The E-commerce Leader

[00:00:00] JM: So let’s talk about the next topic on our list here.
[00:00:02] What is it? Yeah.
[00:00:03] MV: Sourcing. I think we’ve got to get to the point. So find out what they want and then go get it is the hard work, right? Cause otherwise anyone could say, Oh, I’d love to get a really, really strong coffee. And I’m going in the coffee shop going, yeah, that would be amazing. That’s not an entrepreneur.
[00:00:16] That’s just a bunch of people having a conversation. So, finding a student supplier, I’ve broken it down into, So the three areas, you could break it down a lot more than this, but I would say the first thing is you’ve got to think about location. Now, if you’re roasting coffee, you probably don’t want to import that from China because even the Chinese, with due respect, probably wouldn’t want to eat things that are made in China.
[00:00:36] In fact, one of the reasons that Western breakfast cereals, I understand, are really popular in China is because they trust the people who make it. they just closed down the Shedded Wheat factory from the place that we moved to here in Wellington. but, that’s the sort of brand that works. So think about what you’re buying and that implies locations to a degree.
[00:00:53] So if you’re buying cheap plastic widgets, hopefully they won’t be so cheap and nasty, they’ll be cheap and good, but that’s probably still China in 2023. It will shift over time. I think, if you are sourcing stuff that goes on or in your body, topicals, lotions, or ingestibles, you know, Supplements, whatever.
[00:01:11] You’re probably looking at U. S. Europe. some things are starting to be an interesting in between. Stage where the higher quality products, you might be looking at the U S Mexico kind of, what’s the word? I don’t know, sort of, becoming a trade conglomerates, as it were, they’re starting to integrate their manufacturing hubs and that’s going to be one to watch.
[00:01:29] And there’s an awful lot of, favor for keeping a supply chain simple. So if you sell stuff in us and you source in us, or even in Mexico, you won’t be prone to international shipping issues or delays and so forth. So once I think through, it’s a big topic. But I’m just going to put it out.
[00:01:44] There is the first thing you’ve got to think through. Any thoughts? Yeah,
[00:01:48] JM: sure. I mean, I think there are a lot of ideas here. The first one, as you said, is keep it simple, but also keep it proximate. I mean, to the greatest extent possible, the best supply, process is. Completely in your control and at your facility and done with machines, not manual labor.
[00:02:07] Is that possible financially? I have no idea, but maybe it is. And, you know, the, the reason to think it through that way is because, every, additional layer of, intermediation that you put in to your process is an opportunity for a breakage. A delay, shortages, outages, transportation strikes on and on and on and on.
[00:02:31] And so really, for, for my mind, the supplier situation is, about managing risk and cost and the, the challenge with, you know, sourcing internationally is there’s just a lot of inherent risk for, you know, things like I mentioned. So, you know, that to me, that’s top of mind. Can you make it, could you make it with a team?
[00:02:52] Could you make it with a machine? could you make it in a jar? Could you make it in a bar? I don’t know. that was supposed to be Dr Seuss. You didn’t even laugh, but
[00:03:01] MV: I’m sorry. I have no idea. I haven’t watched Dr Seuss. I’m not familiar with his work, but
[00:03:05] JM: yeah, anyway, I’m just saying, you know, don’t don’t neglect the idea of thinking through your own ability to scale it up.
[00:03:13] And you might say, I don’t want a facility. I don’t want employees. Well, it’s sort of like in business. Sometimes you get to pick the lesser of two evils. Yeah. And, sometimes it’s better the devil, you know, than the devil you don’t know. And so, those are the things in my mind to think about. And then, and then it’s also cost.
[00:03:32] Yeah, issues,
[00:03:33] MV: you know, I think you put it in a nutshell. It’s about managing risk versus cost. I say versus because they normally is a payoff. I mean, China’s been the workshop of the world for whatever the last 2030 years before that Japan was was edging into that position. Remember in the 80s, the Americans were so up in arms about Japan and then suddenly that kind of fear evaporated as the Japanese economy just flatline for a generation.
