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Starting an Ecommerce Business? Here’s What You Should Know About Manufactures & Other Key Terms

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Last Updated: Oct 17, 2019

Starting an eCommerce business is a major undertaking. Although the eCommerce industry is booming, competition is more fierce than ever. And the frightening fact is, the majority of these companies will fail within just five years. Spearheading new product launches is even riskier.

Let’s say you’ve conducted a Google search for the best electronic circuit design software and built a powerful PCB for an innovative piece of technology. Naturally, you’ll take the next step towards getting a prototype for product validity.

But after you’ve designed your own product and finally have a prototype, what’s the next move?

One of the biggest issues eCommerce businesses have is the inability to understand what services are best for them, and what those services mean.

Are you looking for a wholesaler, a manufacturer, or a distributor?

When you don’t understand the various services under the commerce umbrella of terms, you’ll be less likely to succeed.

Here’s how each service stacks up against one another:

Manufacturer

A manufacturer is a company that produces products for sale. Every tangible product has to be made somewhere, and the first step in your supply chain is your manufacturer. However, eCommerce business owners can quickly become confused as to how manufacturing companies work, and what exactly manufacturing entails.

Any scalable eCommerce store wants to have solid profit margins. This is the reason why so many businesses look to manufacture overseas, despite the logistical complications. Real manufacturers that actually produce their own products in-house are more difficult to come by these days. Always ask a manufacturer for their license to determine where they really reside in the supply chain.

Trading Companies

Trading companies fall under the manufacturing umbrella. A trading company adds a markup to the margin to make money off the products produced. Although there are plenty of cases where trading companies have great relationships with the manufacturers they work with, companies that are well-versed with purchasing usually go directly to the manufacturer themselves.

However, there are some instances where it might be smarter to work with a trading company, such as if you have had a low minimum order quantity. Many trading companies have lower ordering requirements, and this could make it easier to get the attention you need—especially if the manufacturers you’ve been eyeing work with large purchase orders and you’re concerned about getting lost in the shuffle.

However, you should always proceed with caution when working with trading companies. Some trading companies disguise themselves as manufacturers of their own products, so it becomes impossible to know who’s the real company behind your manufacturing.

Furthermore, these companies don’t always have a great reputation for communication, and their contracts include clauses where they are not held responsible for defective products.

Wholesalers

Wholesalers take a substantial cut off your profit because they purchase the product in bulk and a profit to the top. Generally speaking, wholesalers purchase the product and sell to resellers, who then distribute to the public. Anytime you see a markup on a product, chances are a wholesaler was involved.

Wholesalers and sourcing agents that work for wholesalers will always diminish the amount of money you’ll be taking home at the end of the day. If you’re new to the market and trying to run a lean company, wholesalers probably aren’t the best option for you because you’ll need as much margin as you can get to grow.

Distributors

It’s important not to confuse wholesalers with distributors, who are product resellers. Distributors supply goods and services to customers and businesses. Wholesalers can have independent contracts with manufacturers, while distributors cannot.

To better understand these key differences, it helps to analyze the three main levels of distribution channels. A wholesaler specifically targets retailers, while a distributor targets wholesalers, retailers, AND direct consumers.

And lastly, distributors help promote products to boost sales, while wholesalers stay out of promotional activities.

Vendor

In manufacturing, you’ll hear the word vendor often. A vendor supplies goods to a company. While a manufacturer develops the product, the vendor is the final step in the supply chain, because they distribute the goods to the consumer.

Vendors purchase goods from distributors and manufacturers to sell them to the final customer, and because of this, they are more customer-oriented and have higher levels of interaction with their clients.

To better understand how these terms connect and align with one another, it helps to look at the traditional supply chain, which is Supplier > Manufacturer > Distributor > Vendor > Customer.

The more you understand about different facets of the supply chain, the better off you’ll be when you start to search for manufacturers of your own product.

Manufacturing is highly complex, even for larger corporations, and understanding the lay of the land ensures you don’t make business-crumbling mistakes.

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