You’ve chosen the type of products that you want to sell on Amazon. Now you need to figure out how to source those products for your business. “Sourcing” products refers to the process of purchasing or obtaining the inventory of products that you’ll sell in your business.
How you source is a crucial part of your business. It will determine your potential risks, rewards, and expansion.
So what are your options for sourcing your products? And how do you choose the right one?
1. Retail Arbitrage
Reselling or “retail arbitrage” is common for many Amazon sellers. This is when you purchase products at a steep discount and resell them on Amazon’s Marketplace. Think of it as “flipping” products.
- Low startup costs: You purchase a few products at a steep discount.
- Low overhead costs: You usually don’t need to house a lot of inventory.
- Trending: You can have instantaneous sales and always be looking for hot or unique items at a discount.
- Expansion: It can be challenging to build a brand when reselling discount products; you likely won’t grow a loyal following or build brand recognition.
- Scalability: You’re spending most of your time hunting for bargains, which only allows you to scale based on the products you can find.
- Margins: Margins are usually low for resellers, and there is little control over pricing.
If you’re looking to build a business based on your own crafting skills, you can make your own products. You can sell handmade products on Amazon, Etsy, and other marketplaces if you know how to make a quality product.
This is a good option for anyone who is artsy and has resources to physically produce the goods themselves. This is low risk with medium reward, depending on how your price your products. Scalability is a challenge, so this is usually best for someone who wants to be an Amazon seller as a side gig or who will look into other means of sourcing in the future.
- Low startup costs: You buy materials as you go; there are low production costs; there are no minimum order quantities.
- Brand control: You build your brand and products from the ground up.
- Price control: You set the prices and margins, and you determine your own promotions and discounts.
- Quality control: You make the products, so you control how they come out.
- Agility: You can quickly adjust features of the product to match trends or changes in the marketplace.
- Fast launch: You can start selling before you even make the products.
- Low risk: You’re not hosting a lot of inventory, as you can make products as orders come in (if applicable).
- Scalability: It’s hard to expand or scale up because you only have so many hours in a day; you would need to partner with a manufacturer or train a team of people to do what you’re doing in order to expand.
- Time-consuming: You’re making the products yourself, so you have to put a significant amount of time into product labor; this often doesn’t leave a lot of room for running the sales and promotional side of the business.
- Limited product selection: You can only sell what you make, so it can be hard to grow your portfolio; however, you can make complementary products or partner with another sourcing method in the future to offer additional products.
In some cases, you can consider partnering with someone else who makes the products, and you would then sell their goods. You would collaborate to build a product and promote it. This can free up time to help grow the business while still creating quality specialty goods. If you choose to partner with someone, be sure to draw up a specific contract that outlines the communication and relationship moving forward.
3. In-House Manufacturing
Manufacturing in-house is a mixture of DIY and manufacturing. You basically set up your own factory to start producing your unique product.
This is a possibility for someone with a lot of start-up capital, proof of business, and a unique product that they can’t outsource to a manufacturer. Though this isn’t ideal for most Amazon sellers, this is an option for larger businesses and companies who want to maintain control of the supply chain.
- Production control: You can better manage each step of the operational process of your goods.
- Scalability: You can continue to grow your production without constraint.
- Reduced competition: You are making a unique product and not sharing the production lines of a manufacturer with your competitor.
- Expense: There are exorbitant investments involved in in-house manufacturing, including fixed assets (buildings, equipment), labor, materials, and other overhead.
- Management: Your factory itself becomes a business that needs management; you have to have expert manufacturers on your team to ensure compliance and smooth operations.
4. Contract Manufacturing
If you want to manufacture a specific product, you can outsource production to a manufacturing partner. They can help you develop the product—whether it’s a novel idea or a product that’s similar to something already on the market.
If you’re looking to create your own private label, this is a great way to manufacture products with your own branding. This is an option for people with a unique idea who want to build their own product—and have some financial means to get their business up and running.
Learn more about starting a private label here.
The margins you’ll make are dependent upon your product, manufacturer, and order quantity. However, there is a strong potential for high margins because you have more control over the brand and products. With its high rewards come high risks, like choosing an incorrect factory or large upfront costs. You can minimize these risks with a sourcing partner like Seller’s Choice.
- Branding: You can build your own private label and have control of your product, brand perception, and customer retention.
- Price control: You’re selling your own brand, so you control how much it sells for as well as the promotions and discounts you’ll offer.
- Quality control: With contracts and quality inspections, you can have greater control of what the final product will look like compared to other types of outsourcing production partnerships.
- Expertise: Outsourcing to a supplier who specializes in production in your industry gives you a plethora of experience, resources, and expertise.