[00:03:55] Be interesting to see what happens with China, but that there isn’t here at risk. So here’s an example of inherent risk right now. There’s war in the Middle East. We had war up in Europe around the Russian periphery, kicking off, you know, a year and a half ago. Now, nearly two years, I guess. Well, no, it was about a year and a half.
[00:04:09] I think, the East Asian rim could be another place it happens, but even if you’re sourcing stuff from East Asia, it doesn’t take more than a couple of ships being sunk internationally for your shipping insurance to go sky high. And then it becomes hard to get a ship. Or it becomes very expensive to ship internationally.
[00:04:25] So in the current geopolitical climate, I would say the risk is probably more elevated than when I first started sourcing from China in 2014. Everything was fairly stable. Pax Americana, post second world war. That’s no longer the case, I think. So, I would say the, risk element is higher. So the cost, whilst important, has to be balanced against that.
[00:04:46] And the simpler it is, you know, as we’ve talked about before, the challenge is. Can you source it from literally down the road? And that’s just going to make everything so much more reliable and easier and here’s a another nuance to think about is the Characteristics not just cost because the profit and loss lens we’re looking through but the cash flow So if you tie up a bunch of money In a load of products that are coming from China and you have to buy, say, three months worth of products so you don’t run out of stock.
[00:05:13] And then it’s going to be on the water for two months and it takes a month to manufacture. You’re going to have at least three months, probably more like four months worth of stock with your money tied up for that time. Even if it’s cheaper per unit, that’s a lot of time to tie your money up. Whereas if you’re sourcing in North America or the UK, as friends of mine have done, and you can order two or three weeks worth of stock at a time.
[00:05:35] you’re tying a lot less cash up. So that reduces financial risk as well and makes it more efficient business. so these are the things to think through and they’re, they’re not, there are no particularly easy, quick wins. And thinking that through, you’ve got to go talk to people, think it through, but create something you can live with as well.
[00:05:50] As you were saying about the name, don’t source something in a nightmarish way that in order to continue the business, you’re going to have to keep living the same nightmare, because I know a lot of people that have done that. They created supply chains that are very complex, big demand, huge amounts of cash.
[00:06:03] And now they’ve got a business that’s working. They are stuck in that. And that’s not a fun place to be.
[00:06:08] JM: Yeah. So then that leads us into the question of what is the costs that are appropriate. So you’ve got some notes here about unit economics. So what are your thoughts on all that? Yeah.
[00:06:17] MV: I mean, I think the first thing to do is, is to recognize that if you’re doing a test launch and I suggest that you probably should, you don’t go all in before you got some actual market data.
[00:06:27] You need to prepare two sets of, of profit and loss projections really. And which is to say your gross profit, you just nevermind that overheads too much when you should look at that, but it’s the unit economics said per product that I’m, I think a critical for the sourcing piece. so the most important thing is let’s say you assume that your product is going to be successful.
[00:06:46] You’re going to order a thousand units every three months or something. Okay. That is the set of accounts that you need to set up or the projected profit and loss. So that’s how I found it. It’s necessary to operate in the situation. What’s your experience with your clients? Do they work in that sort of way?
[00:07:04] Do you think that’s necessary?
[00:07:06] JM: I think. Some have some don’t depends on their financial kind of, I guess, rigor, I guess, the right word. and so, yeah, I’ve, I’ve seen people do it back of the envelope and just kind of wing it. And I’ve seen people who are very, you know, ultra methodical. and so, yeah, I mean, I, I do think that that the, the, the main question is, what is the cost that you can get and what’s the.
[00:07:30] So what’s your sales price? The basic question is, what is it? Fundamental unit economics and many new entrepreneurs. see the numbers and, and, assume that, you know, if they have 1 times markup 2 times markup, they’re going to be able to survive. And, that’s just incredibly difficult. you know, so if, if you source it for 10 dollars, you know, you’re not going to, you’re not going to make a thriving business.
