What is wholesale?
Wholesale refers to types of businesses that purchase products in bulk from manufacturers and resell them to retailers for a slightly higher price. In doing so, they act as the middleman between manufacturers and retailers.
Wholesale companies can streamline this process by creating an eCommerce website to sell their goods online. Whatever industry they’re in, wholesalers can use their websites to boost credibility, establish a strong first impression and create brand awareness.
How does wholesale work?
Wholesalers get a better deal from manufacturers than retailers because they purchase a very large number of goods at one time. For example, a wholesaler may buy 20,000 backpacks for $5 each and sell them to 200 different retailers. The retailer may then purchase them from the wholesaler for a higher price - let’s say $8. This is still cheaper than if the retailer had bought from the manufacturer directly. Then, the retailer could resell each backpack for $15 each, earning $7 in profit per item. It’s a win-win situation for everyone.
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Pros and cons of wholesale
Here are some of the advantages and disadvantages of wholesale:
Lower cost of doing business
By purchasing in bulk from wholesalers, retailers pay less than they would if they had to buy from manufacturers directly. If the retailer purchases the items at a low price, they may also be able to resell them for less than their competition, giving them a competitive advantage.
Better financial predictability
Wholesalers can create a minimum for retailers, which provides them the ability to better predict important benchmarks such as sales and revenue. Additionally, once wholesalers have established stable relationships with retailers, their sales can grow at a faster rate and become a trusted source of goods.
Trust and reliability leads to higher profits
Reliability and dependability help wholesalers gain the trust of both retailers and manufacturers. In turn, this leads to more business. The more trustworthy a wholesaler, the more opportunities to increase the number of products they sell and make connections with other markets. And when wholesalers have more customers, they can sell their products for less than their competition - helping retailers earn a profit.
Sharing of marketing responsibilities
Retailers who purchase from wholesalers need to market their brands and products the way any business would, picking up some of the marketing efforts. The more the retailer sells, the more the wholesaler sells. This can reduce some of the marketing costs for wholesalers and is another reason for them to maintain positive relationships with retailers.
The supply chain is complicated
The supply chain is not so cut and dry. Depending on the industry, wholesalers may have to compete with manufacturers in other countries who sell their products at a cheaper price. Other wholesalers may need to dismantle products into multiple parts or even produce goods before they’re sold. In some cases, wholesalers may even sell to other wholesalers.
Large capital investment
To get started in the wholesale industry, you need to make a large initial investment to have enough product in stock to actually start selling. This can post a large financial risk if you don’t have a solid business plan and your products don’t sell.
Steep overhead costs
Unlike retailers, wholesale distributors must have a large inventory of products at all times. This means they need to invest in storage space and be able to precisely predict orders ahead of time. In cases that products don’t sell, manufacturers typically will not take them back, which could result in financial loss.
Wholesale vs. dropshipping
Dropshipping refers to a specific eCommerce business model in which retailers do not maintain any inventory. This type of business requires very little startup capital and can be highly beneficial for specific online businesses. When a customer places an order, the wholesaler fulfills it directly and ships the items straight to the buyer.