Starting a product business: 8 terms you need to know
If your business involves sourcing products there’s a whole vocabulary of trade to get to grips with. We break down the key commonplace terms
The barriers to starting a product business have probably never been lower. Armed with little more than a laptop, a good idea and some cash, an entrepreneur can set about sourcing goods from home or overseas suppliers. These can then be marked up and sold at a profit, either online or through physical outlets. Depending on the business, the initial investment can be as little as a few hundred pounds.
But if that seems simple, the devil is in the detail. Let’s assume for a moment that the first-time product entrepreneur finds a suitable manufacturer or wholesaler to supply the goods. From that point the challenge is not only to strike a deal but also ensure that the products are shipped safely and according to specification. That, in turn, involves becoming involved with processes and procedures that will be totally familiar to the supplier but not necessarily to the buyer.
And in fact there is a whole vocabulary of trade. Suppliers blithely talk of SKUs and MOQs. To the initiated these are commonplace terms but if you’re new to procurement you could be looking at a steep learning curve.
And as Katie Canvin, co-founder of underwear company cheekfrills observes, the language of commerce continues to evolve: “I’ve been sourcing products for many years and I still hear new expressions all the time, particular in relation to how data is handled.”
This shouldn’t be a big problem. You can ask your supplier what he means or – as Canvin prefers – take careful note of the expression and ‘Google’ it at a later date.
But, in the meantime, here are some of the terms and concepts that you should be aware of from day one.
Short for ‘minimum order quantity,’ this is one of the most common acronyms used by suppliers.
Essentially the minimum order quantity specifies the lowest quantity of a particular product that the business is willing to sell.
As such it’s hugely important. If you want to buy five hundred units and your potential wholesaler or manufacturer puts the floor at 1,000 you have the choice of upping your order, negotiating very hard or going elsewhere.
If you’re new to the market, upping your order may not be a good idea. Firstly, it will stretch your finances but equally importantly it won’t give you the opportunity to a) test your target market and b) test your supplier by starting with relatively small orders. Canvin advises caution. “I have always tried to avoid parting with large sums of money at first,” she says.
The unit price
This is the amount you’ll pay for each unit – which may be a bottle of perfume or a package containing two (or more) related items such as a pair of socks. That sounds straightforward enough, but there are a few complicating factors. For instance, in the case of manufactured goods, the unit price is likely to be augmented by setup costs, quoted separately from the cost-per-unit. It’s also important to remember that unit prices tend to vary according to the quantity ordered, with large volumes triggering discounts.
As Oliver Bridge, founder of shaving products company Cornerstone, points out, businesses have to think carefully about the relationship between quantity and unit cost. “If you’re selling low margin products, you may have to think in terms of taking larger quantities to keep unit costs down,” he says. In contrast – a business with higher margins – can be less focused on unit cost and thus have more flexibility in terms of order quantities.
Freight and shipping
Bridge also cautions against making purchasing decisions on the basis of the unit cost alone. “It is often better to focus on the total cost of buying the product, shipping it and having it delivered to your warehouse,” he says.
Again this is where more variable factors come into the picture. In addition to factoring in, say, discounts for taking larger orders, it’s also important to look at the cost of shipping, along with associated tariffs and taxes.
Shipping costs vary according to the supplier’s location and the mode of transport, with sea freight being considerably cheaper than sending goods by air. Additional costs include fees charged by ports and warehouses when goods are being moved and stored. Goods coming into the EU from elsewhere in the world will be subject to tariffs and VAT. Your supplier’s quote may (or may not) include shipping costs. Alternatively you can use a freight forwarding agent to manage the process and provide transparent costings.
SKU – standing for Stock Keeping Unit – is another familiar acronym. Essentially this refers to the codes used by businesses to identify products when they are sitting in the warehouse. Usually designed to be read easily by a human, SKU codes typically specify the manufacturer, the item and variable factors such as colour.
SKU codes are used to keep track of inventory by a warehouse and can also be deployed in e-commerce systems to help buyers locate an item by known codes. When you buy goods from a supplier you can retain the existing code or create a new one for your own system.
There are various ways to pay suppliers. If the money is going overseas, the commonest method is “wiring”. This is no more difficult than transferring cash between accounts in the UK. All that is required is the international account number of your supplier’s bank (the Ibank Code) and the SWIFT code. Banks do charge fees for this, depending on where the cash is going. Credit card payment is also popular.
Many product businesses start on a relatively small scale with the owner investing a minimum amount of money, reselling online and using the profits to pay for the next order. However, as a business grows and the sums of money get larger, cash management issues can arise. Put simply, if a supplier requires upfront payment for goods which will arrive three months later and the products then take several more months to sell, a cashflow issue can open up.
There are a number of trade finance options available. For instance, your bank may offer a supplier finance solution. Under this type of agreement, the lender pays the supplier as soon as an order is placed. The buyer repays the debt over an agreed period. This provides not only breathing space for the buyer but also an opportunity to take advantage of “prompt-payment discounts” offered by the supplier.
This probably won’t be available to smaller businesses, however, users of the Alibaba.com e-commerce platform can borrow from two specialist lenders – EZBob and Iwoca – both of which have their application processes embedded in the platform. Users can apply for a loan and once it is approved, suppliers are paid as soon as the goods are ordered. In addition, users can find the most favourable rate on Alibaba.com platform when they borrow money from EZbob and Iwoca.
Bill of materials, product specs and other paperwork
One of the most worrying aspects of sourcing products – particularly from overseas – is the fear that when products arrive at the home port or warehouse they will not match your expectations. Perhaps the materials will be wrong or the finishing poor. As Claire Velo, founder of beauty products company Aurelia Skincare, says, the key to satisfaction is to “have a contract for everything you buy that is of importance.”
Getting the documentation right is vital. If you’re dealing with a manufacturer rather than a wholesaler, you may want to supply a bill of materials, specifying every constituent. At the very least you should provide a detailed specification sheet.
As Velo points out, when things do go wrong it’s important to have pre-empted the situation by agreeing compensation arrangements with suppliers.
Nevertheless there will always be a concern that after an upfront payment has been made, a supplier will fail to deliver goods of a suitable standard or even fail to deliver any goods at all. One way forward is to use an Escrow Account. Essentially this means putting money into a third party account, which will only be passed on to the supplier when the goods have arrived or been checked. The supplier has the assurance of knowing the buyer has transferred the cash.
More comprehensive protections are available. For instance, e-commerce platform Alibaba.com offers “trade assurance” when buyers purchase from a selected supplier. Essentially this provides payment protection when problems arise. As Matt Rodger, managing director of camera accessory business Triggertrap, explains, the service not only provides insurance but also the reassurance of working with vetted suppliers. “Trade Assurance helps us filter out suppliers and choose those who can supply what we want at the right time,” he says.
Sourcing products needn’t be difficult for a new business but it’s vital to understand the basic procedures. Once you’ve got to grips with the key terms, there’ll be no stopping you.