[00:08:01] If you sell it for 20 dollars, it just, it just will never work even 30 dollars, 40 dollars. You’ve got to find. An opportunity to have a markup that, you know, is in my view, 4 to 5 times would be, you know, what, what you’d look for. Now, you can add products over time that have smaller margin. Because they’re rounding out your catalog and because they’re an upsell cross sell, or they maybe maybe their top of funnel lead generator.
[00:08:28] but then you have a more profitable product that you sell. But to me, that’s sort of the most important question. And I would just point out 2 things that are vital. One is that the shipping costs need to be factored in, you know, it’s, it’s basically think of it like, you know, all in cost of goods for, for you per unit.
[00:08:50] And then, also a packaging, is vital and a lot, you know, a lot of people have choices to make with packaging and they, re really can make compromising choices there. You know, it’s an easy place to say, well, let’s not maybe get the best paper or the best packaging, the best, you know, Layout and, and that can be damaging [00:09:10] as well to the overall brand and sellability of the item.
[00:09:13] And so you’ve got to factor that in and frequently there are times where the packaging costs as much as the product and just depending on the industry, it certainly could be the case. And that’s just the reality of it. And so what you realize is especially for e commerce operators, people don’t hold these items in their hand.
[00:09:33] And if they’ve never had it before, they’ve never touched it. They’ve never experienced it before. Literally, the packaging that you’re showing them on the website is the only understanding of what they’re getting. It better look good. You know, it better do a good sales job because it’s a replacement for physically picking up an item in a retail store and being able to, you know, inspect it.
[00:09:55] And so your packaging has to do a lot of hard work that way.
[00:09:58] MV: Yeah, you’re right. And so it’s a question of, a couple of thoughts here. I mean, I think you’re right about the packaging. If in doubt, you need to err on the side of spending more than you would naturally think on the packaging. And quite a lot less on the actual product than you may initially think is sensible, if you haven’t done this before.
[00:10:14] And I absolutely agree with the markup thing. I see clients so often that on early stages, they bought a small set of inventory. Effectively, they’re doing a test launch, but they’re trying to make it profitable and they’re buying it. You know, two and a half times markup. They’re buying for whatever, 8 and trying to sell for 20.
[00:10:31] I say to them, look, this is incredibly hard to do. What you need to do is either commit to this product and go back and find a supplier and negotiate a sensible price, like 5 per unit, or move on to something else because the economics are going to make this super hard for you. So I absolutely agree with the markup thing.
[00:10:47] This brings me back as well to your fundamental brand promise and why people are buying from you. If you’re buying coffee for somebody, you’re buying it for the caffeine. You’re not buying it because you want a big bulky set of stuff that is expensive to ship around the world and expensive to store and inexpensive to fulfill.
[00:11:01] You want the caffeine. In fact, The smaller the package it comes in, in some ways the better. So that means that you can save an awful lot of money while still delivering on your promise. whereas if you’re selling, I don’t know, sand, which would be crassly bad idea, but you get the other extreme, you’re selling something that is literally valued by bulk, which means you’re going to have to sell more of it, which is going to cost you a ton of money every time you sell more.
[00:11:23] So that would be a disaster to sell on Amazon. I think, whereas coffee is extremely good because the packaging. Is is important, but the actual product, whilst it has to contain caffeine and be safe and be seen as safe is not bulky. And so the actual production costs can be very modest. And so again, it comes down to.
[00:11:43] The product category choices and the sort of promise you’re making to try not to make a promise. That implies spending an awful lot of money. And that’s very easily done. That’s a big trap. That’s very easy to fall
[00:11:54] JM: into. I’d say. Yeah, I totally agree. Okay. So that leads us to sort of how to deal with the manufacturing process, negotiating, ordering all of that.
[00:12:03] You’ve got some ideas on that too.
