Heard Any of These Before?
There are plenty of enticing quotes in marketing materials for Amazon training programs that create a false perception of easy success. Quotes like “Selling on Amazon is a piece of cake!” or “With my system, anyone can become a seven-figure seller on Amazon” mislead aspiring sellers into thinking that they can achieve substantial income with minimal effort.
The reality is quite different. We have worked with thousands of business owners who struggle with cash flow management, find it challenging to source quality inventory, and feel overwhelmed by the complexities of running a business.
Many sellers have learned from experience that even if they do everything right, a single miscalculation or misjudgment can lead to financial losses or even a disaster. Those who enter the game without proper knowledge or significant investment can quickly lose their life savings, similar to walking into a casino.
However, for those with sufficient financial resources and unique supplier relationships, selling on Amazon can still be challenging but also profitable, stable, and promising.
Among the two million current third-party sellers, only a small fraction have achieved lasting success on the platform. This is because only a few sellers incorporate intelligent business strategies. To become an expert seller, you need to master every aspect of Seller Central, implement detailed checklists and processes for your business, and develop advanced sourcing capabilities.
Becoming an expert product sourcer goes beyond relying on scanning apps to find items at local yard sales or swap meets. It requires a deeper understanding of the market and building strong relationships with suppliers.
While some sellers gain a competitive edge through proprietary product research tools or advanced account management software, these advantages tend to get adopted by other sellers quickly. In our experience, the most consistently successful sellers not only leverage technology but also possess unique supplier relationships.
Some of today’s top sellers on the platform may lack certain technological tools like intelligent forecasting, feedback solicitation software, or repricers, yet they still perform exceptionally well. Their success stems from their well-kept, exclusive supplier relationships.
Our goal in this chapter is to provide you with a proper understanding of the difficulties and the necessity of sophisticated product procurement. We will help you develop those vital supplier relationships and guide you in identifying products that sell at your desired velocity and profit margins. There will be some overlap between this chapter and the Product Identification chapter since your products and suppliers are interconnected.
Let’s delve into how to find suppliers in different categories and discuss the trade-offs associated with each type of supplier. This chapter is divided into two sections to provide a comprehensive exploration of the topic.
Reselling Existing Branded Products
In this section, we will explore various supplier relationships that are key to reselling existing branded products.
These relationships include
- Wholesale from Manufacturers/Distributors
- Dropshipping from Manufacturers/Distributors
- Retail Arbitrage
- Closeouts from Manufacturers/Distributors
- Gray Market Suppliers
- Manufacturing your own product
In this section, we will shift our focus to supplier relationships specifically related to manufacturing your own product.
These relationships include:
- Trading Companies
- Direct-to-Factory Relationships
Are you ready to establish a robust supply chain infrastructure that will enable you to consistently source the right products, leading to substantial sales and profits? If so, let’s begin building your supply chain now.
Reselling Supply: Distributors/Manufacturers
Establishing an account with a manufacturer or distributor can be a challenging task, even for brick and mortar businesses. However, with persistence, you will find that many companies are willing to work with you.
As part of your learning curve, it’s essential to understand how to find manufacturers or distributors and how to approach them. In this section, we will use the terms “manufacturer” and “brand” interchangeably.
Examples of Brands (Manufacturers) or Distributors
To give you an idea of different brands and distributors, let’s consider a few examples:
- Otterbox: Otterbox is a manufacturer known for cellphone covers. However, they utilize distribution companies to sell their products. As a seller in the US, you would need to go through one of their main US distributors, such as Nite Ize, Tessco, VoiceComm, Ingram, or Brightstar, to purchase their products.
- Doc Martens: Doc Martens is a shoe company that directly distributes its own products to wholesale customers. To purchase their products, you would need to work with one of their internal sales representatives.
It’s important to note that contacting sales representatives might seem intimidating for new sellers, but there’s no need to worry. Sales reps are there to answer your questions and assist you. Most of them are courteous and understanding, especially when you explain that you’re new to the business. Don’t be discouraged if they decline doing business with you at the moment, as it’s a common occurrence.
They may ask you questions about your business, including the number of years you’ve been in business, your store location, the products and brands you carry, and whether you sell online or have a website or presence on platforms like Amazon or eBay.
They may require business information such as your address and a completed W-9 form to establish the business relationship. Building relationships with distributors or manufacturers takes time and effort, but it can lead to valuable partnerships for your reselling business.
How to Find Brands or Distributors
There are several methods to connect with brands or their distributors. Let’s start by discussing Wholesale Trade Shows. These shows typically take place from January to fall and are held in major cities across the United States, such as New York, Chicago, Miami, Las Vegas, and Los Angeles.
For buyers, some shows are free to attend, while others may have a small entrance fee. However, keep in mind that travel, lodging, and meal expenses can accumulate quickly, especially if you plan to attend multiple shows or bring additional employees with you.
If you register at the door of the show, it is advisable to bring business cards, preprinted purchase orders with your letterhead, incorporation documents, a corporate credit card or company bank account checkbook, and your sales tax permit for your home state. Pre-registering often provides a discount, and if you do so, you can leave much of this information at home. When meeting with brands at the show, make sure to have your business cards and an electronic device or notebook to take notes.
Trade shows offer an excellent opportunity to explore potential suppliers, obtain catalogs, and business cards, and if prepared, place orders for products. They can also serve as a way to stay updated on new and popular items in your product category. Attending a trade show might present an opportunity to discover a hot new item and gain access to it.
Many new sellers have successfully established relationships with small manufacturers at trade shows, which eventually grew into substantial wholesale accounts.
