Now more than ever, e-commerce merchants need to make smart sourcing decisions. With tightened credit, changes in consumer demand and more pricing pressures from the marketplace, today's online seller has less "play" in their inventory budget than in years past.
Because of this, it's important to do everything you can to minimize product sourcing risk and maximize profits on every sale.
Even without these external influences, learning how to minimize the risk of an inventory buy and extract more profit on the backend will serve to improve the bottom line for every online retailer. Fortunately, there are concrete steps you can take to make better and more profitable inventory buys.
But before we get to our 10 steps, it's important to start with the No. 1 rule when it comes to minimizing product sourcing risk…
The riskiest time to buy inventory is when you are in the throes of inventory infatuation
Don't fall in love with a product
The riskiest time to buy inventory is when you are in the throes of inventory infatuation. I see this happen a lot on tradeshow floors. Sellers will see a selection of appealing products and, without taking time to think through their inventory requirements, they'll write an order based on emotion alone. This results in bad inventory decisions, overspending and selecting inventory that doesn't fulfill your customers' expectations or mesh with your product line.
But this can happen in the comfort of your own office as well. When you become emotionally invested in "I have to get this inventory," you've introduced a huge risk factor into your decision-making abilities.
It's OK to love your inventory when it's making money for your business. But until that happens, here are 10 concrete steps you can take to put potential inventory to the test before you purchase it.
Follow these steps and you'll lessen the risk of every purchase you make, and be sure that each inventory buy is primed to maximize profits.
1. Know your customers' needs
Are you crystal clear on what your customers want to buy? If you don't have a good sense of what your customer base wants, each inventory purchase comes with built in risk. Talk to your customers, ask them what products they're looking for, put a "tell us what you want" button on your site. Listen for clues and insights in customer questions. You must have an ongoing dialog with your customers and pay close attention to their buying habits to know what they'll buy from you next.
2. Look at historical sales data
Many merchants look forward to purchasing new products, but don't start by looking at their historical sales data. Don't rely on memory to determine how many units of that red men's dress shirt you sold last Christmas. You have too much going on in your business to keep track of these things without the help of sales reports. After you've confirmed that the red "no wash" men's dress shirt sold out in all but one size, you're ready to make an informed inventory buy.
The sweet spot is the price at which a product is most likely to sell
3. Research price points in the marketplace
Most every product has a price range on the Internet, and every product has a sweet spot. The sweet spot is the price at which a product is most likely to sell, all things being equal. Your branding, reputation, guarantee and customer service will all influence the sweet spot on your product prices.
Where you sell will impact your prices as well. You need to research current selling prices for your future inventory before you make the purchase. This way you know a product's potential going in. And there will be no surprises as you work with the price points in your store.
4. Know the purpose of the product
Every product in your product line has a purpose. You must be clear on what it is before you invest money in inventory. This will help you determine whether you should buy the inventory at all and also if you're paying too much for it.
In our complete product sourcing course, one of the ways we teach people how to build a profitable product line is through the use of our exclusive Product Line Wheel. The Product Line Wheel shows you how to identify the purpose of the product. Are you purchasing this inventory for a "product line staple," or is it an up-sell or cross-sell item? Is this a seasonal item or an advertising buy? Once you clearly understand the purpose of the product in your product line, you'll know exactly whether it's the right buy for you.
5. Know your profit margin
Once you know the purpose of your product, you'll also know whether there is enough profit in the item to make it worth your while to procure. You might accept less profit per item on a seasonal item that you know you'll sell a lot of. In this case, you'll make your money in the volume. But you'll look at profit margin with a completely different eye if the inventory requires a large investment of cash but carries with it a potentially long turnover time.
6. Test market unproven products
You can save yourself a lot of money, mistakes and heartache by following this one critical tip. If the inventory you're looking to buy is brand new to your store, it is an unproven product. When you are sourcing an unproven product, always bring in a handful of units to test the market before placing a volume order. Even if you have to buy your sample units at a higher cost or at retail, the money you'll save in "mistake purchases" can amount to a huge sum.
Once your test market products have sold, assess the turnover time to sell them, and the amount at which they sold, before you determine whether a volume buy is in order.
Suppliers are carrying less inventory and are more willing to negotiate on what they do have in stock
7. Don't be afraid to negotiate
While e-tailers are dealing with leaner budgets and lower credit lines, so are their suppliers. Because of this, suppliers are carrying less inventory and are more willing to negotiate on what they do have in stock.
One of the changes we've seen over the past year is that suppliers are willing to negotiate and work with a seller to write an order. This can mean anything from negotiating on price to breaking apart a case of product or shipping the items to you for free. Always be willing to ask. The worst that can happen is that they say no. You have nothing to lose by asking.
8. Ask your supplier if they'll drop ship
A widely held belief is that only certain types of suppliers are "drop shippers." But nothing could be further from the truth. Many suppliers will set up arrangements with you to drop ship their products directly to your customer. Some will require a minimum guaranteed monthly order volume. Others will require you to order in bulk first so that you can prove the monthly volume before they'll set up a drop ship arrangement. If you can set up a drop ship arrangement, you'll have access to more inventory without investing more capital. This is another area of negotiation where it doesn't hurt to ask!
9. Buy low, sell high
Yes, you've probably heard this a million times before, but it's so important it bears repeating. The lower the base unit cost of your item, the more leeway you have in the final sales price of the product. Pay too much for your inventory and you'll need to work a lot harder to get the final sales price up in order to be profitable.
10. Look at the overall cost of the item
This is especially important for online sellers who ship and store their own inventory. If an item is hard to store and expensive to ship—even though it meets some of the other criteria above—it may just be too costly to sell.
Finally, don't hold onto a bad buy. You bought the neon green lamps when you probably shouldn't have. Maybe you paid way too much for those beautiful men's watches that you later found out were a commodity item. Don't hang onto this inventory just to try to recoup your losses! Mark it down and move it out as quickly as possible. Every day you hold inventory, it depreciates in value. Even though you think there's no cost to keeping it in stock on your virtual store shelves, there is. Each dollar you have tied up in inventory that isn't selling is a dollar you could be investing in inventory that will sell at a profit.
Understand that there is an art and a science to purchasing inventory. We've covered the science above—tangible data points that will empower you to make the right inventory purchases for your business. The art of product sourcing comes from a blend of experience and intuition: both of which are very valuable; neither of which can be ignored.
If you make an inventory buy that you realize is a mistake, learn from it, identify what you'll do differently next time and move on. Your next profitable buy is right around the corner!