So if I find a product that costs me $60, and I can sell it for $100, I make $40, right? Of course not. We all know there are expenses and overhead costs that we have to take into consideration. Overlooking all the expenses could be slightly disappointing, if you end up with a 10% profit instead of 15%, or it could be downright tragic if you end up in the red. In order to help avoid the pitfalls, it’s best to make sure you are taking ALL the necessary expenses into consideration. Here are 7 that you may or may not have considered.
1. Inbound Shipping
Not much science to this one. If it costs $100 to get 10 items into our hot little hands, the cost of each of those items is really $10 higher than the sticker price, right? It doesn’t have to be any more complicated than that. If you are running things out of your garage and buying by the pallet, be sure to include those pesky lift gate fees some carriers charge for residential delivery. Of course you could always spend next Saturday building a loading dock next to the garage. I’m sure the neighbors will love that.
2. Brokerage Fees, Duties, etc.
If you are importing goods from overseas, the simple Inbound Shipping fees or only part of the equation. Working with your Customs Broker, you should be able to get a rough estimate of what will be due once your product lands. The total will vary, depending on the origin and destination, the type of goods, the weight, and your broker. Here is an example breakdown of fees I recently paid. This was on a $20,000 order, comprised of 200 pieces, each about 10 lbs, from Shanghai to Salt Lake City:
Ocean Freight: $1,260
Merchandise Processing Fee: $44.82
Waterways Fee: $16.17
Customs Clearance: $80.00
Messenger Fee: $15.00
Security Fee: $15.00
ISF Filing Fee: $45.00
ISF Bond: $40.00
Surety Bond: $56.00
Origin Charges: $93.75
This includes the Inbound Shipping, plus all the other fees. As you can see, together they added about 12% to the overall cost of my product. If not accounted for, that can eat up profits quickly.
When I started, I sold primarily liquidation merchandise. One of the biggest expenses I encountered was not having adequate packaging on hand. Shipping boxes, fill (peanuts, paper, or other), tape, labels… they all need to be taken into consideration. For packaging materials, here are the options from worst to best:
Worst: Pay retail for boxes, tape, etc. Buying materials at the UPS Store or FedEx Office can be an expensive option. If you are in a bind and need to get an item out, they are a great resource. But they should be avoided when possible.
Good: Buy packaging materials in bulk from a supplier. Uline, Amazon, and even eBay are all great places to buy boxes, bubble wrap, and tape. You will pay less than half what you do at the retails stores. Also, keep in mind that the cost of shipping the materials to you makes up the bulk of their costs- so if you find a bulk supplier nearby, negotiate for a will-call rate to save some cash.
Better: Some carriers provide shipping boxes and labels for free. These require you use the boxes for a specific service, but if you are shipping a lot of FedEx Express, or can fit your goods in a USPS Flat Rate box, you can’t beat the price! UPS and FedEx also supply other free supplies such as shipping labels (even for a normal Laser or InkJet Printer) so no need to buy labels at the local office store.
Best: If you are working with a factory or wholesale supplier, negotiate to have your product delivered in ship-ready boxes. One less bit of handling you need to worry about, and it should save money on the supplies.
For larger items, checkout the box selection at the large hardware stores such as Home Depot and Lowes. It isn’t the most professional way to ship at item, but the boxes cost a fraction of what a plain box of a similar size runs.
There is a cost to acquire customers. You can pay that cost in advertising, you can pay it in spending all your spare time selling your product door-to-door, or you can pay it to a marketplace like eBay and Amazon.
The advantages to using a marketplace are obvious. The audience is there, ready to buy. While selling on marketplaces may or may not be part of your long term strategy, its a great way to get started. Depending on the marketplace and what you are selling, you may be paying 5-12% of the gross revenue in exchange for that customer.
In addition to the marketplace, you will need to pay commission to PayPal, or a similar service in order to accept credit card payments. This depends on your volume and the overall price, but 3% is a safe number to use in your calculations.
If you are launching your own website to sell your products, you get to avoid those pesky marketplace commissions. But, you still have to do something to get traffic. Maybe the New York Times will write about your product and you will never spend a dime on ads, but for the rest of us, you need to consider where your traffic will come from, and how you will pay for it. You might be paying an SEO firm, using Google Adwords or Facebook Ads. A general rule of thumb is 10% of your revenue may need to be directed to advertising.
6. Outbound Shipping
If you are offering free shipping, be sure this is baked into the price you are charging. Look up sample rates for the package size and weight you will be sending out to make sure it is covered. No sense in making $20 on a sale, just to turn around and give it to UPS.
If you are charging customers for shipping, evaluate what they are paying vs what you are paying to the carrier to ensure that you are covering those expenses.
Keep in mind that rates for the big carriers can vary quite a bit. You pay the highest price at the retail counter, lower prices online. There are some discount programs available through eBay and others to get 10-13% off retail rates, so it pays to do some hunting for the best prices.
Of all the overlooked costs, this one is by far my favorite to ignore. But as much as I like to ignore it, I still have products go bad. I have them get lost, stolen, or damaged in shipping. And I have a few customers just change their minds. I pay attention to the failure rates of my products, and make adjustments as needed. Recently a factory I work with sent me a batch of products that had about a 10% failure rate. I don’t do business with them anymore- I can’t afford to. Even when you have a bad batch, you can usually get something out of them, though not full price. I plan on approximately 3% of my products to fail.
So do you still have profit left?
I like to use a simple sheet to keep track of these costs and make sure I can make the margin I hope to. It is available for download here.
Once all that is said and done, hopefully you are still in the black. If not, keep looking. There is a better product or better pricing out there that will allow you to be competitive AND turn a profit.
Anything I forgot? What else can be overlooked?
This MailChimp shortcode is now deprecated. Please insert the new shortcode to display this form.