While suppliers at trade shows may offer discounts for orders placed during the event, it’s crucial not to place orders without conducting a SKU-level analysis of the products you are considering. This analysis verifies the competitive nature and pricing on Amazon, ensuring that you can make a profit and realistically win the buy box for each SKU.
It’s important to note that attending a trade show unprepared is not recommended. Instead, consider it an opportunity to engage with prospective suppliers that you have already researched through product and competitive analysis. Although you may come across a few interesting surprises, the focus should be on connecting with specific suppliers rather than simply browsing through a variety of options.
Here are a few examples of trade shows:
- The Magic Show: Held twice a year (in February and August) in Las Vegas, it is an apparel/clothing and accessory trade show that generates over $200 million in daily orders.
- The International Housewares Show: Organized annually by the International Housewares Association (IHA), this show covers more than 750,000 net square feet of exhibit space and is among the top 20 largest trade shows in the U.S. and top 10 in Chicago.
- ASD: Held biannually in Las Vegas since 1961, ASD has become one of the nation’s largest merchandise trade events. It showcases various merchandise categories, including gift and home, fashion accessories, apparel and footwear, jewelry, health and beauty, toys and novelty, and general merchandise.
These examples are just a glimpse of the many wholesale trade shows available. You can find a comprehensive list of shows for product sourcing in our Wholesale Trade Show Directory within the Additional Resources section. You can search online using terms like “wholesale trade shows” to discover directories featuring a wide range of shows across different product categories, such as pet supplies, gifts, fashion accessories, home and garden products, and more.
How to Find Manufacturers or Distributors
There are several other popular methods you can use to find manufacturers or distributors
- Research through the brand or distributor’s website: Visit the official website of the brand or distributor you are interested in to gather contact information and learn more about their products and distribution channels.
- Leverage your network: If you have a close relationship with a retail business owner, they may be able to provide you with contact information for the brand or distributor’s sales representatives. However, keep in mind that this may not work if your friend operates in the same geographic area and sees you as competition. You can also reach out to friends or relatives who work for the company to inquire about contacts within the sales department.
- Wholesale websites: While not always the most reliable resource, some sellers have successfully navigated wholesale websites to find meaningful contact information for reputable brands. Take the time to sift through the available information and identify potential leads.
- LinkedIn: Use LinkedIn to see if you are connected to anyone of interest within the brands you have identified. You can also search for the brands you wish to sell and try to find sales representative information. If you have a connection through a friend or associate, ask for an introduction. Otherwise, you can reach out directly through an InMail message.
- Hire a product broker: Consider hiring a product broker on platforms like Upwork or Freelancer. These experienced consultants, often former sales representatives, can help you find the right people to connect with at the brands you want to buy from.
Advantages of Working Directly with a Brand or Authorized Distributor
There are several advantages to establishing a direct relationship with a brand or authorized distributor
- Higher margins: Purchasing wholesale directly from a brand or distributor usually offers higher profit margins compared to dropshipping or working with gray market suppliers.
- Authenticity and proper packaging: By sourcing directly from the brand or authorized distributor, you can trust that the products are authentic and will be delivered with the proper packaging.
- Credit terms: Once a relationship is established, brands and distributors often provide credit terms, allowing you to manage cash flow and scale your business more efficiently. However, ensure that you only purchase what you can sell within the specified payment term range unless you have sufficient cash reserves or financing options.
- Stability: Brands and distributors tend to be more stable sourcing partners, providing consistent product availability and reliable customer support.
- Fulfillment by Amazon (FBA): Purchasing products directly from brands or authorized distributors allows you to utilize FBA, which reduces the risk of late order shipments and increases your chances of winning the Buy Box on Amazon.
By utilizing these methods and establishing direct relationships with brands or authorized distributors, you can unlock numerous benefits for your reselling business.
Some Disadvantages of Working Directly with a Brand or Distributor
While there are advantages to working directly with brands or distributors, it’s important to consider the potential disadvantages as well:
Approval and eligibility requirements: Many brands require approval to purchase wholesale from them, and some may have specific criteria, such as requiring a brick and mortar store that aligns with their product category. Obtaining a retail setting can be a significant undertaking and financial investment, so it’s crucial to approach this strategy with a well-thought-out plan and a comprehensive business strategy. While some sellers have achieved success by using their physical stores to secure desirable brands and thrive on Amazon, others may find it challenging to secure the brands they desire, leading to a precarious situation.
Minimum order quantities (MOQs): Some brands or distributors have minimum order requirements, which can impact your ability to place smaller initial orders. Your order volume with a supplier often determines your priority in their eyes. Ordering larger quantities may provide advantages, such as receiving closeout notifications or securing inventory during the busy holiday season. However, it’s important to exercise caution when scaling up rapidly or ordering excessively from a particular brand. Brands may question sudden large orders and may be wary of potential unauthorized resale. It’s generally advisable to gradually increase order sizes until you establish a mutually comfortable level with the brand.
Minimum advertised price (MAP) policies: Many brands now enforce MAP policies, which restrict the minimum price at which their products can be advertised. Some manufacturers and distributors have become more sophisticated in monitoring online channels, including Amazon, to identify potential MAP violations. They may cross-reference your inventory levels and purchase orders to detect non-compliant pricing. If you violate MAP policies, particularly as a smaller customer, you risk losing your account with the supplier.
Restrictive agreements and restrictions on selling platforms: Some brands require new customers to sign agreements that prohibit them from selling on Amazon or even on their own websites. Additionally, some brands may approach you months or years after establishing a business relationship and request that you discontinue selling their products on Amazon. These restrictions can limit your options and impact your ability to diversify your sales channels.
Considering these potential disadvantages will help you make informed decisions when establishing relationships with brands or distributors. It’s essential to carefully review agreements, understand pricing policies, and assess the long-term compatibility of your business goals with the brand’s requirements.
