The profitability model behind ecommerce is pretty simple: Get some products and sell those products online for more than you spent acquiring them. As long as you have a relatively inexpensive way to get those items and a market that generates suitable demand, you should generate a profit.
You can improve your chances of success by performing market research to better understand your target demographic and investing in marketing and advertising to generate more traffic. But how can you acquire those products more cost effectively?
Four main supply options are available, and each one comes with advantages and disadvantages. Your choice could have a massive impact on your eventual profitability, so it’s not one to take lightly. As Wasp Barcode points out, figuring out how to enter the ecommerce space is half the battle:
Do it yourself.
Your first option is to simply make whatever you’re selling yourself, piece by piece. This is typically the choice of hand-crafters, who set up Etsy shops as a hobby rather than make plans to build a national-scale ecommerce empire. Some keys to keep in mind here:
- Easy entry. You’re entirely relying on yourself, which means you don’t have to research partners or deal with heavy paperwork. You can literally start immediately, which is a huge advantage if you want to get moving now.
- Complete control. From start to finish, you’re going to have complete control over the execution. You’ll come up with all the ideas, do all the work and give everything a final quality control check.
- Labor intensity. Making everything yourself, however, requires an intense amount of effort, especially if you make everything from scratch. If you enjoy what you’re doing or don’t plan to have many customers, this isn’t a big concern. Otherwise, it could throw a wrench in your plans.
- No scalability. It’s virtually impossible to scale an operation like this. It requires too much manpower and isn’t easy to automate or grow.
Turn to manufacturing.
Your next option is to rely on manufacturing. That way, you’ll be partnering with a factory or some other large-scale industrial producer to make all your products. This is ideal for larger operations or those where products can’t be handmade. Consider these unique qualities:
- Low costs per unit. Depending on your manufacturing partner of choice, manufacturing tends to run with the lowest overall cost per unit. This, in turn, gives you the highest per-unit profitability.
- Scalability. Because manufacturing processes and equipment can be replicated, manufacturing is one of the most scalable ways to get into ecommerce. If your business takes off, you can increase production without a sweat.
- Development time. The downside is it may take a long time to get established in manufacturing, especially when your products are specially designed.
- Minimum orders. You’ll also need to bear in mind that most manufacturers have minimum orders, which could eat up more cash up-front during your startup years.
Rather than making the products, drop-shipping allows you to sell someone else’s inventory. You can establish the process however you want, logistically speaking, but the idea is simple: You sell the product and have someone else ship it to your customer.
- Low costs. Because someone else is taking care of the inventory, you’ll have almost no startup costs. This is ideal for bootstrapping businesses or those with limited capital.
- Minimal management. Drop-shipping also requires less ongoing attention and management, because you won’t have to oversee the process directly.
- Little control. The tradeoff here is that you’ll have less control over the process, and less insight into quality control.
- Lower margins. Drop-shipping also typically has lower per-unit profit margins, which could interfere with your profitability.
Rely on wholesaling.
The final option is wholesaling. In wholesaling, you’ll buy a mass of inventory at a bulk discount, and resell it in smaller quantities at a higher per-unit cost. Like all the other options, there are pros and cons to this approach:
- Existing establishment. On the plus side, you’ll be working with a brand and company that’s already established, so you’ll have fewer hiccups getting yourself established.
- Bulk discounts. The bulk discounts mean you can carry a reasonable per-unit profit margin. However, this depends on your partner of choice.
- High management. Having to track and manage your own inventory comes with its share of problems and a higher investment of time. This can also interfere with the long-term scalability of your operation.
- Partnerships and regulations. In wholesaling, you’ll need to work with at least one partner, which can cause some problems. Managing a partnership is demanding, and you may have to follow certain branding regulations to resell those products.
Keep in mind that your final decision is about more than just generating the greatest profit possible; you also need to consider how much time and stress your chosen supply method is going to cost you.
For example, it may be worth sacrificing your per-item profitability if you can make more sales with fewer hours of work. There’s no winner here, so think carefully about how your specific enterprise fits in with each of these methods before moving forward.