[00:12:05] MV: Sure. I mean, the first thing is that I guess once you’ve chosen your location, you need to shortlist your suppliers. And I would use professionals for this. I don’t think Alibaba is not a great place to start. It’s not the worst thing if you’re sourcing from China, but I would use somebody who’s a specialist in sourcing and particularly somebody trusted, somebody with a sort of Western background, probably, you know, a couple of guys, A couple of people in China, one of whom’s Asian, who spent a lot of time in Britain, so South Asian, so Indian, and an American chap. And so there’s, the sort of people on the ground who I would use to, to choose, who to go with. And then once you’ve done that, then it comes down to, you know, making sure they can do either a prototype, or you’re starting with their existing products.
[00:12:47] And then you’ve got to negotiate and really, The key for negotiation is first of all, know what numbers you need. So the profit and loss is very helpful for that. We were just talking about making sure that you have a sensible markup, have a plan B I, another viable supplier. Otherwise you cannot really get a good price.
[00:13:04] And then if possible, promise big future orders. So don’t start by saying what’s the smallest amount I can spend with you. Cause that’s a very disappointing question. The manufacturers will not like it. You’re going to get the best relationship by volume. And if you promise you’re going to be order containers of stuff, but you need to do a test order of 1000 units in order to make sure that the quality works.
[00:13:26] That’s a much better way to start the conversation. So all these things tweak you towards getting a better pricing as well.
[00:13:32] JM: Yeah, that’s interesting. I also think that there’s some additional elements that to learn about, you know, there are grades of products, you know, we. have, our, our charity or ministry activities in Zambia, and we have a lot of sewing machines that we use.
[00:13:48] We have, like, 96 team members there and I purchased a lot of machines over the last 15 years and, for our vocational sewing program. And and so what we learned early on was, there’s machines that are manufactured in China that are, North American quality. Machines and then there are machines that are lesser quality that they’ll send to Africa or, you know, different places.
[00:14:11] And so with any manufacturing process, there’s going to be gradations of quality and you need to get real clear on, you know, what you’re buying. It’s going to immediately impact your customer, you know, and so you want to think through, okay, how can this be made the highest quality? How can we made the lowest quality?
[00:14:28] And what’s the range in between those 2? And, you know, where does your price point? Sit compared to those, you know, quality ranges. I think that’s a big part of understanding, you know, what you’re doing and it’s different for different products and different industries, different niches kind of depends on what you’re making, but that can certainly be one key issue is to make sure that you understand what’s being made at the highest or lowest level and how you’re.
[00:14:55] Item you’re getting ranks. And it’s funny because, there’s an example from Kyle, my business partners, you know, a personal brand he runs it’s called lead up, art supply. They do journals like for artists, like sketchbooks. And, they, they have sold them for a long time and they had a, they had some negative reviews come in and, which is surprising to them, you know, like customer reviews.
[00:15:20] And they looked into it and the manufacturer had changed the paper without letting him know on an order and their inspection didn’t pick it up. And it was a slight change as I remember the details correctly, just a slight change in the quality. probably, of course, safe costs or something like that.
[00:15:38] And maybe they assumed, you know, Kyle and his and his, his other partner wouldn’t wouldn’t notice it, but the customers did. and so they had to go and resolve all that. And so anyway, all that to say, you’ve got to think through these things.
[00:15:52] MV: Absolutely. So a couple of thoughts. And then you mentioned really quality control, which is absolutely critical.
[00:15:57] We’ll come to that as a special. Area, but it’s extremely easy to just look for cheap if you’re a marketer and you don’t care about product development Which is obviously a terrible error because you get one star reviews and then everything tanks the conversion rates go down. Nothing works but it’s also easy if you’re more of a a production centered person to end up going for Must have the best quality and of course you don’t have a brand name like if you’re selling computers And that would be an insanely bad idea.
[00:16:23] I’m trying to think of a brand. For example, if you’re saying kettles, it’s not a good idea because it’s electronics, but let’s say Russell Hobbs is a big brand name in this country, or, you know, John Lewis, which is, one of the big supermarkets that also manufactures their own stuff. you can’t charge.
[00:16:38] Russell Hobbs prices because you don’t have that brand name. But if you end up with Russell Hobbs costs, because you insist on excessively high quality, you’re dooming your product to being economically a failure. The product may get five star reviews and people will love it, but you can’t charge the money needed to balance that out.