Dropshippers, Online Arbitrage / OA Dropshipping, Retail Arbitrage & Closeouts
Some sellers may be confused by the term “dropshipper.” It is important to understand that dropshippers are essentially the same as the brands (manufacturers) or distributors we discussed earlier. The distinction lies in the order and fulfillment relationship with your supplier. Dropshippers allow you to sell products without holding inventory, as they directly ship the product to your customers.
Examples of Dropshippers
For instance, let’s consider Vortex, a company specializing in hunting and outdoor gun accessories and optics. As a brand/manufacturer, they supply products to distributors and wholesale customers. However, they also offer dropship options for approved wholesale customers, enabling them to fulfill orders directly to the end customers.
Online Arbitrage / OA Dropshipping
Online Arbitrage / OA Dropshipping is a business model where products are purchased via online from retailers and sold on platforms like Amazon, with shipping directly from the retailer to the customer. However, it’s important to note that this model often leads to suspensions due to Amazon’s strict requirements for authorized supply chains. We strongly advise sellers to avoid this business model to mitigate potential risks and maintain account health.
Retail arbitrage is a strategy where sellers buy products from retail stores in person at a lower price and resell them for a profit. It involves searching for discounted items, limited-time offers, or sales promotions. By leveraging the price difference, sellers can make a profit by selling these products on platforms like Amazon. In retail arbitrage, sellers can either ship the products directly to the customers or send them to Amazon’s warehouse for fulfillment.
Closeouts refer to products that are being sold at significantly reduced prices to clear inventory. Brands or distributors often offer closeout deals to move excess stock or discontinued items quickly. Closeouts can be a great opportunity for sellers to source products at lower costs, enabling them to sell them at competitive prices and generate profit.
Understanding these different sourcing methods, such as Dropshipping, Online Arbitrage/Retail Arbitrage, and Closeouts, provides you with alternative options for acquiring inventory. Each approach has its own benefits and considerations, and choosing the most suitable method for your business depends on factors such as your budget, sourcing preferences, and target market.
When it comes to finding dropshippers, establishing an account with the brand or distributor is crucial. However, not all brands or manufacturers offer dropshipping, and securing a dropshipping arrangement can be challenging as it requires mutual trust. Some sellers inquire about dropshipping during initial conversations with the brand, while others build relationships through small wholesale purchases before broaching the topic of dropshipping.
One example of a dropshipping aggregator is US Direct from Inventory Source & Doba. These platforms act as marketplaces, connecting hundreds or thousands of manufacturers with resellers. However, it’s important to note that these sites often disguise the manufacturer’s name to prevent customers from establishing direct relationships with suppliers. In our experience, and that of many other sellers, it is challenging to find items with significant profit margins on such platforms.
A better option for finding dropshippers is WholesaleCentral.com. Sellers who heavily rely on dropshipping as a core part of their business often find the best dropshipping accounts by working directly with brands or distributors, typically after establishing a solid relationship with the supplier over time.
We do not recommend dropshipping for sellers who are just starting out on Amazon or working with a new supplier. Even if you manage to find a dropship supplier offering high-margin products from the beginning, it is crucial to verify their reliability in terms of fulfillment. Building a history with the account and ensuring timely shipping and accurate inventory updates are essential.
Jumping into dropshipping without a history with your supplier poses risks, such as listing inventory that is unavailable or experiencing delays in order fulfillment. We have seen new sellers have their accounts suspended when they had to cancel several orders due to incorrect inventory quantities provided by their dropship supplier.
It’s important to approach dropshipping with caution and establish a solid foundation of trust and reliability before fully relying on this fulfillment method.
Advantages of Dropshipping with Your Supplier
- Performance-based terms: Dropshipping allows you to pay your supplier only when the product is shipped, received by the customer, or when you receive an invoice after the purchase is made. This helps in managing your cash flow effectively.
- No minimum order quantities (MOQs): Dropshipping enables you to have flexibility in fulfilling orders, as you can have just one unit sent directly to your customer. This reduces the need for upfront inventory investment.
- Diverse listing capabilities: With a reliable dropshipping supplier, you have the potential to add their entire catalog to your Amazon account. This allows you to list a wide range of products without the need to purchase and store inventory yourself.
Disadvantages of Dropshipping with Your Supplier
- Risk of supplier competition: If your sales volume becomes significant and your supplier realizes what you’re doing, they may decide to sell directly on the channel, potentially replacing you as a reseller.
- Lower profit margins: Dropshipped items usually have higher costs compared to items purchased directly from the supplier. As a result, profit margins are typically lower, ranging from 10% to 30% depending on the supplier.
- Inability to utilize FBA: Dropshipped orders need to be fulfilled by the merchant, which means you can’t take advantage of Fulfillment by Amazon (FBA). This can result in lower Buy Box share, especially when competing with FBA sellers.
- Challenges in inventory management: You need to stay updated on the supply availability from your dropshipper to avoid overselling products that are out of stock. This can be a tedious process if the supplier provides PDFs or flat files, and API access may require additional software and programming.
- Increased competition: Dropshippers often work with multiple resellers, so you may face competition from other sellers trying to access the same dropshipper’s selection. This can lead to squeezed profit margins as more resellers offer the same products.
Is It Possible to Build a Lucrative Dropshipping Business?
Building a successful dropshipping business is INDEED POSSIBLE, as demonstrated by the experience of one of our clients, a successful internet entrepreneur. This client had a track record of starting and selling multiple sites, earning substantial profits and achieving millionaire status in his twenties.
