As an eCommerce entrepreneur, you always need to be keeping an eye on your product margin. If your total cost to market, ship, and produce your product is over the price you sold it for then you will be losing money.
That is why eCommerce is often a margin-driven business and for any store, large or small, increasing the gross margin on your cost of production can make a drastic difference in your scalability. If you save more on production costs, you’ll have more money to spend elsewhere.
The hard part for any online store is figuring out how to increase your gross margin. That’s what we specialize in at my company, Sourcify. On average, we’ve saved companies 65% of their gross margin.
I know that sounds crazy, but it will make sense when you hear the reasons why you and the other companies we’ve worked with are able to save so much.
Who are you actually working with?
Not everyone knows this, but the term “manufacturer” usually falls into three distinct categories: you have wholesalers, trading companies, and actual factories. All operate differently and there can even be multiple middlemen between them (sourcing agents).
If you think you’re overpaying for your product, you’re probably working through a middleman and not actually going directly to a factory. Even if you think you’re working with a factory, it may be a trading company as they often pretend to be factories.
These are the companies who buy in bulk from a factory and then take their own margin while enabling their customers to buy at lower quantities. Wholesalers are quite common in America, and at Sourcify when we cut major costs for clients it usually stems from them working with a wholesaler.
Most people deal with wholesalers because they have some type of foreign representation and may even have a warehouse in your country. With that said, when they’re charging over 50% more for the same products you could get by going directly to a factory, they aren’t worth dealing with.
These are the slyest type of companies that exist and many eCommerce entrepreneurs we deal with don’t even realize they’re dealing with a trading company. These companies may have great relationships with factories and often act as a factory, but aren’t actually a factory.
You can identify these companies by the products they offer. If they have a wide array of products that stem from different raw materials, you can guess that they are a trading company.
The easiest way to determine a trading company can lie in their name:
(An easily-identified trading company on Alibaba)
Though not all trading companies are bad, they will usually have higher costs than a factory.
Trading companies also have the following potential problems when you’re sourcing from them:
- You may not be able to know the factory that will actually be manufacturing your product.
- If there are defective products, it can be difficult to hold the trading company liable.
- It may be easier for the trading company to ‘disappear’ or otherwise evade communication.
Though these scenarios are rare, it is worth being aware of.
If you’re really looking to increase your product margin, your best bet is to work with a factory. Though they may be harder to find, the good ones will enable you to cut costs and have a smooth manufacturing experience.
The best way to identify a factory online is by cross-referencing their presence. This process involves finding their complete online presence, seeing what trade shows they’ve attended, and confirming any business licenses or certificates that they have.
You should never rely on one source so cross-referencing enables you to have multiple sources.
Start by seeing if your potential manufacturer has their own website and if their email is @theirwebsite. From there, move onto searching for them on open databases such as Alibaba and Global Sources. Next, see if they attend trade shows or are a part of any trade organizations. Conduct a Google search with their name and the word ‘fraud.’ Checking and double-checking their credibility is the most important part of connecting with a potential manufacturer.
You can have a strong manufacturing relationship with a factory even if you’ve never met them face to face.
Can I Use That?
The other steps to take to cut costs stem from the actual background of the factory you’re dealing with. You obviously want to work with a factory who has experience producing the product you’re looking to make.
You also want to see what molds they have, if your product needs a mold. This way you can use one of their existing molds instead of making your own. Molds can be very expensive and take weeks to produce. That’s why we always suggest working with a factory who has a mold that you could at least adjust to fit your product.
This is specific to products, like watches, that require molds for the watch case or for metal hardware products.
Over time as your store grows, your goal should be to lower your production costs. Doing this by increasing your order size is key, yet you should also be looking for other ways to optimize your supply chain in order to cut costs.
If you’re currently running an online store and don’t know where your products are actually being manufactured, it’s about time you take control of your own supply chain.
Sourcify can help you cut costs and bring new products to life through our platform, which introduces you to the right factory while walking you through a production run with our project management tools!
Nathan Resnick is the CEO of Sourcify, a platform that makes manufacturing easy. Nathan has brought dozens of products to market, ran ecommerce stores generating over six figures in revenue, been a part of campaigns on Kickstarter raising a total of over one million, and used to live in China.
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