What Is Wholesale? The Complete Beginner’s Guide To Wholesaling
There’s a rising trend in eCommerce, called wholesaling, that’s getting a lot of attention. Are you tempted to jump on board? Before you leap, first consider whether wholesaling is the right approach for your eCommerce business. Keep reading for an in-depth look into wholesaling best practices, pitfalls, and more, so you can decide if this is the right direction for you and your small business.
Table of Contents
What Is Wholesale?
Let’s start with a simple question: What is the difference between wholesale and retail?
Retail is the most common eCommerce business model. As a retailer, you make or obtain products and sell them directly to consumers, at a price that’s high enough to ensure you make a profit and stay in business.
When you’re a wholesaler, your business obtains discount pricing on a large quantity of certain products by purchasing directly from the manufacturer or an importer. You may focus your efforts on one particular product or on a whole line of related products. As the wholesaler, you store the products while you work to sell them to retailers, who then market and sell those products to their own individual buyers.
That sounds simple enough. It’s not a particularly complicated business model. However, there are some tricks that can help you succeed and traps you’ll want to avoid. We’ll cover those below, so keep reading.
What Is Wholesale Pricing?
Wholesale vendors purchase products directly from the manufacturer or an importer and then resell them to their own customers, who in turn sell them to individual buyers. As a wholesaler, because you are buying in large quantities (or buying in bulk), you receive a price break or discount on your purchase. The profit lies in the difference between the wholesale price and what you can sell products for.
That’s all there is to it!
But what is the wholesale price? Compare it to something you probably already know: the terms list price or retail price. Both refer to the amount that a retail vendor charges to their customers, the end-users.
Retail price is higher than the wholesale or bulk price you can expect to pay when you buy in large quantities directly from a product’s manufacturer. Wholesale price is the amount a business charges to another business, with the understanding that the purchaser (the wholesaler) intends to resell the products to other sellers. The wholesaler acts as a middleman between the manufacturer and the retailer. The manufacturing business is able to accept a lower per-item price, because the volume of sales makes up for the loss of revenue and because there are little to no marketing and storage costs required on the manufacturer’s end.
There’s no set formula for arriving at a wholesale price in relation to the retail price, though there usually are industry-standard ranges. Some manufacturers offer a set percentage off their standard list prices; others use a sliding scale with a minimum order level or offer lower rates to proven partners. As a wholesaler, you may be able to negotiate a larger discount for yourself, especially if you can guarantee a certain volume of ongoing sales.
It certainly never hurts to ask, anyway!
How Wholesale Works
Wholesaling is very much like a typical sales model, with some key differences. For one thing, instead of a two-way sales process, where products move from seller to buyer, wholesaling brings in a third party — the wholesaler — who acts as both customer and seller. The wholesaler first finds a wholesale vendor or wholesale supplier, buys in bulk, then turns around and resells the wholesale items to retail vendors.
Let’s break that down into steps:
- Wholesaler contacts a wholesale supplier.
- Wholesaler and wholesale supplier agree on a discounted price for the merchandise.
- Wholesale supplier ships merchandise to wholesaler.
- Wholesaler stores merchandise, while working to attract retail buyers.
- Retail buyers agree to purchase merchandise from wholesaler at an adjusted price that ensures a profit for wholesaler.
- Wholesaler ships products to retailer and collects payment. This normally ends the wholesale transaction.
After receiving shipment of merchandise from the wholesaler, the retailer markets products to end-users. The wholesaler may stay involved if there are problems with shipments or if items need to be returned by the retailer — or if the retailer wants to order more merchandise. Those situations will be included in negotiations between the wholesaler and the retailer.
The Three Types Of Wholesalers
Now that you have a basic understanding of how wholesaling works, it’s time to break down the model even further. There are three types of wholesalers, each with a different approach. Read on to see which type of wholesaling might work best for you.
Because this is the most common type of wholesaling arrangement, it’s worth going over it one more time. When you are a wholesaler, you act as a “middleman” between a product’s manufacturer and the retail vendors who offer the product for sale to customers. You purchase the products directly from the manufacturer at a discount (based on the volume of your order), and then you resell the items to retail vendors at a markup or higher price. Typically, those retail vendors will add a percentage to their price, so everyone makes a profit. You do not have a direct relationship with the retailer’s customers, the end-users.
