What Is Wholesale?
If you have an ecommerce business, you’ve probably heard of the term “wholesale”. Most equate wholesale to buying in bulk. That’s true at some level. But there’s more to it when you consider the chain of supply and sale from suppliers to consumers.
Here’s What We’ll Cover:
What Is Wholesale?
Wholesale is when one business purchases a large amount of stock from a supplier with the intent of reselling it.
There are two ways that the business may resell. They may accept the product as is and sell it directly to consumers for a premium price.
For example, a stationery store may stock many different stationery items. They purchase a large amount and offer a smaller quantity in their store at a higher price. That’s called a retail markup - we’ll come back to that.
Alternatively, a business can use the product and transform it into another product for sale to consumers.
For example, a bread maker buys flour wholesale to create bread. They sell the bread to the consumer. Not the original flour components. This is still a wholesale deal.
What Are The Different Types of Wholesale?
This is the most common type of wholesale trade in retail today. Merchant wholesalers don’t manufacture their own products or transform the wholesale goods they purchase in any way. They merely package them and resell them at a higher price to smaller retail outlets. They have a very detailed knowledge of the products they stock and trends within the industry. They tend to have warehouses to store the goods over time.
Sales and Distribution
A supplier might decide that they’ll make direct deals with retail companies or manufacturers to sell their goods. They’ll use a distributor to negotiate the best wholesale price. This cuts out the merchant wholesaler. Instead, it allows manufacturers to create individual alliances with potential buyers. Generally, this is a more costly option than selling bulk goods to merchant wholesalers. But the returns can be higher with individual deals. It depends on the nature of the product the supplier creates.
Yes, brokers are a kind of wholesaler! The big difference is they don’t purchase or own the services they sell themselves. They’re an intermediary to an end consumer. The reason it still falls under the wholesaling umbrella is that they have access to a large volume of products that they sell at a premium price.
Distributor Vs Wholesaler Vs Retailer
Now we’re going to get a little more detailed on how the supply chain works in wholesale trade. Stay with us!
First, let’s define the initial component of the wholesale chain. It will make a lot more sense starting from the very beginning. The manufacturer is the entity that creates the item or provides the goods for resale. It could be a finished product like a notebook. Or it could be a component, like flour for bread. The manufacturer sells the items slightly above the product cost.
A distributor sells the manufacturer’s goods to wholesalers or retailers. They tend to have large warehouses and keep stock for a long time. They often have restrictions on the wholesale deals they can do. For example, one flour maker may have an exclusivity clause with the distributor so that they can’t distribute competitors.
This is the middleman between the distributor and the retailer. The wholesaler buys the product in bulk and sells it to a retailer at wholesale price. They have smaller storage units than distributors.
The final retailer will purchase a smaller amount of the product from the wholesaler and sell it at retail price. They are for-profit businesses and can often set their own markup (depending on what the product is).
What Are The Benefits of Wholesale Trading?
- You save money purchasing products in bulk quantities from wholesalers.
- You can build authority in a certain industry by having supreme knowledge over a wide range of products.
- If you’re in the wholesaling system, you can easily cross-sell and upsell with your industry connections.
- Industry connections are easy to foster with wholesale relationships.
- You have a bird’s eye view of the selling trends in the wholesale market. You can see what is selling and what isn’t. That’s invaluable information within your industry.
A Guide To Wholesale Pricing
Finally, we get to the good stuff! Let’s talk about the monetary aspect of wholesaling. It’s quite an elegant system.
Wholesale pricing is the cost of a product directly from the wholesaler. This is not the intended final retail price. Wholesale prices are purposefully cheaper because of the bulk order volume. Sometimes the more the retailer buys, the larger the discount.
Retail pricing is the end price that consumers will pay to purchase and use the product. They cannot resell it from there (not as a new product anyway).
This is where you make your money if you are an ecommerce business.
Let’s take the example of an online stationery store. You purchase a bulk order of 500 blue notebooks for $2000. That’s $4 each. Then you sell the notebooks for $6 each. You’ve made a $2 profit margin on each notebook. If you sell them all, that’s an extra $1000 in your pocket.
This is a very crude example. Remember that as a retailer you have web-hosting, marketing and storage costs. You need to make sure that your expenses are accounted for when setting your final retail markup on a wholesale item.
Retail businesses rely on wholesale suppliers to replenish the product supply chain. We hope this article helped you understand how the wholesale market works to get product to consumers.
For more guides like this, head to our resource hub.