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What is wholesale?
Wholesale is the process of selling goods in large quantities to be retailed by others. Unlike retail, where products are sold directly to the consumer, wholesale involves selling merchandise to a business, which then sells the goods to the end consumer at a marked-up price.
This enables the efficient distribution of goods from manufacturers to retailers. By buying in large quantities directly from manufacturers, wholesalers can take advantage of economies of scale, which allows them to sell these goods to retailers at lower prices.
What is a wholesaler?
A wholesaler is a company or individual that purchases products in bulk from multiple suppliers and sells these products to other businesses for resale, acting as an intermediary between manufacturers and retailers.
Different types of wholesalers exist, each catering to the specific needs and requirements of various manufacturers and retailers:
Types of wholesalers
This is the most common type of wholesaler. Merchant wholesalers do not produce goods themselves; instead, they buy products in bulk from a manufacturer or supplier, and then re-sell these goods in smaller quantities to retailers. They tend to specialize in certain types of products, allowing them to offer expert knowledge and a wide range of items within a specific industry.
Some manufacturers act as wholesalers by selling their products directly to retailers or to the end consumers. They produce their own products for resale, which allows them to have a deep understanding of their product line and offer comprehensive product information to their customers.
Distributors acquire products in especially large volumes but do not manufacture or produce the products themselves. They often specialize in specific industries and provide a range of services to manufacturers and retailers within that industry.
Brokers and agents
Brokers and agents primarily set up deals between wholesalers and businesses. They earn a commission for facilitating transactions, acting as a liaison between manufacturers or suppliers and the businesses that want to sell their products. They are often hired by manufacturers or suppliers who lack the resources to maintain their own sales teams.
In the dropshipping business model, wholesalers are responsible for storing, managing, and shipping products on behalf of retailers after an order has been placed in their online store. This process is advantageous for retailers because it eliminates the need to maintain large inventories or handle shipping logistics themselves, allowing them to offer a wide range of products without significant overhead costs.
How does the wholesale process work?
Wholesalers, if they don't manufacture products themselves, purchase goods from manufacturers in bulk at a discounted rate. This bulk purchasing allows them to sell to retailers at a markup, but still at a price that provides a bulk discount to the retailer. The retailer then also applies a markup to the goods when selling to the end consumer.
This process allows manufacturers to sell large quantities of goods quickly, enables wholesalers to make a profit by selling these goods to retailers, and allows retailers to offer a wide range of products to consumers without having to deal with multiple manufacturers.
When setting their own prices, retailers must take into account the wholesale price to ensure they make a profit when selling to the end consumer.
Wholesale vs retail price
The wholesale price is the cost charged by the wholesaler to the retailer. This price is typically lower than the retail price because wholesalers buy goods in large quantities directly from manufacturers, allowing them to take advantage of economies of scale.
The retail price is the cost charged by the retailer to the end consumer. This price is higher than the wholesale price because it includes the retailer's costs such as rent, staff salaries, and utilities, as well as a profit margin.
How do retailers price wholesale products?
Retailers use various pricing strategies to determine the price of a product. These strategies are part of a broader financial plan, designed to cover costs and generate a profit while remaining attractive to customers.
One of the most common and straightforward strategies used is keystone pricing. In keystone pricing, retail prices are set at double the cost of the wholesale price, effectively a 100(percent) markup.
For example, if the wholesale price of a product is (dollars)10, then the retail price would be (dollars)20. This method ensures prices are kept reasonable in most cases and ensures a healthy profit for the retailer.
However, keystone pricing may not be optimal for all businesses. Retail prices are ultimately determined by a wide range of factors, such as the wholesale cost, marketing expenses, product type, shipping costs, industry standards, supply chain issues, and more.
What are the pros and cons of selling wholesale?
Selling wholesale can be a lucrative business model, but like any business, it comes with its own set of advantages and challenges. Understanding these can help businesses make informed decisions and develop strategies that maximize benefits while mitigating potential drawbacks.
Pros of selling wholesale
- High brand visibility: Selling wholesale can significantly increase a brand's visibility as products are distributed to various retailers and reach a wider audience.
- Scaling: Wholesale allows businesses to sell their products in large quantities, making it easier to scale operations and increase revenue.
- Stable client relationships: Wholesalers often establish long-term relationships with retailers, providing a stable and predictable source of revenue.
- Bulk sales: Selling in bulk can lead to higher total sales and can be more efficient than selling individual items to consumers.
- Market expansion: Wholesalers can help manufacturers reach new markets that would be difficult to access otherwise.
Cons of selling wholesale
- Thin profit margins: Wholesalers often operate on thin profit margins, especially when compared to retail.
- Increased competition: The wholesale market can be highly competitive, with many businesses offering similar products.
- Inventory management: Managing large quantities of inventory can be challenging and requires significant storage space.
- Dependence on retailers: Wholesalers are dependent on retailers for their sales, and any issues at the retail level can directly impact wholesalers.
- Payment terms: Wholesalers often have to offer flexible payment terms to retailers, which can lead to cash flow issues.