Now let’s get to the part that’s usually of the greatest interest for most Amazon sellers: How much will you have to pay for the product sourcing services?
There are three way sourcing companies usually get paid in. Let see which ones those are and what pros & cons they have:
Sourcing agents often work on a commission basis.
It’s not possible to give an exact percentage figure here because it depends on the order quantity, order frequency and order value. Usually the commission percentage is between 2 and 10 percent, often around 6%. The smaller your order, the higher will be the commission fee.
A simple example:
If the order value is only $1,000, you will pay about $100 (10%) for the sourcing service. If your order value is $50,000, you usually won’t have to pay $5,000 (10%), but around $2,500 (5%) or less.
Another common structure is that the commission for the first order will be high and for repeating orders lower.
“When’s the payment due?”
The sourcing company does all the work in finding a suitable supplier for you. As soon as you’re ready to place an order, the commission is agreed. You will pay the amount to the sourcing company as soon as the goods are shipped. The problem here is that the sourcing agent has no interest in finding a low priced supplier.
Simply put: the more you pay, the more they make.
The higher the order value, the more the sourcing agent earns from the deal. So why should they suggest a factory that can make your product for $5,000 if they can suggest one that charges $10,000 where they earn a commission that’s way higher??
In this model, the sourcing agent is paid according to his working hours.
The advantage is that no matter how much the deal with the supplier is worth, you will only pay the fixed hourly rate. However, in this case your sourcing specialist has every reason to take his time.
For research work that they can complete in 8 hours, they may then charge 15 hours because there’s no way that you can track how long they really needed.
If their hourly rate is $20 you may end up paying $300 instead of $160. Thus, the two major drawbacks for this pricing model is that you might pay more than the work is worth and, that you will receive the results later than necessary.
With this model, you pay a fixed amount that is agreed at the beginning of the project. The sourcing company starts the research right away and you will receive a list of suitable suppliers and an evaluation of which one is best for you.
There will be no further costs.
The disadvantage here is that you will pay in any case – whether you choose one of the suppliers the agent researched for you or not. The sourcing agent may thus not put that much effort into his research because they will get paid either way
Some China procurement agencies would charge certain percents of the total buying amount as service fee. However, be careful of those sourcing agents in China that offer free service or charge as low as 1-3%. If something seems too good to be true, it is. While most businesses are making 20-30% of profit margin, how can a business survive with such tiny fee? They would be taking from somewhere else like kickbacks from suppliers.
Many foreign sourcing agents in China or quality inspection companies in China would accuse that only Chinese buying agents would get kickbacks from suppliers even some would get as high as 10-30%. That’s not true. Lots of foreign buying agents in China, buying agents in Hongkong have been tempted to do the same too. That’s the business environment in China: unfair competition.