Module #4 Sourcing Products & Pricing Them Right

There are many options when it comes to finding a product to sell online. I will walk you through a few things to think about and even give you an overview of some great options for products to sell.

Making your own products is definitely the most complicated way to bring a product to market, in my opinion. I’m not really a crafty type of person, so creating something that people will buy is not up my alley.

If you have the gift for creating hand-crafted items, own it! Making something awesome will give you a real edge in the market. There are just a few things you need to do to stand out: create cool packaging, a great brand story, and then you're ready.

The second option is the easiest but comes with the least amount of profitability most of the time. Find products that you can buy wholesale. Most dropshipping sites are designed to do this process without touching products, where you sell other people's items without even touching them.

In my business, wholesale products have their place. To keep new products coming in and keep a fresh set of products, can require a lot of funding! To bring new products and customers to our site, we work with wholesalers and add their products to our site.

If you plan to ship your own orders, consider buying products wholesale in categories that you’re currently selling. It might open doors for the future.

A few other ways to purchase products to sell would be liquidated items from a business, overstocked products, or buy-out another company. There are so many different ways to acquire products to sell in your eCommerce store. Getting creative will only make things better for you.

Let’s dig in and talk about international suppliers and 

buying from services such as Alibaba, AliExpress, DH Gate, Made in China, and even eBay. These are all good sources to find international products that can be sold as is or even re-purposed to sell. 

• Alibaba is a way to connect with factories and wholesalers in China. 
• AliExpress and DH Gate are a way to buy smaller amounts of products but with lower margins.

If you’re purchasing international products, there are a few things to consider. The first would be the timeframe. Buying products from international markets can take several weeks to arrive; and in some cases, several months. If you’re purchasing a pallet or more of product and shipping by sea, you can expect a time frame of anywhere from 2 to 6 months to get your product. There are a few other things you need to consider.

Quality Control - Getting samples is only part of the process. Definitely request samples of any product you buy internationally or buy a small amount to test the product.

Opening Lines of Communication - A good practice whether you’re buying from any US or international supplier. It is essential when it comes to finding a good supplier to build a relationship with. If you’re sourcing items from China, relationships are important. Communicating with your suppliers, asking them questions, and talking to them often will help.

I promise those things will go a lot further than you think. Keeping lines of communication open with your suppliers will help you to get better deals. You might even see new products first. There's just so much benefit to making sure that you have good communication with your suppliers. The same thing goes for US suppliers if you’re purchasing products from a distributor in the US.

Need icebreakers? Here are a few questions that will help you to start a conversation.

• Ask if they’ve ever used the product. 
• Ask them about their favorite color of the product.
• Ask them if there is anything they really like about the product.
• One of the easiest icebreakers is asking about the weather. People talk about it all the time!

A few other tricks for you. Ask if you can get pictures of their factory or do a video call with them. These are great ways to build strong communication and possibly build a future relationship.

Your cost of goods sold or your COGS is your lifeline. I personally believe it's what you need to focus on most when it comes to profitability.

A good CPA or a mentor could give you a solid direction based on what products you’re selling or planning to sell.

I’m going to give you a basic overview of how all of this works and how to apply it.

A simple Google search of COGS will tell you that cost of goods sold is the total amount your business paid as a cost directly related to the sale of products. Depending on your business, that may include products purchased for resale, raw materials, packaging, and direct labor related to producing or selling the goods. In my experience, there are a lot of little things that add up to affect your COGS so let's explore some of them. 

Consider all of your expenses to start growing the business. Though they do not affect each product you sell, the time to be profitable will be affected!

There are a few overlooked items like the cost of shipping products to your location, sample costs, and even design services for packaging. Most people add some of these to operation costs. I would argue if you don’t know every cost, you don't know how to price your product.

The actual price of the products and any packaging materials required to make your products sellable i.e., boxes, bags, and all other materials may change. Keep track of these costs in a doc, spreadsheet, or notepad, whatever works for you! Making sure you are on top of these things will be critical to your profitability!!

Simply said, take all these costs, add them together and divide them by the number of items you have to sell. Once this is done, you will have a more realistic cost of goods sold. Let’s say, for instance, all of these costs come to $100 and you have 100 items. That would mean that your product cost for your GOGS is $1 per unit.

