Having an amazing product is often the first step in a successful subscription business. Subscription teams must carefully consider what items to include, and subscription product sourcing is a key element in the process.
In this article, we will talk through some product sourcing tips to help you improve quality and cash. Product sourcing is the process of searching for, negotiating and delivering products for your business to sell. Identifying amazing products alongside effective, efficient manufacturers can have a significant impact on many aspects of your business. We will share some methods that businesses can use to find the right items and partners.
Read on to learn how to successfully source subscription products, negotiate good pricing and terms with manufacturers as well as important things to look out for.
7 Tips for Subscription Product Sourcing
Review Trade Show Exhibitor Lists
Traveling to trade shows may be a bit difficult right now, due to the pandemic. Secondly, they can be pretty expensive to attend when you stack up travel, hotel and entry expenses.
One good tip to take advantage of if you cannot travel to trade shows is to review exhibitor lists, which are typically posted on the trade show website and can be accessed for free. The purpose of this is to find the direct source for products you want to consider for your subscription.
Utilizing sites such as Alibaba can be problematic because finding a direct manufacturer is typically difficult; many resellers pose as manufacturers, and this can cause a host of issues. Working directly to a manufacturer through trade show listings can aid in communication, expectation setting and receiving quality products.
Set Clear Expectations About What you Need
Spending a couple of hours putting together a clear, quality document that highlights the key components of what you are expecting from a quality and function standpoint can save you multiples of that time later. Written communication is always best when very clear instructions need to be followed.
Be sure to include color references, exact sizing in the measurement system of the country you are purchasing from (usually the Metric system) and functional details. Don’t forget about labeling for the SKU and UPC, both on the product directly and the outer packaging. It is easy to forget about these elements when you are first starting your sourcing journey, but they will be imperative for scaling your business — whether that be in a retail resale environment or even for warehouse pick and pack accuracy.
If quality is a critical component of what you are purchasing, consider engaging a quality and audit firm in the vendors’ country to inspect the facility and product quality prior to shipping.
Pricing and Purchasing Methods
Pricing per product typically changes depending on the quantity purchased. Work directly with manufacturers to understand the best possible price you can get and the volume tiers at which discounts occur. Subscription businesses can also think about the volume projections for growth over the next few years to proactively purchase products and save with bulk pricing. Asking about the pricing specifics first will give you an indication of the top-tier pricing available from each vendor, then you can negotiate based on minimum order quantity (MOQ), but always start by asking for the large quantity tiers first.
Once you have a tiered pricing matrix from your vendor, there are some ways to optimize this information, depending on how accurate and comfortable you are with your unit forecasting.
Parent and Child purchase orders are a great way to procure at a lower price tier, without having to purchase that quantity all at once. This is done by creating a parent purchase order for a large quantity purchase commitment over a period of time. This could be a quarter, six months or even 12 months. Using this model allows subscriptions to lock pricing in at parent unit level; you then issue child purchase orders against the parent purchase order quantity at the vendors MOQ or above.
The subscription business will then have improved working capital utilization while obtaining the best possible price. It also works well for the vendor as they have a longer-term commitment that enables improved planning and efficiency on their end. Make sure you have a contract lawyer review the language and ensure there are out clauses to enact, should your demand change.
Optimizing Subscription Cash Flow
Suppliers often ask for full payment upfront — at least in the very beginning of your relationship. This can put a lot of constraints on your cash position if you then have to put that product in a container and wait around five weeks for it to arrive; you could be using this capital to fund growth or other efforts in the business. If working capital is tight and the vendor has said no to standard credit terms, offering a slight premium to the price in return for credit terms is one option. This will obviously result in a slightly lower margin on the product, but if it improves cash flow, it could be the right trade-off for your business.
Consider Using a Third-Party Firm
Establishing an efficient relationship with manufacturers can be challenging, especially when they are located overseas. A third-party firm has experience with these partnerships and can support your subscription in a variety of ways.
Some key benefits of a third-party subscription sourcing firm are:
- Having this partner in close proximity to your manufacturer can make communication easier, especially when sourcing comes from another country.
- Local contract law can depend on location. This should be a top consideration once you are purchasing significant volumes. Trying to hold international companies accountable can be very challenging and costly.
- The third-party firm is then responsible for ensuring the quality of the product as well as any ethical and environmental standards you want to ensure your supply chain is following. This reduces the burden of what you must manage with vendors.
- Oftentimes, a third-party sourcing company has negotiated much better pricing based on their collective buying power, which often means you are landing a product at a lower cost.
- Many third-party sourcing companies also handle the logistics of getting the product directly to your warehousing. They will arrange for the transportation and customs clearance, which can drastically reduce your time investment.
- You have a single point of contact for most (or all) of your sourcing needs. This puts the responsibility on them to scale as you do, as opposed to you having to hire sourcing, procurement and inbound logistics staff as you scale.
At some point in your growth journey, it will likely make sense to bring all of the above in-house to optimize costs and control. For early stages or hyper growth, however, an outsourced sourcing company can really help.
Ask the Supplier for References
This is often forgotten about when sourcing. Just like you check references for a new hire, you should also check references for suppliers and vendors. Not all vendors will be willing to give this information up but it is advisable to obtain firsthand accounts of what it’s like to work with that vendor before signing a contract.
Ask for a reference or two that can vouch for the vendors’ quality, communication and on-time delivery. A good resource is to check the company’s Better Business Bureau rating. Offering to sign a non-disclosure agreement should give comfort to the vendor about sharing a couple of references.
Review the Packaging Process
Every detail matters from beginning to end within the product sourcing process. Review the specifics of how your products are being packaged. This is important because you can eliminate the possibility of any damages happening during transit both to you and then to your customers, if items are not being repacked. As mentioned above, make sure you are clear about SKU or UPC label requirements on both the product and the outer cartons.
Acquiring and delivering quality products is the lifeblood of our businesses, and these guidelines will help you consider all aspects of a product before placing an order.