Now that I know what I want to sell — high quality, colourful and fun mens dress and casual socks, I need to decide if I am going to make, manufacture or drop ship. There are pros and cons to each one of these methods and my choice will partially determine my margins, overall control, costs of getting started and work that will be involved. The 3 common methods to obtaining your product are:
It’s important to understand the the pros and cons for the 3 most common methods to actually obtaining your product.
This approach is common for many hobbyists. Creating the product yourself allows for the most control over quality and the brand but comes at the cost of time. The primary product costs in this situation include the purchasing of materials and the storage of inventory, along with any labor and shipping costs.
Low Risk – A big bonus of making the product yourself if that there are no minimum orders (MOQ) like you would have if you ordered from a manufacturer. You can make the products as you receive orders allowing you to easily get the business up and running and prove your concept before investing too much time, energy and effort into it.
Etsy, an online marketplace for self-made goods, can be a good place to start and prove your model if you are going to/capable of making your product yourself. My girlfriend has done this with her shop YesMissy. She started on Etsy and slowly built up her sales until just recently when she switched to a Shopify site to have more control over the brand. Her upfront costs were only the cost of materials she would purchase, as she needed.
Branding Options: If you make a product yourself you only have the option of building your own brand.
Example: LizSox on ETSY
You can purchase product directly from a manufacture. There are various sites to help you source a manufacture from all over the world and it’s much easier than you probably think. Purchasing product from a manufacture is a great option if you want to create your own brand or just want more control over your product and customer experience. Many products from manufactures can be rebranded allowing you to create your own brand and stand out from the competition.
High Risk - Obtaining your product through purchasing from a manufacture is the highest risk option. You must purchase inventory upfront with no guarantee it will sell. Manufactures generally have a MOQ (minimum order quantity) so you will likely be starting out with 1,000, or more units. It depends on the product and manufacture so make sure you discuss early what the manufactures MOQ is. Risk also comes in the form of fraud if you are purchasing from a manufacture overseas, particularly from Asia. Sites like Alibaba do have safeguards in place to help prevent fraud but it is still a very real issue. If you do intend to use a service like Alibaba to find a manufacture, make sure you check out my Ultimate Guide to Safely Sourcing a Product from Alibaba.
As a side note, from my experience using Alibaba for sourcing if you ask 10 manufactures/suppliers of they can do something, 9 will say yes, 1 or 2 will actually be able to.
Process - The process is fairly straightforward but usually ends up being a little more complicated than expected once to get in to it from my experience.
1. Use a service like Alibaba or IndiaMart and search for the product you are looking for or search locally for a manufacturer
2. Contact 5-10 manufactures that fit your criteria and confirm pricing, MOQ, terms, accepted forms of payment etc.
3. Order samples from the manufactures that fit your criteria after step 2
4. Choose manufacture based on all the above criteria and place your initial order
As I mentioned before, it usually becomes more complicated than this. You are likely to go back and forth negotiating terms, as well as pricing and MOQ. I usually like to place another order from an anonymous name, email and address to confirm I receive the same quality sample. Of course there is also a chance none of the samples you order will live up to your expectations and its back to sourcing more manufactures.
Branding Options: Just like making your product, if you manufacture your prodct you also are going to be building your own brand.
Example: Cole & Parker
Wholesaling is a fairly simple and straight forward process. You are essentially buying your product (another brand) from the manufacturer directly or from a middle man wholesaler at a discount, which you then resell at a higher price.
Wholesaling is a good option if :
1. You want to get up and running quickly
2. You don’t want to create your own brand
3. You wan’t to sell another brand or many different brands
Margins really depend on the product and the terms you negotiate. Usually, the more you buy the better price per unit you get.
Medium Risk – Wholesaling is a lower risk business model vs. manufacturing for a few reasons. First, you are dealing with brands that are usually already validated on the market place so you don’t waste time and money developing a product no one wants. Also, you usually don’t have to purchase as high of a quantity compared to manufacturing your own product.
Branding Options: Wholesaling usually involves selling other brands but you will be selling it under your website brand. Sometimes, other brand manufacturers will allow you to do private lable packaging which means you are selling their product but it will have your label on it allowing you to build your own brand of the actual product.