If you are selling a product at $5 and you have a $1 COGS that means you have a 5x return or 500% return on your investment. As you grow and add staff and other operating costs you need to factor these things into your process. 

Here is an example. You have the 100 items that you are selling at $5 apiece which means you have a total revenue of $500.

Now you know the COGS for this product is $100 because you assessed they were $1 per piece. Now you really only made a $400 profit from that order of 100 PCS. 

Now, do you think it's wise to hire someone at $400 per week or rent a space at $1,000 per month at this point? I know that was a bit extreme so let's bring it to a lower level.

Does this mean you can pay yourself $400 because you made that much? You might not like the answer, so take a deep breath. NO! You need to be looking at re-investing as much as you can back in the business from your revenue. This is very important when you are early in the business. 

In my business as well as when I start or take over a company there is a time frame I plan before we start making a profit. In a start-up, you should plan on 12 months at least in my opinion. That doesn't mean you won't do this a lot faster! If you are already popular, simply posting about your product might sell it out every time. 

This is not the norm, so keep at it and don't get stressed. You will burn out before you catch on fire.

Let me warn you first about a few blind spots. Cash in the bank is needed a lot more than you will know! Starting off your first year, it's hard to tell what your tax liability will be and even liability insurance. So having cash in the bank is your best friend. I would recommend keeping 3 months of your operational budget in the bank but I know this is not always possible in a start-up. So live within your means as they say.

Consider all of the costs associated with the specific product you’re trying to sell, but also keep in mind that there is no perfect way of looking at all of this. There are always other costs that are associated with selling a product that could be missed or forgotten. 

My top tip is to write it all down so you do not forget something BIG.

Need just a little more on COGS? This video is short and sweet! https://m.youtube.com/watch?v=NWJX8oY2gZA

 Pricing your products is one of the most important decisions you will make when starting a business. It impacts almost every aspect of your business. The blog says it best. Your pricing is a deciding factor in everything from your cash flow to your profit margins to which expenses you can afford to cover.

A lot of studies have been done on this  If you are the type of person that likes to read, here is a helpful article: http://jibe-net.com/journals/jibe/Vol_2_No_2_June_2014/1.pdf 

Let's chat about Gross Margin for a minute. What is Gross Margin? Gross “margin equates to net sales minus the cost of goods sold.” Shopify even has a free estimator to use: https://www.shopify.com/tools/profit-margin-calculator.

It's really, not a number most people look at but it can help you know if your products are profitable and priced right. In my business, a 60% margin is the lowest margin we can take on with our operating costs which is a 150% markup.

Our goal number is 83% or 500% mark up. Now, why can this be so valuable?

If your operating expenses are 30% of your Gross Margin, then you know a 60% profit margin will leave 30% of revenue after your costs. What does this mean in the real world?

If you have sold $2,500 in product and your mark up is 150% your Gross Margin is 60% and your profit should be $1,500. 

Now let's deduct your operating expenses of 30% margin, and that leaves you with $750 in cash.

Sound Confusing? or did you get it? This is just one of the ways you can look at your finances and how to price your product. To be honest with you, there are a ton of ways to get to this same formula.

See the Product Pricing Chart

Let's talk about other key factors to pricing your product correctly. 

Market Research is the next big one. Look at what products like yours are selling for and be competitive but don't give it away!

Let me give you an example to think about. There was a kid's toy we looked at carrying. The market price ranged from $24.99 to $29.99. When looking at our COGS we only paid $3 per piece for the item.

With that COGS we would normally price this item at $18 per unit but by doing so we would undercut the market a lot. We went in the middle of the two at $27.99 which was approximately 800% mark up and 88.89% Gross Profit.

We stayed at the price for 60 days and only sold 10% or so of our stock. Then we had a flash sale at $19.99, $5 below any competitor and we sold out overnight.

Now, are you starting to see how all of these different parts fit into the whole process? It's just looking at all of the factors and seeing how they can be used to your advantage or profit. Don't be greedy, customers will see that, and if you are the highest priced all the time you might have a lower sales number than you would like.

There is a flip side to that, unless you are a liquidation site, don't always try to be the lowest on everything. You can make that part of your business model as I have seen it work, but don't use words like Cheapest, Cheap and Cheaper. You will attract the wrong buyers!

You can simply say the lowest price guaranteed and make a plan to back that up. Focus on what you do best and get help for the rest.