This is a good business model for those who have room to store products and the working capital to pay the discounted rate to the manufacturer while waiting for payment from retail vendors. Your profit lies in the difference between the amount you pay for merchandise and the amount you charge the retail vendors you sell to. Although you can realize a nice sum, this type of wholesaling is not a good fit for small business owners who are working on a shoestring budget or who want to make a quick profit.
Is there a way to make wholesaling work without the financial risk of holding on to merchandise and paying for it before you’ve resold it? Yes, there is, and although it’s less common it’s still a legitimate business model. You may be able to act as an agent or broker. In that case, you work still as a “middleman” between the manufacturer and the retail vendor, but you don’t necessarily handle the products or take or receive payment. Typically, an agent or broker is paid a commission or fee instead. An example from the brick-and-mortar world would be a real estate agent, who connects the seller and the buyer and arranges the sale without ever taking possession of the property.
In the world of eCommerce, you still can act as an intermediary between sellers and buyers, all without seeing or touching any products. That means you won’t have to pay any shipping or storage costs. This type of business would be a good choice for a business person who has extensive contacts and deep knowledge of a specialty industry. Top categories currently include food and grocery products, automotive parts, electrical equipment, medical supplies, plumbing equipment, construction materials, and home/office furniture.
If that sounds intriguing, pick your niche and start looking for products and manufacturers that could use your help connecting with buyers.
There’s a third type of eCommerce wholesale activity, and it’s a model that takes you out of the middle of the sales process. If you are a manufacturer yourself, you can offer large quantities of your products at a discounted price to other small business owners who are interested in ordering in bulk and receiving wholesale pricing.
Why would you want to work with wholesalers to distribute your products? Marketing, shipping, billing, customer service, processing returns — those are all activities that can take up a lot of your time. When you work with a wholesale customer, you eliminate most of that work and pass it off, in exchange for a slightly lower share of the profits. For many business owners, that can seem like a good trade-off, especially since you’ll be selling in larger quantities at one time.
The Pros & Cons Of Wholesale
Many small businesses find success as wholesalers. Doing your research is the best way to determine whether this business model is a good fit for your small business. And you should be aware of some of the risks you may encounter as well as the rewards you’re likely to reap. Take a look at these pros and cons.
First, the upside:
- Control Your Profit Margins: Yes, there are industry standards. But if you spot the right opportunity and have good negotiating skills, you may be able to follow the classic business advice to “buy low, sell high.”
- Pick & Choose: When you create products, you naturally invest a lot into the process. That’s not necessarily true for wholesale items. You’ll have a little more leeway to pick and choose the items you purchase and offer to your retail customers. If a product line doesn’t sell the way you hoped it would, it’s easier to walk away as a wholesaler, rather than as a creator who has put a lot of time money, and energy into creating a product from scratch.
- Tap Trends: Does staying on top of “the next big thing” sound good to you? If you enjoy watching developing trends and think you could profit from them, you may be able to lock in suppliers and have retailers begging for the products you’ve stored.
- Bulk Up: When you’re a wholesaler, you don’t have to worry about chasing down small buyers to close out your stock. You’ll be buying in bulk from manufacturers, and you’ll also be selling in bulk to a select few retailers. So you’ll spend less time arranging deals and more time looking for the next product you want to add to your line.
What about the downside? Here are some risks to watch out for:
- Cash Upfront: Are you prepared to pay manufacturers for merchandise before you have orders from retailers confirmed, let alone paid for? If you don’t have the cash to pay your bills before the receivables start rolling in, you’d better be prepared to get really creative in negotiating terms with your suppliers.
- Storage & Logistics: When it comes to wholesaling, you’re buying in bulk. So where are you going to store that bulk, while you draw in buyers to take it off your hands? If you’re dealing in small items, it may be possible to store them in your existing office or storage space. When you start to deal with larger, bulky products, you’ll need a bigger space to store them. You’ll likely have to pay for that space, and you’ll need to work out the details of shipping and receiving, and then shipping orders out to your retail customers.
- Supply Chain: You may not be the products’ manufacturer, but you’re the face of the product to your retail buyers. And if you end up providing a product that your customers really like, are you confident that you can secure a steady supply to keep them happy? Make sure that you’ve got a solid agreement with your wholesale supplier so that you’ll be able to restock your inventory and keep your retail customers happy.
