E Commerce Sourcing Choices, a Comparison

There are many ways to approach E commerce business today. Whether you have been in business a long time or you are first starting out, it's always good to re-evaluate the facts. If you have been in the E commerce business for a while, you will notice that details get clearer as you go along. More and more facts about your customers buying habits, your advertising campaigns and your product offerings get revealed. If you are considering going into the business, it can be daunting to try and figure out where exactly to get started. I put together this comparison to help me get a better understanding and more importantly to make adjustments as my business grows. Adjustments sometimes are very subtle in nature or they can be radical as the internet changes.

In order to get the most from the chart and data you will need to note a few key things.

You can easily get into Ecommerce by simply opening an Amazon aStore. Amazon makes it easy to open a store using any of the products that they supply online. Although putting the store together is somewhat simple, getting traffic and sales is still the same challenge. You will notice that I list a 4% rate that you start off with when working with Amazon. Over time it is possible to work your way up to higher return rates from them. You will also see sales volume per month across the top. This represents the amount of sales (gross) that you would make for analysis purpose.

I list several different types of opportunities out there that exist for Ecommerce. There is Amazon (affiliate income), a drop ship affiliate, a manufacturer's distributor, and carrying your own inventory that you either obtain or make yourself. I then take some sample percentage rates that you could expect. These are not chiseled in stone, but are typical numbers you can expect. You can make your own spreadsheet if you feel these numbers are not close enough to your scenario. The rest of the chart is simply public math that helps you figure out some income projections.

You will notice a few things when digging into the chart, Lets start with Amazon.

In order to make $200 per month in profit, you will have to sell $5000 worth of merchandise.

This may sound like a lot, and it might be if your items are low priced items. You will have to consider what kind of traffic you have (or don't have) and determine if the cost of your advertising is worth it or not. At this particular level, you will find that most owners are spending far more in advertising then they are bringing in revenue. This can be a little frustrating unless you have a long term plan. A long term plan is key in this scenario. It would appear that getting to the $20,000 mark would be the goal for bringing in some steady cash at the 4% level.

Working your way up in percentages with Amazon, has more impact with the higher sales volumes. However if you are getting this kind of volume, you would then start searching for a newer sourcing scenario to help you get some higher margins.

Setting up drop ship vendors for your site pays higher returns. However as you know you have to set up each vendor one at a time. This can be time consuming, but as you can see it is worth the effort. The saying of building wealth slowing certainly applies here. The same $5000 monthly scenario gives you considerably more dollars to your bank account.

Developing these relationships and finding these vendors is always time well spent. There is a bit more work when you have drop shippers since you have to process orders individually verses Amazon which basically does it all for you automatically. It is fairly common if you find a true drop shipper, to experience between a 15% to 20% return. Many businesses won't even work with a vendor unless they can find a 20% margin. Knowing your numbers and doing your homework is the key to knowing what you have to have to make your business work. You will notice that in the 40,000 to 50,000 range, you can make a decent living without having to touch product or ship it out by hand.

I added Distributors in the chart to show a 5% return rate. For some products, not all, manufacturers give small margin rates. If you are new vendor for a manufacture, you can expect small margins. Having the name brands of a well know manufacturer is a good way to build integrity as a trusted vendor, but it does have a cost.

The last example is for an inventory based business. These are for companies that either manufacture their own products or import them in bulk from somewhere else for a larger margin. You will notice that 25% is the starting point since most inventory business put more money up front to gain their inventory. But they also have more costs when you add in storage, employees or business partners to move the inventory. All items need to be boxed and shipping systems developed. The margins are higher because the work is more demanding and requires more management. $5,000 is generally easy to attain but the real profits start to come when you get above that. You can see that at 25% you can start to do some real budget planning. However 50%, 75% and even 100% is very common. Those numbers bring more profit margin and then the business can start to really focus on moving more product. These numbers become especially valuable when your start to figure out ways to cut your products production costs down to increase your margin. You gain the full value of a chart like this when you start looking for ways to cut 1% or 2% off the cost of delivering the product to your customer. These cuts have gains that you can see to your bottom line. The key here is to have a way to measure those gains and look at what you're doing.

Lastly I would encourage you to set up your own system to look at the way you do business. If you are just starting out this is imperative. Most businesses fail in their first year and a lot of it is from lack of planning. The more planning you do the less chance of a surprise. I love surprises that benefit me and my business but I don't like them when they hurt my bottom line. Planning is a factor that helps you sleep at night and grow you business as best as possible.