What happens when you combine the retail arbitrage and wholesale models? What if you find a one-time deal on a bulk order of products without needing a middle-man? That’s liquidation product sourcing — the Schadenfreude of business models.
Liquidation is similar to the wholesale model in that you buy in bulk for a discount. The main difference is that liquidation products aren’t always intended to be sold that way. Most of the time, liquidation stock becomes available because the company went bankrupt, bought too much, or simply couldn’t sell it. To sum it up, wholesale products were intended to be sold in bulk, while liquidation products were not.
So how do you manage a successful liquidation product sourcing model? Where do you find such deals and what other factors do you need to pay attention to? We explain everything you need to know about liquidation product sourcing below.
What is Liquidation?
In the broadest sense, liquidation refers to all products that were originally intended for retail sales, but for whatever reason didn’t make the cut for consumers. The significant discount reflects this, and often liquidation is a “last resort” strategy to relieve inventory for some profit.
While you commonly see defective or undesirable products sold through liquidation, there are also perfectly fine products as well. Sometimes products end up in a liquidation sale because of unfortunate circumstances rather than their own shortcomings; for example, the company could have been mismanaged into bankruptcy, or they simply miscalculated how much stock they actually needed and are selling off the overflow.
Regardless of why they’re being liquidated, these products are often offered at a tantalizing discount, again likely as a last ditch effort to profit off them. That makes liquidation one of the most lucrative methods of product sourcing, as long as you can find enough stock to sustain your store’s demand.
One of the biggest drawbacks to liquidation, though, is the one you’d expect — why did these products fail to sell in the first place? If you can find a supplier who’s going out of business, that’s usually enough of a reason to ease your concern, but you always need to make sure the product’s condition is good enough for you to be able to sell them.
On top of that, there are also some legal tax concerns. Because these products were originally intended for retail sales, you may be subject to a sales tax, even if it is a B2B transaction. In some states, you’ll need a resale certificate, which we discuss below.
Moreover, if you intend to sell those products on Amazon, there’s even more red tape. Amazon tries its best to restrict major brands and prevent counterfeiting through “brand gating.” As an Amazon spokesperson told The Seattle Times, “We want our customers to be able to shop with confidence on Amazon. We consider several factors when determining qualifications and criteria to sell certain products. For certain products and categories, Amazon requires additional performance checks, other qualification requirements, and fees.”
Whether or not you can sell liquidated products on Amazon depends on how big the brand is and why they were liquidated, but it’s worth keeping in mind when determining if that liquidation deal is really as good as it sounds.
The Best Product Sourcing Strategies for Liquidation
Want to source your products from liquidation sales? Follow this advice for the best results.
1. Resale Certificates
Let’s start with legal compliance for sellers in the United States — your liquidation model won’t go far if the sales tax undermines the discount. The best way to circumvent this issue is to acquire the appropriate forms and certifications beforehand, usually a resale certificate.
A resale certificate authorizes you to sell liquidated products — because these products were originally intended for retail, they were subject to sales tax, so acquiring them through liquidation necessitates some extra legal steps. Otherwise, it’s just retail arbitrage in bulk.
Each state has their own requirements and criteria for acquiring a resale certificate. You can see a breakdown of how to obtain one in each state here, along with the appropriate links to applying online. (The page is several years old, so some of the links may be dead.)
2. Develop Personal Relationships with Sales Managers
So how do you access a juicy liquidation deal before anyone else? Liquidation resellers still find the traditional methods best: personal relationships with sales managers or other key figures in buying and selling large stock.
Having a network of friends in high places can get you advanced notice of liquidation deals, giving you a head start over your competitors. Working closely with your suppliers can cement a strong relationship, so if they need to unload a large quantity of goods for whatever reason, they’ll think of you first.
If diplomacy and striking deals are one of your strengths, you may find lots of success with the liquidation model. Just keep in mind that these kinds of relationships take time to develop, so don’t expect to break into liquidation overnight.
3. Help Them Come to You
Not all merchants have access to sales managers at large companies, especially when the merchants are just starting out. Rather than trying in vain to reach out to these people, you can take an opposite approach and make it easier for them to come to you.
Necessary for attracting customers as well as suppliers, making your brand searchable is a challenge that extends beyond product sourcing. However, the same strategies can help both goals: improve your SEO, extend your social media outreach, strengthen your brand’s reputation. A content strategy with blogs or social media posts can do wonders for getting your name out there, and if consumers can find you, so can companies looking to sell off their inventory.
4. Liquidation Companies
Just as dropshippers have dropshipping directories and wholesale buyers have wholesale suppliers, liquidation resellers can enlist the help of a middle-man to connect them to the best deals. If you’re struggling to meet liquidation suppliers on your own, here are three of the most trusted liquidation companies to aid your search.
- 888 Lots — One of the most trusted names in liquidation. You can also try their equally reputable subsidiary, Miami Lots.
- Source — With a modern interface and connections across a diverse array of industries, Source is worth a browse if you’re new to liquidation.
- BoxFox — A popular platform for both liquidation buyers and sellers.
Finding liquidation sales puts extra emphasis on timing. Just like retail arbitrage, you have to keep your eyes peeled for the latest deals and close them before your competitors can make a counter-offer. As such, the liquidation model requires a more hands-on management style, but the size of the discount is more than enough to justify the high-paced ups and downs.
Interested in learning more about product sourcing? Check out our guide outlining the best sourcing strategies for every ecommerce business model.