His success stemmed from not only his marketing skills in driving relevant and high-converting traffic to his sites but also his ability to identify manufacturers/brands that offered expensive and high-quality products. Seeking to expand his business on Amazon, he approached us to gain insights into selling the right products, understanding costs, and navigating the fulfillment requirements.
During his crash course, he learned crucial research techniques to assess product availability on Amazon, evaluate sales ranks, determine buy box prices, and analyze competition for each product. We also emphasized the importance of being cautious about his dropshippers’ fulfillment services, as any failures on their part could impact his account performance metrics.
Through working with dropship suppliers, he discovered that certain companies exhibited higher reliability in shipping products promptly. He also observed variations within these trusted companies, with some products more consistently reflecting accurate inventory levels. In other words, he identified specific suppliers who consistently delivered products on time, though even they occasionally faced challenges in updating their stock availability.
To safeguard against order cancellations or late shipments, he implemented an additional layer of security by maintaining a buffer of inventory levels listed by his suppliers. He now exclusively lists products that have a sufficient inventory buffer to minimize the risk of fulfillment issues.
While it is possible to achieve success through dropshipping, it’s essential to acknowledge that it can be one of the most challenging methods for acquiring quality and in-demand products. Moreover, it often yields lower profit margins compared to alternative supply routes.
When discussing product sourcing methods, it’s important to differentiate between Gray Market sourcing and Retail Arbitrage. Gray Market sourcing involves purchasing new products in original packaging from retail stores or outlet stores, usually in large quantities and at close-to-wholesale costs. On the other hand, Retail Arbitrage refers to the business of buying items within a store or retail setting, typically by scanning clearance shelves, checking prices online, and making purchases at the checkout counter.
While some entrepreneurs have managed to build profitable businesses through Retail Arbitrage, we generally recommend against it due to several considerations. Many Retail Arbitrage sellers have shared that their business proceeds amount to approximately $10-20 per hour, taking into account the time spent on travel, finding quality products, scanning items, and preparing them for fulfillment through services like FBA (Fulfillment by Amazon).
It’s crucial to weigh the pros and cons before deciding if Retail Arbitrage is worthwhile for you. Factors to consider include the potential risk of investing in inventory that may not sell or sell at a loss, the complexities of sales tax filings and establishing sales tax nexus, and the legal requirements for income tax filings, business registrations, and dedicated business bank accounts.
Instead of relying on Retail Arbitrage, we encourage you to explore the possibility of developing a sustainable supply chain model. By establishing a reliable network of suppliers and streamlining your business operations, you can aim for a significantly higher “hourly wage” or net income divided by the hours worked, surpassing the $10-20 range.
Our goal is to help you build a business that offers greater long-term potential and profitability. By focusing on strategic sourcing, efficient operations, and developing a strong supply chain, you can maximize your earning potential and achieve sustainable success in the e-commerce marketplace.
Retail Arbitrage: Evaluating the Pros and Cons
Advantages of Sourcing via Retail Arbitrage:
- Flexibility in purchasing small quantities: Retail Arbitrage allows you to buy products in small amounts, which can be beneficial if you’re just starting out or prefer a lower risk investment.
- Finding less competitive items: By searching through clearance shelves and discounted sections, you have the opportunity to discover products that may be overlooked by other sellers. This can give you a competitive edge and potentially higher profit margins.
- Access to heavily discounted popular items: Retail stores often offer significant discounts on popular items, providing an opportunity for you to source products at a lower cost and potentially generate higher profits.
- Accessibility for anyone: Retail Arbitrage is often considered an accessible sourcing method, as it doesn’t require specialized knowledge or expertise. With product research apps, even individuals with minimal technological skills can participate.
Disadvantages of Sourcing via Retail Arbitrage:
- Limited scalability and repeatability: Unlike other sourcing methods, Retail Arbitrage is not easily scalable or repeatable. It relies on your physical presence or online browsing capabilities, and once you’ve purchased a particular discounted item, it’s unlikely you’ll find the same product in abundance again.
- Time-consuming with unpredictable results: Retail Arbitrage can be time-consuming, as it involves searching for discounted products, scanning them for profitability, and preparing them for resale. Additionally, the availability of great items can vary greatly from day to day or store to store, making it unpredictable in terms of revenue and profit generation.
- Self-financing inventory: With Retail Arbitrage, you’re responsible for financing all the inventory yourself. As a consumer purchasing items for resale, you may face limitations in obtaining sufficient financing, such as credit limits that may not support large-scale inventory purchases.
- Limited potential for building a sustainable business: While some sellers have managed to develop processes to turn Retail Arbitrage into a business, it’s important to recognize that it’s often more of a hobby than a scalable business model. The time and effort required, coupled with the limitations and uncertainties, make it challenging to build a sustainable, long-term venture.
Closeout purchases present a lucrative opportunity for many sellers, as they allow for the acquisition of heavily discounted inventory. Building strong relationships with suppliers throughout the year often leads to exclusive access to closeout deals, enabling sellers to enjoy substantial profit margins from liquidation stock.
Here are a few examples that illustrate the potential of closeout sourcing:
Casio: As the year comes to a close, Casio offers its wholesale customers a list of overstocked watches available for purchase at a significant discount off the wholesale cost. This allows sellers to capitalize on the excess inventory and generate substantial profits.
Shoe Distributor: A shoe distributor anticipates the arrival of the latest models and seeks to clear out the remaining stock of the previous year’s shoes. To make room for the new collection, the distributor offers liquidation pricing to customers, providing an opportunity for sellers to acquire inventory at highly discounted prices.
Outlet Store Owner: An outlet store owner aims to minimize losses from unsold inventory by offering significant discounts on this season’s products. Establishing direct relationships with a few select sellers, the owner offers attractive pricing, allowing sellers to acquire the merchandise at pennies on the dollar.