Example: Socking Behaviour
In its simplest term, drop shipping allows you to list products on your ecommerce site and sell them but you are essentially selling them for someone else. The order gets passed to the drop shipper who then fulfills and ships the order to your customer on your behalf. Your profit is the difference between what you charged the customer and the price the drop shipper give you the product at. Usually with drop shipping your profit margins are slim, around 20%. You definitely need to move a lot of units to make good money with drop shipping but it can be done. I highly suggest you check out Andrew Youderian’s blog EcommerceFuel. Andrew has a drop shipping business that does over a million dollars.
Low Risk – Drop shipping is pretty low risk in terms of potential loss because you never buy inventory up front. Other benefits of drop shipping include:
When going with a drop shipping business model, you can either work directly with manufacturers by contacting them directly or you can work with an aggregator. An aggregator works with hundreds or thousands of manufacture and makes it easy to sell thousands of types of products without establishing the need to establish thousands of relationships with individual drop shippers.
A word of warning though, that although these aggregators make it easier to sell a variety of products but they take a cut of a already slim pie. Additionally, many will make you pay a yearly “membership” or “sign up” fee of a few hundred dollars. You usually can’t even see the products or margins on the products they have to offer until you pay that fee.
Drop shipping done right can be lucrative though. I highly suggest you watch my interview with Billy from ForeverJobless.com. Billy at one point owned 20 drop shipping businesses and has done very well in the space.
Branding Options: Drop shipping involves exclusively selling other brands.
You have probably guessed by now what I plan to do for my sock business. I’m a high risk/high rewards kinda guy and I’m also branding guy. I generally prefer to build brands and I believe in order to really stand out, I will need full control over the product, packaging and fulfillment to start. Therefore, I will be working with a manufacturer to manufacture my product.
In my previous businesses I have always sourced from China. A choice based purely on getting my product for the best possible price. I’m doing it a little different this time though. I have decided to work with a local manufacturer for this project for a few reasons:
1. I want better communication with my manufacturer – It can be a challenging process to communicate with someone on the other side of the world who speaks a different language. I want to to be able to build a stronger relationship with face to face communication this time. Personal preference.
2. I’m better at negotiating in person – I have already selected the manufacturer I am going to work with and was able to negotiate favourable terms for a minimum order quantity. If I went overseas, I’d have to order a minimum of 1000 pairs per style minimum (likely closer to 2500). This doesn’t work well for limited editions socks, especially when we are just starting out. The local manufacturer has agreed to give us a minimum order quantity of only 60 pairs per style!
3. Low MOQ means lower startup costs – The low MOQ of 60 pairs per style allow me to keep my startup costs low.
4. No import headaches – Not that this is a huge issue but when you import from other countries, there are a few extra steps and processes to set up to get your goods shipped and cleared through customs.
Finding local manufacturers for my product wasn’t all that hard. This is obviously depend on the type of product you choose and where you live but I was easily able to find a half dozen manufacturers within an hour drive of me but doing a few simple searches on Google for “Sock Manufacturer Toronto” and a few variations of that search term.
It took me a few calls to find a manufacturer that was willing to work with a lower MOQ. Many other manufacturers simply said no. Once I found one that was will to help to discuss details further, I presented to him our unique business model and team. This gave him the confidence needed to help us out and agree to a lower price than he would traditionally charge, higher quality material, and even lower MOQ’s.
Some tips on negotiating with a manufacturer:
My next step which I am already working on involves creating the socks designs for out first series and getting those to out manufacturer. Production will actually take about 8 weeks because we are using a higher quality cotton material compared to what our manufacturer currently uses and has in stock. Because of this they will have to dye the material first before the socks can be produced.
What are your thoughts on working with a local manufacturer vs. going overseas? My costs per unit are much higher (probably close to 300%) compared to if I got my product in China, but I also have a much smaller MOQ and and a better relationship with the manufacture that can work and scale with us.
If you were starting a sock business would you make, manufacturer, wholesale or drop ship and why?