In today’s episode of the eCommerce Lifestyle Podcast, Anton answers the question, "Should you ever pay suppliers in advance?"
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Hello everybody, Anton Kraly here and welcome back to the eCommerce Lifestyle podcast. This is my show that is designed to help you increase your revenue, automate your operations, and become the authority in your niche, whatever that may be.
Now, today's episode is coming from a discussion I just had with a member of my coaching program, which if you don't know, is called Drop Ship Lifestyle. You can learn more at dropshiplifestyle.com, but the question came from somebody that is very early on in their journey, they're literally just getting to the point where their store is about to go live, they have a launch date set that will make sense to you if you're part of my coaching program, but if not, just know they're going to start their store soon. Simplest way to describe it right now.And in this journey, the stage they're at is reaching out to different suppliers in their niche, different brands that they want to drop ship for and they reached out to one that they see as the biggest in their niche, like the biggest supplier. And I'm not sure how they define that, I'm assuming it's the one they see most around the internet as they're doing their market research. And when they reached out to the supplier and they went through our script about why they should sell for them, the supplier said, "Typically we are not opening new accounts right now, but we can work with you if you're willing to put down a $4,000 deposit, which will go towards your first few orders."
Now, that might sound like a lot of money, and it is right? 4,000 is a lot of money, but they said that the average order value for the products they would be selling from the supplier would be between two and $4,000. Just to give you some context. So as far as profit margin, you know, assuming our normal 30% average, that would mean they were making between 600 and $1,200 profit per sale. So in order for them to kind of run through this deposit, that could possibly mean anywhere between what, five, six, seven sales, probably somewhere around there, before that deposit was spent. And then, you know, their profit is back and that money's not laid out anymore. So anyway, they were asking me if they think it's a good idea for them to send that deposit over, to open an account or not. And I answered them, but I thought it would be a good idea just to hop on, record a quick episode and share what I told them with you as well, in case you find yourself in this situation.
So, a few things that I want to mention, made a few quick notes here. The first is that this might come up from time to time, but it's definitely not common. Most suppliers want to work with you because they think that you're going to help bring them more sales, that you're going to be an asset for their brand. That is the main reason suppliers will approve you. So with that being said, some brands that might be more established or really in my opinion, that might be understaffed, they might want to only put their resources towards certain things, and maybe even suppliers that might have been burnt in the past by putting their limited time and resources into working with online retailers that never amounted to anything or possibly even hurt their business. Then that could be a reason why occasionally suppliers might say, "Yeah, we'll do business together if you put down a deposit of X amount of dollars."
Now, first thing I recommended to them that I would recommend to you as well, is not to do this early on. So at the stage where this person that asked me is that right now, I don't recommend going into debt basically to start your business. Now, they said that again, the supplier is the biggest one ... Let me see exactly how they worded it, because I copied their screenshot. They said, it's the biggest in their industry. Now, yeah, that could be great in all, right, maybe it is the brand you see everywhere, but that also might not be a good thing. So just because you see a company everywhere, maybe they're on all your competitor's websites, that actually might be a disadvantage for you.
Now, the way that we gauge how competitive products are, is by looking at how many people are selling the same product, not just that, but how many are advertising them on the same platforms we advertise on. So I want to mention that even though you might see a company everywhere, don't get too excited, you should still try to get approved, you should still list their products, you should still run ads, but just because they're everywhere, doesn't mean that they're going to be your biggest seller at all. In fact, in a lot of cases, that's not true. So I wouldn't, again, this is what I recommended to the person, what I'd recommend to you, don't get too excited about it. Don't go ahead and just send them a bunch of money and think that your business is now going to explode because you're selling for them.
Now, with that being said, when suppliers do ask us for these deposits basically upfront, we don't just say, "No, we're not going to work with you", but we also don't just say, "Okay, great, where can we send the money?" And what I would recommend is, what we do, especially if you're a little bit further on in your journey and that's just trying to keep the conversation going. So let's just say you call me and I have a company that makes stand-up desks and you say, "Hi Anton, I'm calling from so-and-so, we want to sell your desks because X, Y, Z." And then I say, "Well, you know, we're not actually opening many new accounts right now. To show you're serious we would want a $4,000 deposit."