By leveraging closeout opportunities, sellers can maximize their profitability by securing inventory at reduced costs. However, it’s important to note that establishing these closeout relationships requires maintaining strong connections with suppliers throughout the year. Incorporating closeout sourcing into your overall supply chain strategy can be a powerful way to increase profit margins and diversify your product offerings. Keep an eye out for opportunities to capitalize on closeouts and maintain a proactive approach in nurturing supplier relationships to unlock the full potential of this sourcing method.
Sourcing through Closeouts: Maximizing Margins with Caution
Advantages of sourcing through closeouts
- Excellent profit margins: Closeouts offer some of the best margin deals, rivaling the profitability of manufacturing your own products. Suppliers are eager to move inventory quickly, allowing for negotiation and the opportunity to secure inventory at highly discounted prices.
- Negotiation potential: Unlike in-line product purchases, closeouts provide an opportunity to negotiate prices further. Suppliers, driven by the urgency to sell, are often willing to accommodate lower offers, resulting in even greater cost savings.
Disadvantages of sourcing through closeouts:
- “Take all” requirement: Closeout deals typically come with a condition to purchase the entire inventory of a particular item or lot. This may force you to buy more inventory than you can sell within a reasonable timeframe or walk away from the deal. Skilled sellers sometimes collaborate or seek investors to partner on such purchases.
- Intense competition: If you opt not to purchase the entire lot or SKU, you may face competition from other sellers who price their products as low or lower than yours. This can make it challenging to maintain a competitive edge.
- Changing popularity: Closeouts often consist of older inventory that may currently be popular but could become less desirable when newer models or versions are released. It’s crucial to be mindful of this trend and avoid over-purchasing inventory based solely on its current popularity.
- Complex cost allocation: Closeout lots often contain mixed SKUs, making it challenging to allocate costs to each individual item. Skilled analysis is required to determine the resellability and revenue potential of each SKU, ensuring a strategic approach to inventory allocation.
- Potential profit variation: With a mixed lot, some SKUs may perform well while others may struggle or not sell at all. It’s important to understand that profits earned from successful SKUs may be offset by losses incurred from underperforming ones within the same lot.
Navigating closeout sourcing requires careful consideration and expertise. As a seller, it is crucial to evaluate the viability of each SKU within a closeout lot, allocate costs effectively, and make strategic decisions to maximize profitability while minimizing risks. Partnering with experienced professionals or learning from industry experts can help refine your skills and increase your chances of success in this sourcing strategy.
Navigating Gray Markets and Parallel Imports
Gray markets, also known as parallel imports, refer to the sale of new, used, surplus, or refurbished products through unauthorized resellers or channels. These goods are genuine and legitimate but may be considered unlawful when sold in competition with authorized U.S. distributors upon importation to the United States.
The concept of gray market goods involves legally manufactured products protected by intellectual property rights, which are purchased outside the United States by individuals or entities not authorized as importers or distributors. These goods are then imported and sold in the United States at a typically lower price point.
U.S. manufacturers face significant challenges when competing with gray market sellers who offer similar goods at reduced prices. To counteract this competition, manufacturers often attempt to prevent the re-importation of these goods.
In some cases, resellers who are unable to establish direct relationships with authorized brands or resellers turn to gray market suppliers. These suppliers divert products intended for one channel or even another country and make them available for sale within the United States.
Some resellers have engaged in practices such as exporting products out of the U.S. intended for international markets and immediately re-importing them back into the country. Others have purchased products in foreign countries and shipped them to the U.S. for resale, even if those goods were not meant to leave their country of origin.
While the legalities surrounding gray market activities have been subject to questioning and challenges, many companies have sourced products through these channels. It is worth noting that certain brands have managed to mitigate the presence of gray market goods by implementing serial number tracking systems.
The complexities and implications of gray markets extend beyond the scope of this discussion. It is essential for resellers to consider the legal implications, potential risks, and ethical considerations associated with engaging in these practices. Understanding the relevant laws and regulations and seeking legal guidance can help navigate this complex landscape effectively.
- Access to brands that may not be readily available or willing to sell to you through authorized channels.
- Opportunity to acquire products that are not typically sold online.
- Potential for unique and niche inventory.
- Ability to establish relationships with retail store owners and benefit from their overstock or seasonal items at close to wholesale cost.
- Unpredictable inventory replenishment as it relies on what the gray market supplier can obtain.
- No financing terms available; payment is required upfront for all gray market products.
- Limited or no return policies with gray market suppliers, making returns and customer issues your responsibility.
- Lack of extra packaging or instructional materials to aid in reselling returned orders as new.
- Tighter profit margins due to additional risk and costs associated with the gray market middleman.
- Higher shipping costs resulting from multiple destinations before reaching your possession.
- Potential for multiple rounds of customs fees for the same items, both for export and import.
- Brands and manufacturers often do not honor warranties for gray market products, posing risks for customers and additional costs for resellers.
- Various legal issues may arise, including determining the permissibility of product importation and the authenticity of the product.
It is worth noting that sourcing opportunities outside of the U.S. (such as Canada, China, Singapore, and Europe) may present similar challenges as gray market products, including warranty limitations, authenticity concerns, and higher shipping costs. If considering a legitimate foreign supplier, ensure you have the legal right to import their products and obtain the necessary paperwork for a streamlined importation process.
Approaching retail stores for gray market supply can also be an option, particularly when partnering with store owners to purchase items at a slightly higher cost than their wholesale price. This arrangement can benefit the store by increasing their purchase volume, improving relationships with suppliers, and potentially leading to additional inventory acquisition or closeout purchases.
