The single thing that I find most intriguing about Amazon businesses (or entrepreneurial style businesses in general) is there are so many ways to do the same thing. The question we are asked most often is – how do I find wholesalers? The problem with this question is it does not take into context the different types of wholesale businesses that can exist. In this article I will describe the different types of wholesale and the model that we subscribe to.
There are four primary types of wholesale: Closeout, Liquidation, Distribution and Direct.
Closeout – This is a type of wholesale done with “end of lifecycle” product. The primary benefit to operating in the closeout space is the product is at the end of life cycle, so there is a finite supply of what is and will be available. This means, ultimately, if you purchase the entire available allotment, you could sell this product without competition as competition ran out. There is a level of solace in being in sole control of a branded and demand-driven product.
The primary problems with operating in the closeout space are:
1) Products aren’t replenishable. If you find a product that works for you there is an “end” to the amount of sales that you can do with it.
2) Purchasing the entire runs of products can be prohibitively expensive, and if you don’t purchase all of the product you are leaving yourself open to the possibility of facing competition and not being able to maximize your profits.
3) It makes poor use of your cash flow. Purchasing heavy on the front end simply ties your cash up for long periods of time and doesn’t allow you to maximize your purchasing power over time.
Liquidation – This is a type of wholesale where companies liquidate their holdings of given products. This can be done for a variety of reasons: clearing shelf space, getting rid of shelf pulls, or moving product that someone didn’t purchase. The primary benefit to liquidation is that the cost per unit is VERY low, and leaves you with a lot of room for profitability.
The primary problems with liquidation are:
1) Products aren’t replenishable.
2) If you purchase shelf pulls there will be MANY problem products like expiration date issues or damaged product that you cannot sell.
3) For the most part, the Chain of Custody on these products is poor or doesn’t exist. This comes up in Amazon inauthentic claims or not-as-described claims. Without being able to prove the lineage of your products – Amazon assumes the worst and may suspend or ban your account.
Distribution – This type of wholesale involves setting up accounts with companies who represent and distribute product for a variety of companies. The major benefit for Distribution-based wholesale is that you have access to a larger variety of products.
The primary problems with Distribution wholesale are:
1) Finding products is like looking for a needle in a haystack. You can do it efficiently with a program like Price Checker, but still you don’t know what you are looking for.
2) Distributors tend to offer worse margins, as they have to make money as well.
3) Competition is generally tighter on these products as distributors’ goals are to move high volumes of units and they don’t generally discriminate who they sell product to.
Direct Wholesale – This is the method that we utilize. We purchase products directly from the brand owner/manufacturer. The term manufacturer in the context that we use it means we purchase from the Brand Owner directly if possible. For example if we were buying Nike Shoes, our goal would be to purchase product directly from the Nike sales team. Going around this to the factory opens up a lot of liability and should be avoided.
In general, anytime you thwart the Chain of Custody on a product, you are engaging in counterfeiting which can cause you problems on the Amazon side, as well as open you up to litigation. It is our suggestion that you do everything above board and purchase through the brand owner.
Direct Wholesale has a specific advantage. You are purchasing product at the highest point on the supply chain and are generally able to get the best possible pricing, as well as hopefully you work with manufacturers who care about protecting their brand and make it less restrictive to competition.
The primary problem with Direct Wholesale is:
1) it is harder to open accounts, as these companies don’t want to work with just anyone.
While this is the greatest problem, it is also the models greatest strength. You have to spend a lot of time on the front end to work with manufacturers and get them interested in working with you. However, when you are able to set-up those relationships you tend to have great products for longer periods of time.
I want to transition this into replenishment, as that is our true motivation for purchasing products via direct wholesale.
Replenishment simply means that the product is available for purchase over and over. Our goal is to identify products and companies, and establish relationships that allow us to take advantage of replenishment and consistently buy the same products many times.
The true strengths of the replenishment model are:
1) Your business will become more consistent. Once you get a product – you are able to realize a true long-term-value from that product, as the products become nearly a passive income source. You simply reorder them as you need them.
2) It has lower carrying costs. We generally only purchase 30-45 day supplies of the products that we carry and repurchase as needed. This allows us to stay incredibly liquid and constantly reinvest our money and profits into new products.
3) You can create uniform processes that allow you to effectively scale. We have outsourced nearly every part of our business and simply manage the overarching strategy at this point. Anytime you create a process – you can outsource that process to someone else. Your business will become process-based rather than talent-based and allow you to grow more quickly.
4) Replenishment lends itself to better bookkeeping. This allows you to utilize growth models and projections into your business. For example, we purchase products to fit 30 to 45-day stock periods. In that period, we can reliably say how long it will take us to sell our products, as well as the amount of cash it will generate – with a high degree of accuracy.
Our business changed dynamically when we moved to the liquidity-based replenishment model. We were quickly able to scale our business by utilizing our cash better, as well as outsource processes to employees and contractors.
Look at what you do in your current business:
– Do you source products?
– Do you pack/ship your own products?
If you are sourcing via a method like RA (if you are anything like us), a lot of your process is based on intuition or feeling. However, in our model, we were able to base it on strict sets of criteria, allowing us to plug other people into that equation. With the replenishment model, we were then able to project the amount of products we would be processing and effectively plug in processors as necessary to fill that role.
In terms of you and your business, look at the benefits of replenishment. The systems it allows you to create, the predictability you get from it and ultimately the consistency it will add to your business. This model isn’t something you can move to overnight, but something you should look to start introducing as it will allow you to scale more effectively and take you from the position of working for your business to working on your business.
Guest Post by Dan Meadors – The Wholesale Formula