[00:16:54] So be very careful about. Just another reason why quality full stop is a terrible differentiator. Because if you do try and differentiate based surely on quality, you’re going to price yourself into, you know, negative, in a profit and losses. The customer products, promise, I should say, what is it that you’re promising to give people?
[00:17:15] What is the minimum force needed to deliver that reliably? That’s for me, the question. Brand product design,
[00:17:22] JM: unless you’re in a niche where you can double the price and higher offer, higher offer, higher quality. So there is a play to be made for out, you know, high ending the high enders. but you just have to know what you’re doing in that regard and know that there’s a market there for, the, the top of the, the, the pyramid.
[00:17:42] they’re ultra premium brands as a positioning strategy. And, you know, if you can do that. Then your packaging is a massive part. The quality is a massive part. so anyway, in general, I completely agree with you, except for that 1 exception, which is, you know, if you’re going for ultra premium, then, you know, they’ve got a, you’ve got a positioning thing to do with their pricing and all that.
[00:18:02] So yeah, you make
[00:18:03] MV: an extremely good point. I’m about is absolutely doable. you’re probably going to have to put a lot of money somewhere in the system, aren’t you? And imagine with branding and brand awareness and getting endorsements from celebrities and that sort of thing. So you’re not wrong. All I would say is, again, let me [00:18:20] rephrase it so it’s more generally true, make sure that the quality and thus the costs on the production side match up to the price you can charge.
[00:18:28] And that comes down to how strong your branding is to your point. And if you’re going to create a new brand from scratch, understand that that’s not a casual thing. You’ve got to put some serious money into it. So that will be reflected more in the overheads, I guess, for marketing than, than the product economics.
[00:18:43] Yeah. Do you want to talk a
[00:18:44] JM: bit about quality
[00:18:44] MV: control? We talked about quality. So that’s very, very, very important. If you’re sourcing from China, it’s ultra important. I would never ever ship anything out of China without expecting it every single time. a lot of people say, Oh, I’ve, I’ve shipped once or twice.
[00:18:58] Why should I bother assuming consistency from the manufacturer? And as Kyle’s story shows, that is a dangerous assumption. particularly once you’ve built a product, there’s actually more at stake once you’ve got reviews and listings. So here’s the things I would say, the basics of quality control. Number one, see it coming from the very beginning before you even negotiate the price, create a document that covers all the possible defects and the price, the test for that, which will probably mean by the way, that your manufacturer want a bit more money because they’ll realize you’re serious about quality.
[00:19:30] That’s okay. The economics still has to work. It still needs to be a viable, profitable markup, but I wouldn’t want to suddenly start springing quality control demands on people after they’ve made things. You have to see it coming up front, submit this with your purchase order. So negate your upfront on the quality and argue about that.
[00:19:48] And if they say, if you want this quality, it’s going to cost you 5 more per unit, and you can’t afford that. Then you may have to compromise, but know exactly where you’re compromising and test out whether it’s going to break the product. And then. When you get inspectors in, make sure you use external inspectors.
[00:20:03] Do not rely on the factory. use the best people you can use. I’ve got some, resources for this, which I’ll put in the show notes. I don’t remember everyone offhand. I use for all the sourcing stuff for so many things to put into it. We use the best people you can and give them your list of the quality control points that you agreed up from the manufacturer.
[00:20:21] So from the beginning to the end of the process, be very, very specific. And that may mean that you need to buy 30 competitive products. So that’s pretty excessive, but 10 and use them until they break and find out how things break and where they break and why they break and then put a list in. So the meticulous, boring work that really makes the difference.
[00:20:40] JM: Yeah, totally. that’s your area of expertise more than mine. But I know that there are many stories where those aspects of the process can be challenging and difficult and getting a good on the ground, you know, quality control person. Is is vital and there are many people who do that work, you know There are there aren’t
[00:20:59] MV: so many people that I trust but that yeah It’s not that hard for them to do a good job if you’re incredibly specific if you’re dealing with electronics You need to be hiring a specialist or something Which is probably another reason to stay away from certain products now if you’re sourcing in north america That isn’t really something i’ve got experience of you’re sourcing in the uk You’re probably going to have more naturally higher standards anyway So I wouldn’t be so paranoid, but I would still check things, at least initially.
