Are you trying to understand the product sourcing costs and need help figuring out what’s included? There are many more costs to consider than just the product price, and each one plays an important role in calculating profitability.
Reducing the supply chain costs from 9% to 4% can double your profits, so it’s in your best interests to understand them in detail. In this article, we share the top 7 product sourcing costs to help you improve product profitability.
1. Product Price
The first and most obvious cost is the price of the product itself. As a rule of thumb, it should be about a third of the amount you want to sell it for to ensure profitability. For example, if you plan on selling a product for $21, then the cost should be no more than $7.
It’s a good idea to negotiate with suppliers to drive the costs down as much as you can. Usually, the product price is lower when you order a bigger batch and have a long-term relationship with suppliers.
2. Shipping Cost
The shipping cost is another big component that you need to consider. In same cases, the shipping cost can be as high as the product price from the supplier. This is especially true when sourcing products from China.
You can reduce the shipping price by ordering a large number of products in a single delivery. Also, choosing slower sea shipping delivery is cheaper than air freight. However, your inventory management needs to be spot-on. That’s because with sea shipping, the lead times are longer, which is the amount of time it takes to receive stock after placing a resupply order.
3. Quality Inspections
Hiring a quality inspection team is a great idea to ensure that the products manufactured by the supplier are up to your standards. These types of services can reduce the frequency of customers getting faulty products and leaving a bad reviews.
The cost of quality inspection services depends on various factors. This includes the depth of inspection that you require. For example, you can ask for the entire batch to be inspected or a smaller number of units chosen at random. As you build a relationship with the supplier and trust the quality of their products, you can reduce the amount spent on quality inspection services. This is great for new companies that have limited funds after an online company incorporation.
4. 3rd Party Logistics
3rd party logistics or 3PLs are services that allow you to send products to their warehouses as an intermediary before delivery to customers. They offer services such as damage inspection, packaging, and sending inventory one by one to specific customers.
3PLs typically provide an online platform where you can manage orders. This means you can efficiently communicate your buyer details and where orders should be sent. Furthermore, it’s a good idea to use 3PLs with the Amazon FBA model. That’s because they can ensure your products have the correct packaging for Amazon – otherwise, there would be fees and a delay in replenishing inventory.
5. Taxes
Is your supplier located outside of the country where you want to sell products? Then you’ll need to pay import taxes. For example, if you’re selling products in the United States but importing from China, you’ll need to pay taxes.
The size of the taxes depends on the country where you’re importing from and to. Also, the product category plays a role in the tax rate. Some products are taxed at a low rate while others at a much higher one.
It’s best to hire the services of a tax accountant to understand what taxes you need to pay. Alternatively, some shipping arrangements cover the taxes on your behalf, but you’ll need to pay extra for the service.
6. Software Solutions
You can take advantage of software solutions that help you find products worth selling. That’s because these services provide data such as monthly revenue, the number of units sold, reviews, competition data, and much more.
These software solutions usually charge a monthly subscription and offer a large number of tools. Top examples include Helium 10 and Jungle Scout. It’s important to understand how the tools work to get the most out of them.
7. Packaging
You’ll need to pay for packaging to present the products to your customers. There are many different things to consider when choosing the packing you want your products to be placed in, and here are the top ones:
- Start off cheap: it’s a good idea to choose cheaper packaging when starting your e-commerce business to save money. This will free up money for other parts of the business. However, once you generate profits, it’s a good idea to get better packaging.
- Customers will notice: the quality of the unboxing experience can play a big role and increase the quality of the reviews. Therefore, you may want to spend more on packaging to impress customers and give them a better experience.
- Branding: it’s important to show off your brand on the packaging. This allows you to set yourself apart from the competition. Furthermore, you can share the quality packaging in one of your product photos. This will usually impress customers since it shows the brand goes the extra mile to offer a better experience.
- Bulk is cheaper: you can typically get a lower per-unit cost for packaging when you place bigger orders. This can save you large amounts of money in the long run.
- Protection: you also need to consider the primary purpose of product packaging, which is to get them from point A to B without suffering damage.
Final Thoughts
To conclude, the product sourcing costs in this article are the most popular ones for the majority of e-commerce. Therefore, you need to incorporate them into your profit calculator. Otherwise, your calculated profits will be higher than what you’ll find in reality.
Furthermore, you may find other product-sourcing costs relevant to your specific business. It’s important to look for these and take them into account to ensure you get the complete picture of your costs.
