Let’s talk about wholesale selling…
When you start an online business selling physical products you’ll run into terms like:
And it can be confusing to keep track of it all and figure out what you need to know to get started. What business model are you supposed to use? It helps to know what everything means that way you feel confident moving forward.
So in this article we’re covering to topic of buying and selling wholesale, what it means and how it’s different from other business models.
Here’s What We’re Covering:
- What is Wholesale?
- Is Amazon a Wholesaler?
- Benefits of Buying and Selling Wholesale
- 3 Different Types of Wholesale
- Difference Between Wholesale and Retail Price
- Differences Between a Wholesaler, Distributor, and Retailer
- Understanding Wholesale Pricing
Let’s start by defining wholesale…
What is Wholesale?
Simply put, wholesale is when a business buys products in large quantities straight from the manufacturer. Afterwards, they store the products and will look to resell the inventory after marking up the price.
Because wholesalers deal in large minimum order quantities (MOQ) and get great deals from the manufacturer. Especially if they have developed a great relationship with their supplier. Wholesalers can either sell to retailers or directly to the customer. But both the retailer and the customer must buy in a decent sized quantity.
A good example of a wholesaler selling directly to the customer is BJ’s Wholesale Club or Costco. Anyone can shop there but you’re only buying in bulk, not one item at a time like a regular supermarket.
Is Amazon a Wholesaler?
Amazon is not a wholesaler, it’s an online retailer. The purpose of Amazon.com and most other retailers is to make a profit on the products they sell with a markup. Retailers will buy a product from a wholesaler for the lowest possible price, add a 50%-150% margin and resell the product in their retail store.
Sellers on Amazon are also retailers that buy from wholesalers or direct from manufacturers, add a margin and resell the products on Amazon. The main difference is that wholesalers usually buy products in bulk while retailers will buy a small quantity to sell.
Are There Benefits of Buying or Selling Wholesale?
Benefits of Buying Wholesale
- Save Money: Buying directly from wholesalers allows you to get great deals on multiple product lines. Wholesalers deal with multiple suppliers for every product but you only need to deal with one wholesaler.
- Smaller Orders: Since wholesalers are placing larger orders with suppliers, then you can buy slightly smaller orders from them at a fair price.
- Better Deals: Wholesalers interact with multiple suppliers and drop the ones that are terrible. By dealing with a wholesaler you’re cutting out the interactions with shady or bad suppliers. Because the wholesaler did that for you already.
Benefits of Selling Wholesale
- Best Deals: By dealing with multiple suppliers and price comparison shopping you can buy products at their cheapest to sell directly to customers at a high margin. And you can double down and sell to retailers as well for a slightly smaller margin.
- Faster to Market: You have a better understanding of what’s in demand because you deal with customers and retailers. Watching these trends means you can launch new products faster because you will have access to the best suppliers. You can quickly upsell existing customers because you’ll see trends before anyone else.
- Expert Knowledge: You know the ins and outs of your industry and which suppliers to trust. So not only can you be a reliable source for customers but you can be a reliable source for other businesses.
3 Different Types of Wholesalers
Most supply chain experts agree there are 3 different types of wholesalers. When you first launch a business you won’t deal with all 3 but at some point the more you grow the more complicated things can get.
Let’s quickly look at each one:
- Merchant Wholesalers – These are individuals or businesses that will handle most of the business themselves. They work directly with suppliers, buy in large quantities, import, store the inventory themselves, price competitively and sell directly to online or brick and mortar retailers. An example would be wholesale car dealerships or Wholesale Amazon retailers.
- Agents, brokers, and commission merchants – This group works on behalf of producers that can’t sell their own products. Because these suppliers need someone to come in and find retailers that can buy the products for them. These wholesalers are more like middle-man sales people for suppliers. These commission merchants will be paid by the supplier a percentage of the sale.
- Manufacturers – You see this a lot from large factories with their own sales forces. Sometimes factories notice that a product they’re making is hot because wholesalers or retailers are reaching out and requesting a lot of units. Instead of relying on their low production margins, some manufacturers are large enough to have a sales team that can sell products directly to the customer online.
Difference Between the Wholesale Price and Retail Price
Wholesale pricing is the negotiated price between a manufacturer and a wholesaler. It’s typically lower than retail price because they’re buying in bulk. A supplier keeps the machines running and labor costs as low as possible so they can offer low prices on large orders and still make money.
Here’s an example:
A manufacturer can make 1,000 spandex pants at $3.00 each. For them to keep running the machine and make 2,000 it wouldn’t cost more than $3.10 each because they have the tools, labor and resources to just keep going. The only new cost would be material since everything else is fixed.
But let’s say someone wants only 3 pairs of pants. It wouldn’t make sense to start the machines, hire people and pay for electricity just to make 3 pairs. It would cost something like $30 each just to make 3 pairs.
Therefore wholesale pricing is: Cost to manufacture + (small) profit margin. A wholesaler can come in and offer $5 per pair and the supplier will make a $2 profit per each pair sold in bulk.
Then the wholesaler turns around and sells the product for $12 to a retailer and everyone is happy. The retail pricing is higher because the order quantity is lower and the wholesaler needs to make a profit.
Differences Between a Distributor, Wholesaler and Retailer
The supply chain for any product to reach the end customer can be long. There are plenty of hands touching it along the way with profit made in each step. But remember, if you’re a small online retailer you wouldn’t need this many middlemen. It’s larger businesses that need to stay efficient and having more people involved makes sense.
Without everyone in this chain it wouldn’t be possible to efficiently move products from one place to another and offer it at an affordable price. Let’s go over the main players in the supply chain below:
- Distributors work directly with manufacturers and in a particular niche. They’re the ones that become the point person between a factory and a wholesaler. Without the distributor a factory wouldn’t be able to maintain relationships or perform outreach and find productive wholesalers. They hold the largest amount of inventory and are the main point of contact with suppliers.
- Wholesalers are the ones that can buy in bulk directly from multiple distributors or suppliers. They’re able to sell competing goods to multiple retail stores. A wholesaler will warehouse products shorter than 6 months because they typically have buyers interested before going out and buying from distributors. Without wholesalers, there wouldn’t be enough distributors to deal with all the retailers that need products.
- Retailers place the smallest orders because they’re selling directly to customers in one off purchases. The highest markup is between retailers and their customers because there’s typically more costs associated with running retail stores than other business models. Retailers are always price shopping and looking to make the most margin since they’re taking the most risk.
Wrapping This Up…
Once you start this learning process all of the terms will begin to make more sense. Remember the goal here, to start an online business. Everything else is just noise meant to distract you.
You can choose wholesale, private label or retail and find success. What’s important is that you take action and find the answers that you need. Wholesaling is a great way to find great deals on products and there’s a huge resale market available too.
Now that you know about wholesaling, take the next step and start learning more about online retail!