Examples of stores you could approach for gray market supply include auto parts stores, jewelry stores, sporting goods stores, shoe stores, apparel stores, toy stores, book stores, exercise equipment stores, and natural food stores.
For more information on gray market goods and U.S. trademark law, you can refer to the following resource: http://www.thoits.com/resources/gray-market-goods-u.s.-trademark-law.pdf
Advantages of purchasing through a retail store
- Access to premier brands, especially if the store owner has multiple locations, allowing for consistent acquisition of branded products.
- When you negotiate a larger quantity purchase with the store owner, it becomes mutually beneficial, encouraging them to supply you with a significant inventory.
- Decent product margins can be achieved through purchasing from retail stores.
- Products obtained from retail stores typically come with manufacturer warranties.
- Quick shipping is often available as products can be acquired directly from the store’s inventory.
- Payment options such as credit cards are typically accepted for close partnerships with retail stores.
Disadvantages of purchasing through a retail store:
- Limited control over the supply relationship as there is no direct contact with the manufacturer or authorized supplier.
- The retail store may have restrictions on selling online or through marketplace channels, which could lead to potential loss of buying privileges if violated.
- The store may become a competitor or cease supplying you if they discover your selling methods and channels.
- Brands may impose limitations on the quantity of products retail stores can purchase based on their size and expected sales volume.
Selling Your Own Private Label Product
In addition to reselling branded products, another option is to create your own brand of products by working with manufacturers. There are two main approaches to consider: custom products and open market products.
Open Market Products: Open market products are existing non-branded products that manufacturers have already created. These products can be purchased at smaller minimum order quantities.
For example, if you want to sell t-shirts, factories produce millions of blank t-shirts in various sizes, colors, and cuts. You can purchase their existing shirts with a minimum order quantity as low as one unit.
If you want slight modifications, such as a different sewing pattern using open market fabric, the factory can produce t-shirts based on existing materials. The minimum order quantity will be larger than one unit but still smaller compared to fully custom products.
Advantages of open market products
- Smaller minimum order quantities
- Potentially lower costs due to existing production volumes
- Higher initial demand as customers are familiar with the product (e.g., Bluetooth speakers)
Disadvantages of open market products:
- Increased competition due to product saturation, potentially leading to price and margin pressures
- Limited differentiation if the market is already saturated
Custom Products: Are fully tailored to your specific requirements, offering unique features or designs. However, they typically come with higher minimum order quantities and costs unless ordered in large volumes.
Advantages of custom products:
- Ability to differentiate your brand with unique features or designs
- Potential for long-term success and increased sales if you introduce a novel product to the market
Disadvantages of custom products:
- Higher minimum order quantities and costs
- Slower initial adoption as customers may require education about the new product
- Need for effective marketing strategies to establish customer awareness and demand
Building your own brand allows flexibility in determining the size and scale of your business. You can start small with open market products, gradually increase purchasing volumes, and potentially move production overseas as your business grows.
For example, my first company began with small-scale manufacturing in the US before transitioning to larger volumes through overseas production. Over time, our business expanded from ordering a few hundred units to full container loads, totaling more than 40 thousand units.
Consider your goals, available capital, and market conditions when deciding between open market and custom products. It’s important to strike a balance between market demand, cost, and differentiation to create a successful private label brand.
Manufacturing Your Product in the USA
If you choose to manufacture your product in the USA, there are a few considerations to keep in mind. Firstly, you can reach out to your local Small Business Development Center (SBDC) for a list of manufacturers in your area, or conduct an online search for the specific type of manufacturer you need.
In contrast to China, where factories can handle the entire process from raw material procurement to assembly, manufacturing in the USA involves working with separate material suppliers and assemblers.
Payment terms typically involve upfront payment for materials, which are then sent to the assembly facility. Payment for assembly is usually due upon receipt.
Advantages of manufacturing your product in the USA:
- Lower minimum order quantities compared to overseas manufacturers
- Faster shipping times, as receiving products by truck from within the USA is quicker than shipping by boat from China and often quicker than air shipment as well
- No need to deal with customs clearance or import duties
- Ability to claim your product as “Made in the USA,” which can be a selling point
- Payments can usually be made by credit card, providing convenience and security
- No delays caused by Chinese New Year, which can impact overseas production schedules
- Better payment terms, as paying upon receipt is preferable to the down payment and shipment payment schedule commonly used by foreign manufacturers
Disadvantages of manufacturing your product in the USA:
- The possibility of higher quality goods compared to foreign manufacturers, but this should not be assumed as some excellent products can still come from overseas, including China
- Higher cost of goods sold (COGS) compared to overseas manufacturing, typically 2-3 times higher
- US factories may not be accustomed to handling massive orders and may struggle to meet production demands if your product experiences rapid growth.
When deciding whether to manufacture in the USA, carefully consider factors such as quality, cost, speed, and the ability to meet production demands. It’s essential to conduct thorough research, assess your specific product requirements, and weigh the advantages and disadvantages before making a decision.
Working with Foreign Suppliers
When sourcing products internationally, it’s crucial not to rely solely on a single supplier. There are various risks involved, such as customs delays, price fluctuations, or changing regulations that can impact your business. To mitigate these risks, it’s advisable to diversify your suppliers and have a competent import broker who can handle overseas paperwork efficiently.
Chinese suppliers: Working with Chinese suppliers requires familiarity with Chinese business culture and practices. If you lack this experience, it’s essential to quickly educate yourself. There are experts available who specialize in finding reliable Chinese companies, and seeking their guidance can be valuable.
Payment terms: Suppliers typically require a down payment, a payment when the product ships, and the remaining balance upon arrival. Be prepared to allocate capital well in advance of receiving the product.
