In our recent article, “Mind Your MOQs,” we discussed that the first step in boosting profit margins through minimum order quantity is to “know your producer.” In our ever-changing industrial society, factories and suppliers worldwide are out to make a buck—with very little care for their sellers. They feel the pressures of a changing supply chain, forcing a reduction in quality and price. This can drastically damage merchants’ businesses.
A REVOLUTION IN RETAILER’S SUPPLY CHAINS
Sellers are no longer acceptant of heavy, traditional supply chains that increase costs and lose value—and they’re right not to be okay with this!
With a shift in awareness of supply chain “games,” U.S. online retailers and emerging sellers are pursuing private labels with more direct supply lines. There is a major market shift towards these private label brands due to their increased control over production, minimized costs, customization options, and managed customer service offerings.
THE FACTORY GAME
As retailers are changing the way they do business with suppliers, factory owners have to work twice as hard to keep their clients. They’re closely watching online marketplace trends to see what products are selling and at what price. They use tools to estimate sell-through, and therefore they know the entire margin from raw material to consumer doorstep. This means that factories can actually manipulate margins as they deem appropriate—oftentimes in their own favor.
In doing so, this can highly affect and influence the minimum order quantity. It’s not always true that ordering a higher quantity of goods means getting a lower cost. Oftentimes, foreign factories do not hold by a margin standard for MOQs.
Production economies especially, like China, are facing uncertainty in the digital marketplace, which means their factories are in desperate need of sustained order flow. The Chinese government is promoting the use of trade practices that prioritize Chinese factory jobs. Without these jobs, they risk revolution. This doesn’t bode well for traditional factory pricing.
THE GAME’S EFFECT ON SELLERS
Because of these intense pressures from a change in procurement, those factories with heavy supply chains still need to find ways to make money. Their solution is often to pitch the same MOQ to a multitude of sellers simultaneously. This can severely damage markets—and the sellers within those markets—by diluting healthy competition and creating an overall niche collapse.
HERE’S WHAT HAPPENS:
A factory methodically floods a market by producing a single large batch of a specific SKU. They market this to their buyers with low minimum order quantities and low costs, so it seems like a great deal to merchants.
Sellers post these products in their shops using private brand listings, thinking they’ve found a great, money-saving loophole through a foreign, unseen factory.
Customers don’t seem to be coming to the shop, though. The sellers look at their competition and soon realize that many of their competitors also purchased this same SKU, at the same time, for the same MOQ.
The effect of this is disastrous. Soon, sellers are lowering their price in order to compete with one another. They re-price their platforms to win the buy box, undercutting initially by pennies, nickels, dimes, and then dollars.
The price keeps dropping, accelerating in its decline. Soon, the pressure of the selling price becomes unbearable for shop owners. Inventory piles up and profit margins are minimized. Losses mount, eventually leading to inventory liquidation or, worse, enterprise bankruptcy.
HOW TO QUIT THE GAME
There are two key rules to quitting the factory game and avoiding these disastrous results: know your core competency and know your supplier.
KNOW YOUR CORE COMPETENCY
Focus on your mission and core to determine your business’ formula for success.
Are you a master listing builder? Do you excel at visualizing what customers crave? Do you want to promote within a particular category until you own it? Do you want to be known as a high-value, high-margin, premium brand? Have you invested in a strong marketing campaign?
Each of these business models has its own defining mission. Each is, in its own right, a winning strategy deserving of focus and free capital to move the business forward.
You need to understand your brand and model in order to find suppliers that fit your business’ needs.
KNOW YOUR SUPPLIER
Not only do you want a producer that specializes in your industry and has perfected your product, but you also want a supplier who cares about you. Do they have a responsible view of an orderly marketplace?
With such a market-wide trend shift towards private label, you may want to consider working with a supplier like HomeRev. Your goal should be to minimize your supply chain and to know, firsthand, every supplier touching your product along the conveyor belt.
You want to have control over your production, so you can have a higher control over your sales. You don’t want to go in blind with unseen factories that are selling you and all of your competitors the same product MOQ.
You want a fair, honest, and reasonable company with your interests at heart. You want a company that knows that their success stems from your success.