you hate.

How do you get all these discounts?

All of this seems good in theory, right?  How exactly do you REALLY get these discounts in real life?  I’ll sum it up in one word:

Relationships.

Yep, not rocket science.  It comes down to building relationships with your suppliers.  It’s highly likely you won’t receive most (if any) of these discounts when you first open an account with a supplier.  However, over time, the discounts will start to come.

Be the go-to guy or lady for your sales rep.  You want to be the person that is contacted first when a discount comes up.

Some simple tips for building relationships with your suppliers:

  • Get to actually know your sales rep.   Ask about their family.  Follow up and ask if Grandpa Sal’s Hernia surgery went well.  Ask how many goals little Timmy scored this season.
  • Find out something interesting about your sales rep.  As you build a rolodex of suppliers and contacts, it will become difficult to remember each person. An easy way to keep all those contacts straight is find something out that’s really interesting or odd.  Put it in your iPhone, or somewhere you’ll see it.  It makes it a lot easier to remember them.
  • Send them gifts and thank you notes.  Is your sales rep a Pittsburgh Steelers fan?  Send him some Steelers socks.  Does she love chocolate?  Send her a large Hershey’s bar.  After your last big buy, send a thank you note thanking him for his help.  Anything to make them remember YOU when you want them to.
  • Don’t take them for granted.  Your sales rep can forget about you just as easily as you can forget about them!

Sometimes, it’s even worthwhile to reach out to suppliers you don’t even purchase from on a regular basis.  Let them know what you are looking for.  That way, when they have it, you’ll be the first person on the list to call.

Relationships-Equal-Discounts

Take The Plunge and Take Action TODAY!

If you’ve made it this far – congratulations!  Now, you have an assignment.  TODAY. (or TOMORROW if it’s like 11:30pm right now).  Here it is:

Contact a current supplier and find out something interesting about them.

Don’t have any good suppliers?  Look at the exhibitor directory of the ASD / AMD show.  Find a supplier.  Any supplier.  Give them a call. Here’s your assignment:

Contact a NEW supplier and find out something interesting about them.

That’s it.  That’s all you need to do to start building that relationship.

Did you make it happen?  Good.  Pat yourself on the back.

Take the Next Step

fb-artWant to talk business with like minded people that want to seriously grow their online business?  Join my newly created FREE Grow Your Online Business facebook group.  Introduce yourself.  Then, post in there the interesting thing you found out today.  Yep – I’m holding YOU accountable for growing your business.

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There are many amazing topics in our Facebook group that may interest you:

  • Is it safe to hand credit cards to virtual assistants overseas?
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  • Ways to find leads for wholesale accounts
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  • When to fire an employee
  • Looking up CamelCamelCamel and Keepa data in bulk for efficient processing
  • Scaling Retail Arbitrage to different cities
  • Amazing tips on how to create new Amazon listings from scratch and get them to rank well
  • Pros and Cons of RA vs. OA vs. Wholesale
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  • Grocery Ungating Information
  • Pros and Cons of having your business as an S Corp vs. LLC
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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!

8 CommentsLeave a comment

  • Excellent information in a really fun article to read. I’m a newbie, but have started down the wholesale path, and will use some of the approaches you describe. In addition to good business, it’s more fun to have friendly relationships with your contacts! Thanks for the info!

  • What’s the best way to find a true wholesaler here in the states? I know there’s Alibaba and DHgate but looking for the ones in the US. Is there a publication that I can buy that lists them?

    • Good question. The easiest places to find them are at trade shows. In the post above, I mentioned using the exhibitor directory for the ASD / AMD show. The ASD / AMD show is a huge trade show that happens twice a year in Las Vegas. On that site, there is a list of exhibitors, which is a huge list of wholesalers. Also, do a google search for your industry + trade shows. So, say you want to sell housewares, do a search for “housewares trade shows”. You’ll find a trade show you can visit, or go through their website, and they will likely have a ton of contact information for their exhibitors.

    • Great question. There are many trade associations that are affiliated with different industries. In the Halloween example, one of the associations was Party Club of America: http://www.partyclubofamerica.com/. Usually you can find them by asking suppliers “are there any sort of buying associations or organizations in this industry you are aware of?”, or by visiting trade shows. Normally, if there is one, the suppliers will know about them.

  • Chris,
    First of what a great and honest discussion all just caught up with your interview tonight. Was travelling there are plenty of people hawking to make you the next slice bread or Apple of FBA with just let me have your CC otherwise you are going to miss this boat for ever.
    Anyways,you are probably one of the first person I have heard of talking about success and than a downfall. It shows courage,honesty and more importantly deep and matured thinking. I have experienced some parts like your story in the past.

    Just embarked on this FBA journey and trying to get feet wet and learn and keep in the company of some smart,intelligent and Successful people like yourself. See in my my eyes your a success some may not be able to see that But, ….hey that’s ok.

    Sorry about this big long post probably, one of my longest responses ever. But, here to learn and soak up some wisdom from you and hopefully share and contribute if someone sees any value to my thoughts. :-)

    Once again thanks and looking forward to learning from you.
    Ken

  • This is some solid information. Its clear the experience is talking, not just some stuff you heard others suggest.
    It’s the post that makes me want to join the 5 star community, i’ll just wait for that 24 hour flash sale of $19 memberships.

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