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 2: Wholesale Preparation
- Introduction to wholesale sourcing
- Understanding how the buy box works
- Understanding how Amazon’s Best Seller Rank (BSR) works
- Understanding ROI / Margin
- Analyzing competition and potential volume
- Setting your personal buying guidelines
- Determining your long term strategy
- Distributors / Wholesalers vs. Manufacturer Direct
- Ideal targets for wholesale sourcing
- Tools for wholesale sourcing
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!
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Setting Your Personal Buying Guidelines For Amazon
When buying items to sell on Amazon, it’s always wise to set specific buying guidelines for your own personal situation. What I’m referring to is to know exactly what would make you say “yes” or make you say “no” to buy items. The best way to think about your guidelines is to say to yourself “if I handed these buying guidelines to an employee, would they be able to follow them?” If you can answer that question with a “yes”, then you’ve done a good job. If an employee can follow them – that means you can too!
There are quite a few reasons why it’s wise to set your own buying guidelines, instead of specifically following what everyone else says:
- Your working capital may be severely different than other sellers.
- Your knowledge of buying products may be limited, which would cause you to be more cautious than other sellers.
- Your risk tolerance may be different than others.
- Who knows your business better than you?
Once you’ve set your buying guidelines, I would recommend revisiting those guidelines every 3 months. In 3 months your situation may have changed, which may make your buying decisions obsolete. Look them over, and make changes if necessary.
What kind of buying guidelines should I set?
There are many things you can build into your buying guidelines. Here are the most common ones:
- Minimum ROI – Typically the lowest amount of ROI you will accept. Some sellers go as low as 20%, where as some sellers won’t buy anything less than 100%. Keep in mind, high volume wholesale items tend to have lower ROI’s than arbitrage and private label items.
- Volume / Rank – When calculating your share of potential sales, what’s the lowest number of units you will want to potentially buy? 90 per month? 30 per month? 10 per month? 500 per month?
- Minimum margin dollars per item – What is the absolute minimum amount of margin dollars you will accept on a specific item? This is mostly based on your internal processing costs and risk tolerance. The lower this number is, you will have a smaller buffer to accommodate price declines. Make sure you factor in how much it costs to prep and ship an item to Amazon.
- Maximum number of units per item – What’s the maximum number of units you want to buy? This is mostly based on your risk tolerance and working capital situation. At times you’ll find that suppliers will pass along a substantial discount if you buy a large quantity of product. What is your limit?
- Working capital tied up in one product – This somewhat goes hand in hand with maximum number of units What’s the most you potentially want to spend on one individual product? Let’s say you have $10,000 you can spend on a regular basis of inventory. What percentage of that overall working capital would you want to tie up in one product? The higher the percentage you have tied up in one product, the higher of a risk you have.
- How many days of inventory do you want to keep in stock – This has to be balanced with some of the other buying guidelines. There is a lot more lead time involved with wholesale vs. arbitrage. In some cases, it could be 2-3 weeks from the time you place an order to when it is delivered in Amazon’s warehouse. You may want to keep a month’s inventory at all times available at Amazon, which means you may need to order 2-3 weeks before you believe you will run out. We personally strive for 45-60 days maximum, as we like to turn our inventory quickly.
- Total amount of inventory you want to have on hand – You likely will have a specific amount of money you can spend on inventory. That’s what this number is. As time goes on, you’ll want to keep a cash buffer in your checking account for various reasons. Having a budget for the total amount of inventory you want on hand keeps you more disciplined when making buying decisions. It also helps you make decisions of when to dump inventory that isn’t selling quickly enough.
- “Testing Fund” – You should set aside a small portion of your overall budget for testing purposes. If your overall budget is $1000, this may not be feasible. As time goes on, it will be wise to start putting money into products that fall outside of your normal guidelines. Generally this means items that may not have the sales volume you are accustomed to, or bringing new products to market. By doing so, you continuously learn new things and potentially find new strategies to put into the mix.
What does a typical wholesale buying guideline look like?
I’m going to list out two examples of what a company may use as buying guidelines. These are not recommendations on what you should use – just examples you can start building yours off of. Remember, your situation is totally different, and these guidelines might not remotely make sense for you.
Someone risk adverse:
- Minimum ROI: 75%
- Volume / Rank: At least 90 sales per month
- Minimum margin dollars per item: At least $5 margin dollars per item
- Maximum number of units per item: Only buy maximum 250 units of an item at any given time.
- Working capital tied up in one product: Only 5% maximum funds tied up in one specific product.
- How many days of inventory do you want to keep in stock: 15 days on an initial buy, 30 days on re-orders
- Total amount of inventory you want to have on hand: $75,000
- Testing Fund: 2% of overall inventory.
Someone who is OK with risk:
- Minimum ROI: 30%
- Volume / Rank: At least 10 sales per month
- Minimum margin dollars per item: At least $3 margin dollars per item
- Maximum number of units per item: Only buy maximum 2,000 units of an item at any given time.
- Working capital tied up in one product: Only 15% maximum funds tied up in one specific product.
- How many days of inventory do you want to keep in stock: 30 days on an initial buy, 60 days on re-orders
- Total amount of inventory you want to have on hand: $75,000
- Testing Fund: 8% of overall inventory.
Again, your guidelines should be set specifically to how your business operates and your personal situation. Some of these things will constantly change as time goes on – just make sure you look at your overall picture regularly. If you don’t, you may end up breaking a lot of your own guidelines without even realizing it.
Now that you have an idea of how to set your buying guidelines, lets work on building out your long term plans!
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