- Low management: You order from a factory, and they handle everything that goes into the production of that product; you just have to maintain inspections and payment.
- Scalability: Your business has opportunity for growth by breaking into new products and selling at a higher volume; we recommend choosing a factory that is able to scale with your business.
- Slow launch: There can be a significant time to find a supplier, build a contract, facilitate a relationship, and get the first production run going.
- Less control: You don’t have as much control over the different parts of the supply chain, though you can discuss these operations when creating the contract.
- MOQs: Contract manufacturers often have high minimum order quantities, which can be a large investment upfront; you’ll also have to store this inventory with warehousing fees.
- Potential for fraud (discussed below)
Choosing A Manufacturing Partner
When entering into a contract manufacturing partnership, be sure to evaluate the following questions:
- What is the cost per product and production run? What are the fees, expenses, and shipping costs?
- What will the lead time for delivery look like?
- What will shipping and inventory look like? How much control will you maintain here?
- What does the contract say?
Beyond the logistics of the partnership, you want to ensure that the company is legitimate. Working with overseas manufacturing partners can be a challenge if you don’t prove that they are trustworthy and reliable. You don’t want to just Google “manufacturers of vacuums.” You want to ensure the factory you choose is legitimate, honest, and high quality.
How do you find a legitimate manufacturer?
- Trade shows
- Trade magazines
- Trade organizations and industry associations
- Sourcing companies
To ensure legitimacy and strong relationships, we recommend getting a partner to help facilitate your contract manufacturing. Seller’s Choice provides sourcing services, so we can help put you in contact with reliable, quality manufacturers.
Wholesalers connect you to existing products that you want to sell. You buy products from a middleman supplier at a discounted wholesale rate, and you then sell those products at a higher price. This is different than retail arbitrage because you are buying in bulk from distributors, and you have a license to resell these goods.
This is an option for someone who wants to sell a variety of products and brands under their brand name. This is a common practice for boutique stores, for example.
- Validation: The brands you sell are already validated on the market, so you don’t waste time or money developing a new product without data.
- Marketing: Often, the brand name will have its own marketing and promotional tools, so you can profit from by optimizing on this brand familiarity.
- Low MOQ: Usually, wholesalers will have much smaller minimum order quantities than manufacturers; this means you can host a leaner inventory with less risk of a financial investment.
- Pricing: You usually don’t have much control over pricing, as different brands have regulations about their pricing, discounts, and sales.
- High competition: You aren’t selling a unique brand, so you’re likely up against others selling the same product; thus, it’s hard to differentiate yourself.
- Inventory: Although not as much as manufacturing, you’ll still have to hold and stock some inventory.
With validated products and low investment, overall purchasing from wholesalers can be a low-risk business model. Distributing usually falls in the middle ground of margins. It has higher margins than dropshipping but doesn’t have as much potential as manufacturing.
Dropshipping is when you sell products that you don’t own. You take orders online through a platform, and then you forward those orders to your dropship supplier. They then package and ship the product to the customer on your behalf.
This is a low-risk, low-cost option because you’re not buying any inventory. You don’t have to put up a lot of money to buy products and risk them not selling through. Moreover, the dropshipper will deal with inventory, packaging, and fulfillment, so the seller can focus on sales. This makes it a good option for new Amazon sellers who don’t want to manage inventory or put up a financial investment.
- Flexibility: You can sell multiple brands at once without worry of not selling through stock; this allows you to easily diversify your brand’s portfolio.
- Low startup costs: You’re not buying products, so the cost to start is minimal.
- Streamline sales: Dropship partners do the operational side, so you have time to focus on sales and marketing.
- Low margins: Most vendors charge based on the products sold, and they have high fees that cut into your profit.
- Scalability: Your business can only scale at the rate that the dropshipping business scales.
- High competition: Dropshippers often have multiple relationships with sellers, so there could be a variety of others like you selling the same products.
- Inventory syncing: You are relying on another business’s inventory and shipping, so backorders and late deliveries can reflect poorly on your business.
Dropshipping is a low-risk option, but it also tends to result in low margins. We recommend partnering with multiple dropship companies to diversify your portfolio and improve your profits. Nevertheless, you want to ensure each of the brands you source is aligned with your business mission.
The Bottom Line
Sourcing can be a complex process. There are a lot of factors to consider, from margins to supply chain control to brand expansion.
That’s why you shouldn’t do it alone.
Seller’s Choice takes a deep dive into your business. We look at where you are now—whether new or established—and where you want to be. We look at your goals, so we can help you find partners and suppliers that will grow with you.