Samples: Keep in mind that samples may not always accurately reflect the final product’s quality, especially when working with Chinese suppliers. While poor samples from reliable suppliers are not uncommon, trust their assurance that the end result will meet your expectations. However, when starting out, ensure you receive a sample you are satisfied with before proceeding. Over time, slight variations in samples should not be cause for panic.
Quality control: It is advisable to hire a quality control (QC) company to inspect inventory during production and post-production stages. Alternatively, you can visit the manufacturer in person, tour their warehouse, and inspect your product to ensure quality standards are met. Initial samples do not guarantee consistent production quality.
Customs clearance: For regular orders, consider hiring a customs broker to handle the importation process. While specialized brokers are available for specific countries, established companies like UPS or DHL can also provide assistance.
Transportation logistics: Arrange transportation from the port to your warehouse, third-party logistics (3PL) provider, or Amazon fulfillment center. Coordinate with logistics companies to ensure smooth delivery of your goods.
By diversifying your suppliers, understanding Chinese business culture, conducting thorough quality control inspections, and partnering with reliable customs brokers and logistics providers, you can minimize risks associated with international sourcing and maintain a reliable supply chain.
Advantages of working directly with foreign suppliers:
- Cost-effectiveness: When manufacturing overseas, your product costs are significantly lower compared to wholesale purchases or manufacturing in the USA. This allows you to offer competitive prices and potentially higher profit margins. It also enables you to drop your prices on platforms like Amazon, increasing your chances of securing higher sales ranks.
- Availability of supply: Working directly with foreign suppliers ensures that you won’t face limitations on the amount of product you can purchase. If there is high demand for your product, you can produce it in large quantities and fulfill that demand accordingly.
- Product innovation: You have the opportunity to create new products or modify existing ones to offer improved versions. By researching top-selling items and addressing customer complaints, you can manufacture products that stand out in the market.
Disadvantages of working directly with foreign suppliers:
Increased complexity and workload: Manufacturing your own products involves regular communication with your suppliers, planning production and delivery schedules, and managing inventory levels. It requires careful coordination to ensure you have the right amount of stock at the right time.
- Building your own brand: Working directly with foreign suppliers means you need to establish and promote your own brand instead of relying on an established brand’s equity. This requires additional effort and investment in marketing and brand building activities.
- Minimum order quantities: Foreign suppliers often have higher minimum order requirements, which may be more than what you initially desire or can handle. This can impact your upfront investment and storage capacity.
- Shipping logistics: Shipping large quantities or bulky items from overseas typically involves ocean freight, which requires careful planning and longer transit times compared to air shipments. It is crucial to manage shipping logistics efficiently.
- Customs challenges: Importing products through customs can be complicated, especially if your factory misclassifies your products or during busy holiday shipping seasons. It is important to be aware of the potential challenges and work with experienced customs agents to navigate these issues successfully.
Finding foreign suppliers:
- Seek recommendations from friends, family, or business associates who may have connections with overseas manufacturers.
- Utilize freelancing platforms to find professionals who specialize in supplier sourcing.
- Consider hiring a sourcing specialist or translator/interpreter who can assist you in finding reliable suppliers in countries like China.
- Explore platforms like Panjiva.com, which provide valuable insights into the supply chains of your competitors.
- Alibaba is another platform worth exploring for connecting with overseas suppliers.
By leveraging the advantages of working directly with foreign suppliers while being aware of the potential challenges, you can create cost-effective products, tap into new market opportunities, and build a successful business.
Reducing Your Risk When Trading Online
Ensure verification of trading company details
- Verify the trading company’s contact information and address.
- Verify the trading company’s legal registration number.
Request customer references from suppliers:
- Ask suppliers to provide customer references, preferably from your own country, who have purchased from them within the last 12 months. This helps validate their reliability and reputation.
Understand payment methods
- Familiarize yourself with different payment methods commonly used, such as open account, letter of credit, documents against acceptance/payment, wire transfer, PayPal, and Alibaba’s Secure Payment.
- Conduct thorough research on each payment method to understand their pros, cons, and security measures before making a decision.
Consider working with a trading company
- Engaging a trading company, like Basilio Inc, can offer various benefits and risk reduction measures.
Advantages of working with a trading company include:
- Improved payment terms: Trading companies often offer better payment terms, such as 100% payment on receipt of goods or even net 30 payment terms for established clients.
- Assistance in product development: Trading companies can help with conceptualizing and refining your product design and provide samples for approval.
- Quality control and inspection: They can ensure product quality through inspections and quality control measures.
- Customs support: Trading companies can assist with navigating customs processes, ensuring smooth import and export of goods.
- Direct shipment: They can arrange direct shipment of products to your warehouse or to platforms like Amazon.
Disadvantages of working with a trading company include:
- Price mark-up: Trading companies typically mark up the manufacturer’s price by around 15-20%. However, it’s worth noting that some sellers have obtained lower prices through trading companies due to their established relationships and leverage with manufacturers.
It is important to conduct due diligence when selecting a trading company and consider signing non-compete or non-disclosure agreements if necessary. Research and evaluate different trading companies based on their reputation, experience, and track record.
By following these guidelines, you can mitigate risks associated with trading online and establish a reliable supply chain for your products.
Finding a manufacturer through Alibaba
When using Alibaba to find a manufacturer, the process goes beyond simply selecting a product and placing an order. It requires thorough research, due diligence, and the establishment of relationships with suppliers. It’s important to be aware of potential scams and counterfeit items that exist on the platform, so learning tactics to identify legitimate suppliers is essential. Additionally, it’s crucial to understand that even when you find a reliable supplier, you might still be dealing with a middleman or broker.