[00:21:24] and if you are sourcing from abroad, I would get a post shipment inspection as well as a pre shipping inspection because things can break in transit, which may be no fault of the manufacturer, but you need to catch that before it goes to Amazon and you get one star reviews. But also you need to diagnose why did it break?
[00:21:39] Oh, because we’re shipping glass and we didn’t reinforce the corners of the, the shipping cartons. Okay, next time we’ll reinforce the corner. So you need to learn. It’s inspect before shipping and after shipping. It can be quite rough if you’re shipping white air, people can literally throw the cartons into airplanes.
[00:21:55] So you need to anticipate that. And my, my big hint there is do not be penny wise and pound foolish, as they say, or penny wise dollar foolish. Do you say that? so spend a bit of money on some robust cartons, particularly reinforce the corners and the edges. Especially the shipping class or something like that.
[00:22:11] Yeah,
[00:22:12] JM: okay, man. This seems like a fantastic, fantastic outline of these ideas. The next step would be marketing and testing, but maybe we should have a break and save that for another session here.
[00:22:24] MV: I think so. Yeah, because there’s, there’s a whole bunch that goes into that. And besides which there’s, there is a lot of work that goes into,
[00:22:31] getting the sourcing manufacturing right. And I think what’s nice is that really we’ve had two sides of the same coin today, which is what’s your brand promise? You know, what do you stand for? What are you going to give people that nobody else does or not as well as you? And then on the delivery side, how can you ensure that you actually can deliver that and do so at a profit?
[00:22:50] And so those are really the two questions that we’re trying to answer. And so they’re nicely two sides of each other as well, I would say.
[00:22:57] JM: Yeah, totally agree. All right, man. Great conversation today. it’s always an honor and I think this has been a good one. and we’re really grateful for everybody who always, supports the show listens and it’s great to hear your feedback when you reach out to us.
[00:23:11] Michael, where can people connect with you if they’d like to learn more about. Working with you directly.
[00:23:15] MV: they want to work with me more directly. I mean, the best place is probably my amazon audit. com, which you can book in an audit with me if you’ve got an existing business. if you haven’t started with your brand yet, honestly, the best resource out there is by my friend Ben Leonard, who I got to know years ago when he was just starting out.
[00:23:31] And, you know, bless me three years after he started his business, he sold it for several million. yeah. Pounce, which is just insane. So he absolutely walks the talk. Plus he’s a really nice guy, nice, well spoken Scottish guy. And he’s got a book out called quit stalling and build your brand came out a few weeks ago.
[00:23:48] If you go to quit stalling book, let me say that again. If you go to quit stalling book. com forward slash amazing FBA, you can get lots of bonuses as well as the book. So that was cool. Awesome. Yeah. Very good. Now he’s the, he’s the real article. Like, I mean, he’s like, you know, a sort of cliche of how to do it three years to several millions.
[00:24:10] It’s crazy. By the way, not typical. It normally takes a few more years, but he knows what he’s talking about.
[00:24:16] JM: if you’d like to connect with me and learn more about how we build Shopify sites and manage them for people as well as email marketing and social media activities, you can check it out at omni rocket.
[00:24:26] com and, feel free to contact us that way. So Michael, thank you so much for a great conversation today, man. Yeah,
[00:24:33] MV: thank you. It’s been interesting to revisit all this stuff. I mean, it is quite complicated, but I just think you’ve got to do the work, if you’re going to get a big payoff. But the number of people who I know who’ve sold brands for six or seven figures now is lots.
[00:24:46] It really is a real thing. So it is worth doing. It takes a long time and effort, but if it works, it, it works big time. So keep going with it.
[00:24:56] JM: There you have it. All right. We’ll see you later.