- Timing Troubles: Some types of products have a short selling life. Think of holiday wrapping paper as a simple example. You’ll need to understand the retail cycle if you want to succeed. You can’t expect to approach retailers in December and ask them to stock your holiday wrapping paper. You would have missed your sales opportunity by that point. Of course, there’s an opportunity here too, if you’re able to tap it. You can buy closeout lots at the end of the retail cycle, at a bargain-basement price, and hold them in inventory until it’s time for merchants to start thinking again about stocking up. Of course, if you end up buying too many seasonal items, you could be sitting on them for a very long time.
Wholesale VS Retail
When you’re a wholesaler, you stand in the middle of two types of business-to-business transactions. On one side, you have the product’s manufacturer, from whom you buy in bulk, at a significant discount. On the other side, your customers: retail sellers who buy from you and present the products they get from you to their own customers.
As the wholesaler, you’re dealing with a very limited number of people on both ends of the transaction. You may work with several wholesale suppliers who offer a range of products, and you’ll sell those products to just a few retail customers.
When you’re a retail seller, you can purchase a similar number of products, depending on what kind of store you’ve set up. The biggest difference between wholesale and retail is the number of customers you’ll engage with. Rather than selling like a wholesaler does to a few customers, who each place large orders, a retailer sells to a great many customers, hopefully, who all buy in small quantities for their individual use or as gifts.
Retailers also need to provide service to each of those customers. They are responsible for safe, speedy shipping and for handling returns from their customers. Of course, a wholesaler needs to do those things as well, but on a smaller scale because of the number and type of customer they’re working with.
|Orders products direct from manufacturer or importer||Buys from wholesaler|
|Sells bulk orders to retailers||Sells small quantities to customers|
|Holds large amount of inventory until retailers place order||Holds smaller amount of product|
|Makes large sales to a small number of retail customers||Usually sells in small quantities to many customers|
|Generally cannot return unsold items||May be able to return unsold items|
|Makes sure the few retailers are satisfied||Provides customer service to numerous end-users|
|No contact with end-users||Visible “face” associated with product by end-users|
Wholesale VS Dropshipping
What about dropshipping? Is that a kind of wholesale business, too?
Although dropshipping has some things in common with wholesaling, it’s a different kind of business altogether. Like wholesalers, dropshippers take part in a three-party sale. Here are some important differences:
- Dropshippers order in small quantities as their customers place orders with them. They do not buy in bulk.
- Dropshippers do not handle or store products. Their dropshipping suppliers send products directly to customers from their own facilities.
- Dropshippers are not involved in shipping. They process orders from customers and pass them to the manufacturer, and the manufacturer packages and ships items as they’re ordered.
- Dropshippers don’t pay upfront. When a customer places an order, the customer pays the dropshipper, and the dropshipper pays the supplier only after customers order products.
As you can see, dropshipping is a very different type of business. If you’re interested in learning more, you can find plenty of information about dropshipping online.
|Orders and sells in quantity||Orders and sells in single or small quantity|
|Buys from manufacturer, sells to retail sellers||Passes orders from individual customers to manufacturers|
|Warehouses inventory||Never sees or handles the products customers order|
|Intermediary between manufacturer and retail seller||Intermediary between the manufacturer and end-user|
|Orders from manufacturer and stores inventory||Orders from manufacturer as end users place orders|
|Ships orders to retail customers||Do not deal with shipping at all|
Is Wholesale Right For You?
The best thing about wholesaling is that it’s not incompatible with other business models. So, if you’re already doing business online, you can give wholesaling a try without closing up your current online store. If you’ve found a product you can buy in bulk, get busy finding a wholesale supplier and some retail customers, and give it a try.
Or, if you’re looking at wholesaling as your entrance into eCommerce, research products and suppliers until you find something you think you can sell for a price higher than you’ll end up paying for it. Think about your distribution network before you place a bulk order you’ll have to store while you look for customers. Consider starting with a well-known wholesale partner, like Oberlo, Tundra, or AliExpress. Although you’ll face many competitors buying from those same sites, you can get a feel for wholesaling and decide if it’s an area you want to expand in.
Don’t expect to see overnight success or instant riches when you start your wholesaling adventure. However, as you build your network with partners on both ends of the transaction, and as you develop a niche with eager buyers, with thoughtful planning and careful risk-taking, you too can become a wholesale success story.