Research and vetting
- Spend time researching and evaluating different suppliers on Alibaba. Look for reputable companies with positive reviews and ratings.
- Verify the supplier’s credentials, such as their business license and certifications.
- Consider contacting the supplier directly to ask questions and assess their responsiveness and professionalism.
- Clearly communicate your product requirements, specifications, and expectations to the potential suppliers.
- Ask for samples to assess the quality of their products before committing to a large order.
- Maintain open and regular communication to build a strong working relationship.
- Investigate the supplier’s background and history. Check their experience, track record, and the industries they serve.
- Look for suppliers who have worked with clients in your market or industry.
Trade assurance and secure payment methods
- Utilize Alibaba’s Trade Assurance program, which offers certain protections for buyers and ensures the supplier’s reliability.
- Consider using secure payment methods provided by Alibaba, such as Alibaba’s Secure Payment or Escrow service.
- Whenever possible, arrange face-to-face meetings with potential suppliers. This can help establish trust and strengthen the relationship.
- If feasible, plan a visit to the manufacturer’s factory to inspect their facilities, production processes, and quality control measures.
By following these guidelines, you can navigate Alibaba more effectively and increase your chances of finding a reliable manufacturer for your products. It’s important to exercise caution, conduct thorough research, and establish open lines of communication to ensure a successful partnership.
To maintain a clutter-free inbox and reduce spam, it’s recommended to create a dedicated Alibaba-specific email address. You can use an email address like [email protected] or, if you prefer, you can use a generic email address such as [email protected]. By using an alias specifically for communication on Alibaba, you can filter out solicitors and manage your communication more effectively.
Finding & Contacting Suppliers:
When you visit Alibaba.com and enter your item keywords in the search toolbar, you will be presented with a results page. To initiate your search for manufacturers, click on the “suppliers” tab.
Using Filters to Refine Your Supplier Search:
To streamline your search and find suitable suppliers, it’s advisable to apply specific filters. Here are some important filters to consider, listed in order of importance
- “Gold Supplier” – This filter identifies prequalified suppliers who have a track record of reliable service.
- “Onsite Checked” – Suppliers with this verification have undergone an onsite operations check by Alibaba and their legal existence has been confirmed by a third-party verification company.
- “Assessed Supplier” – This indicates that the supplier has been assessed by a third-party inspection company, and an assessment report is available for download.
- “Trade Assurance” – Suppliers with this feature provide on-time shipment and pre-shipment product quality safeguards. It also offers a 100% refund up to the trade assurance amount if any issues arise.
By utilizing these filters, you can refine your search results to include reputable and reliable suppliers that meet your specific requirements. This helps ensure a higher level of confidence when initiating contact with potential suppliers on Alibaba.
Sending a Message:
To initiate contact with potential suppliers, it’s advisable to send a personalized message to each supplier requesting specific information about their manufacturing capabilities and the products they offer. If their company information is unclear, you can ask for clarification regarding their terms or product specifications. Click on the “Contact Supplier” link next to the supplier’s information to send your message.
Here’s an example of a message you could send:
Subject: Inquiry for Wireless Over-the-Head Headphones
Hi Ms. Jenny Su,
I hope this message finds you well. Our company is in need of a large supply of wireless, over-the-head headphones in colors red, gray, white, and blue. Could you kindly provide me with your price list for these headphones, as well as any relevant information regarding shipping and payment options?
Additionally, I would like to request a sample of the headphones. Our business is located in Phoenix, Arizona, USA. Could you please let me know the lead time for producing orders and the minimum order quantity (MOQ)? Is the MOQ color-specific or applicable to the entire order?
Thank you for your time and assistance.
After sending your initial message, you can expect responses from your potential suppliers within a few minutes to 12-24 hours, depending on the time of day and their responsiveness. Compare the price sheets and MOQs provided by different suppliers and narrow down your selection to 3-4 suppliers. At this point, you can request samples from them. Some sellers use these samples as a beta-test, trying the product on platforms like Amazon or other websites to gauge its market potential before placing bulk orders.
It’s important to note that shipping costs for samples from overseas suppliers can be surprisingly high, especially for small quantities.
Evaluating Your Product:
To ensure an objective evaluation of your product, it’s recommended to gather feedback from multiple sources. This can involve listing the sample product for sale, conducting focus groups, or sending surveys to customers or social media followers. Gathering input from various perspectives will provide valuable insights and help you make informed decisions about the product.
Purchasing the Minimum Amount Initially:
If this is your first time ordering from overseas suppliers, it’s prudent to minimize stress and risk by starting with smaller order quantities until you become more comfortable with the supplier. Always use Alibaba’s Secure Payment service or PayPal for transactions. Alibaba’s Secure Payment holds buyers’ payments during order processing and delivery, releasing the funds only when both the buyer and supplier confirm that the transaction is complete.
Other Options to Consider:
- AliExpress.com: Alibaba’s platform for smaller orders, which may be suitable for initial sample purchases.
- AliSourcePro: This platform allows you to post a Buying Request, and approved suppliers will send you quotes. The quotes are audited by Alibaba.com, and the platform selects the best ten quotes to send to you for consideration.
How long does it take to find the right supplier?
Finding the right supplier can vary in terms of time and effort required. Experienced sellers who are familiar with the process can often identify good, new suppliers relatively quickly. However, finding the ideal supplier that meets all your criteria may take more time and sometimes even a stroke of luck.
Based on our experience, it is likely that you will need to work with multiple manufacturers before establishing a great relationship with one that stands out from the rest. This process can be influenced by factors such as your sales volume. As you sell more products and place larger orders, you become a more significant customer for the manufacturer, which can lead to a different level of treatment and service.