Well, what you should say to me to keep the conversation going is, "Oh, you know, we really don't do that, that's nothing we've done in the past. We're confident we can sell your products, but before we even think about doing an opening deposit, we would like to learn more about the potential margins and the potential sales volume of your best-selling products." So kind of flip it and change it to not tell them, "Well, I don't want to send you a deposit because I don't think we're going to make any money with your stuff." But instead you want more information from the supplier, in that hypothetical me, to learn if you can actually make good money with them and to try to get a little bit deeper into their business.
So when we are going through this, it's negotiation, but you know, this brief five or 10 minute phone call, what we're trying to get are price lists. Even if we're not approved to sell on that phone call, I still would want to see a price list, I'd want to see what the wholesale cost was, what MAP was, what MSRP was. I'd get my average shipping prices, like I show you how to do with the Drop Ship blueprint, I would check to see, can I actually make sufficient margins on these products. Because you don't want to get approved and send them $4,000 to open an account and then find out that it's a supplier that offers terrible margins. So you want to try to figure that all out ahead of time.
Something else you want to ask them is what are their best-selling products and how many units their top retailers sell a month. So let's say you asked me that and I say, "Well, our best-selling products are stand-up desk number one and number two and number three, because I'm great at naming my products, and our top retailers sell over 100 units a month of each. Okay, great. Well now you would have some information to work with, right? You know what the top selling products are, you have an estimate of what the top retailers are able to sell and if you get the price lists, you'll know where your margins are. So using that data, you can make a more informed decision of is it even worth, possibly at some point, sending them money to open an account.
Now, what I still do once I get that data from the suppliers, is not just say, "Okay, great, this is definitely a home run, here's the $4,000 deposit." What I'll say is, "Okay, great. You know, everything looks good, I'm confident we can be right up there with the other top retailers within a short amount of time." Not going to just say a timeframe, I'd actually do the research first, like I teach you in the Drop Ship blueprint, but I would say that to the supplier, and then I would say, "Is there any way we can get started? Let's do a one month trial together. We're going to market these products like crazy and assuming everything works out, we're more than happy in the future to put down deposits or even to place larger orders."
And again, just try. At that point, the supplier will know you're more serious because you didn't just say yes, you didn't just say no. At that point, you should be having a conversation with them. Again, they're understanding that you understand the e-commerce, because you're talking to them about bestsellers, you're talking to them about margins and now you're deeper in this relationship, you're more invested, they're more invested. They're more than likely to negotiate with you rather if they just said, Oh yeah, you want to open an account with us? It's $4,000 deposit, and you said no, or I'm not confident about that. So you have to turn it in to a conversation.
Now, sometimes they might just say, "Listen, we can't do that. Maybe we can do half, a $2,000 deposit." Or maybe they'll say, "Nope, it's 4,000, no matter what." Or 1,000 or 500, right? There's not like a fixed number. But if you find yourself in that situation, my advice is only after, again, you know what the best sellers are, you have an average of how many units a month their top other retailers are selling. You know the price lists, you know the margins are there, then it comes down to should you pay suppliers in advance at that point, for that opening order or for that deposit. And the only time I would say yes is if that money, I don't want to phrase it wrong, but I originally wanted to say, 'means nothing to you', right? It shouldn't be because you just opened the business and you're like, "Oh man, it's going to cost me $4,000 more." Or $2,000 more. It should be, "Okay, my business has been up and running, we have customers, we have sales, we have traffic, we have cash in the bank that is basically there for profit or for ammo, for ads or for situations like this. And at that point, if you've done your due diligence and you see the opportunity, then yeah, definitely, you know, you can feel free to make a deposit. But don't say no right away, don't say yes right away, do your research. And if you're going to ever pay deposits to open accounts, only do it after you are 100% confident that that money will be spent within a week or two. Don't do it and think, "Well, hopefully in the next six months, we can do enough business with them where we use our deposit." It needs to be very, very quick turnaround time because you have that confidence through your research and you know you can bring in the sales.
So if you want to know, again, how we do this research and how we're looking into competition and profit margins, go to the Drop Ship blueprint where I teach everything I know on this, and if you're not a member yet, go to dropshiplifestyle.com, I'll post the link up in this podcast description, you can get a free training from me and I also make a special offer for that program, the Drop Ship blueprint.
So that's going to do it for this episode, guys. Hope you got a ton of value. If you did, do me a favor, go to Apple podcasts, I'll link that below as well. Leave a review, let me know what you think and I will talk to you on Thursday in the next episode of the eCommerce Lifestyle podcast. See you everybody.