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September 8, 2020
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Wholesale is the practice of selling products from manufacturers to retailers. Rather than selling items in smaller quantities, wholesalers take orders on large quantities of goods. This means that the prices are much lower per individual product.
A wholesaler is a middleman between the factory that makes the products and the retail business that sells the products to consumers.
Sometimes, wholesalers buy their stock from other resellers. It’s rare that a wholesaler would also be the manufacturer of the products they sell.
Wholesale business is primarily business done between businesses (B2B), rather than between businesses and consumers (B2C).
Very few retailers both produce and sell their products to individuals directly. Rather, most businesses rely on a supply chain of wholesalers.
Wholesalers make their money buying products in bulk from a factory itself and selling them on for a higher price to the retailers.
At its core, wholesale is a volume business, meaning that the wholesalers have enough storage space to buy very large quantities of products directly from the factory.
A retail business still saves money buying their products from the wholesaler, rather than the factory, since the wholesaler can sell their stock to multiple retailers at the same time.
Let’s take an online t-shirt store as an example.
The store buys 100 t-shirts from its manufacturer every month for $10 per shirt. Selling the t-shirts for $12 would only mean a profit of $2 per shirt for the eCommerce store.
Compare this with a wholesaler who can buy 40,000 t-shirts each month from the same factory. Because they are buying such a huge quantity of t-shirts, the factory is willing to sell the shirts for $4 per item.
The wholesaler now sells the t-shirts for a unit price of $8 per t-shirt to retailers. This means that both the wholesaler and the online t-shirt store can make a $4 profit on each t-shirt if the retailer sells the shirt to the consumers for $12 per t-shirt.
Wholesale price means the price a retailer will pay for the products bought from the wholesaler.
At a glance, the wholesale price for a bulk order might seem enormous to the uninformed eye. But when you break it down to the individual units, it’s actually very little compared to the retail price.
Let’s say you run an eCommerce stationery shop. To stock up on the sold-out notebooks, you will need to put in an order for 1,000 items. The whole order total will come to $5,000, but the unit price per each notebook is only $5.
If you sell your notebooks for $10 in your eCommerce store, you’ll make $5 profit on each product.
The reason the retail price is so much higher compared to the wholesale price is due to the retailer offering the consumer services as well as the product.
This could be the convenience of being able to buy sneakers from the comfort of your sofa online.
When people talk about wholesale buying, they are referring to the practice of buying products in bulk from wholesalers.
The main benefit of wholesale buying is the savings in the product unit price.
Selling goods in smaller quantities as a retailer means that you’ll need to consider what other things contribute to your costs as a business.
These could include things like:
To run a profitable business, you need to be able to sell your products at a price that covers all your costs and leaves you with some extra cash in your pocket.
Since you can’t influence things like minimum employee wages, finding other cost points that you can reduce becomes important.
By being able to save money buying wholesale you can keep your prices competitive while running a profitable business.
Since there are thousands and thousands of suppliers out there on platforms like Alibaba, it might be difficult to know how to start buying wholesale.
The first step is to make sure you’ve decided on your niche. Let’s say you’ve decided to set up an online garden furniture store and want to sell wooden garden furniture.
When you start looking up suppliers, pay attention to things like:
Depending on your niche, you might also have some other specific needs, like product certification.
Make sure you talk to a couple of suppliers before making a decision. You should also pay attention to online reviews if you’re using a wholesaler platform like Alibaba.
There are a couple of key differences between a wholesaler and a retailer.
Wholesalers buy directly from the manufacturer or the factory that produces the products. Because they have the storage capacities in the form of warehouses, they can buy very large quantities of products.
For a factory or a manufacturer, it’s more profitable being able to sell 100,000 pairs of shoes for $10 per unit to one buyer (in this case, the wholesaler), than 100 pairs of shoes for $50 per unit for a retailer.
But hold on a minute, $50 per unit seems better than $10 per unit, right?
While this is true, the average retailer could never buy 100,000 pairs of shoes. Probably even 500 pairs would be a stretch if it’s not the only product the retailer stocks.
Selling those 100 pairs of shoes to the retailer for $50 per unit the manufacturer makes $5,000.
However, if the wholesaler sells to a buyer who can buy 100,000 pairs of shoes, selling them for just $10 will still mean a deal worth $1,000,000.
Since wholesalers sell their stock to multiple retailers, they can afford to sell 100 pairs of shoes for $20 per unit to each retailer.
As for retailers, since they deal directly with the end-customer, they will need to consider costs like employee salaries, operating and marketing costs. As the retailer also deals with the consumer directly, they offer their expertise and knowledge to the customer in the buying situation.
A retailer is not expecting a customer to buy more than one or two units of the same product.
That, along with the additional costs the retailer has for the general operation of the store (be it physical or an eCommerce store) means that the retailer can have a high markup for their products.
So, the retailer can sell the pair of shoes that they bought for $20 from the wholesaler for $60 or more to the end-user. The raw markup, in this case, would be $40 for the retailer.
A markup means the difference between how much you paid for a unit and how much you’re selling it on for (the gross profit and sales price ratio).
If you run an eCommerce store for computer accessories, you might be able to buy mousepads for $1 per unit. If you set your markup for these mousepads to $5 per unit in your online store, your markup, or the gross profit you’ll make will be $4.
There’s no general rule for how you should do your markups. But you should research your industry’s markup standards to get an idea of what prices customers are willing to pay for your items.
Some industries, like fashion and jewelry, are known for their huge profit markups. And that doesn’t go just for luxury brands, but supermarkets and high streets too.
While a basic t-shirt doesn’t cost much to make, it can easily be sold at a 100% markup or more in Walmart or H&M.
Wholesale buying is a great way to save money if you’re looking to grow your business and keep your inventory.
There are, broadly speaking, three different types of wholesalers. Depending on your business, one might suit you better than the others:
If you’re looking to buy existing products and sell them in your store, your safest bet is to get in touch with a merchant wholesaler or their agents. This is a great option for white label retailers and anyone focusing on finding the best price on the market.
On the other hand, if you want to have a say in how your products are made, you might be better off reaching out to manufacturers directly.
Depending on your industry and product, you might end up paying more per unit for a private label product but can usually set a higher markup for the end-user.
Dropshipping is an easy way to start an eCommerce business: you act as the middleman between the manufacturer and the customer.
Anytime a customer places an order on your online store, it gets sent directly to the manufacturer or fulfillment center, who takes care of the packaging and shipping.
As a dropshipper, however, you will face some drawbacks compared to someone using a wholesaler:
But that’s not to say that dropshipping isn’t a great option for anyone who wants to try eCommerce out, test a new product idea, or is short on time.
Using a wholesaler, on the other hand, means that you buy your inventory in bulk and store it somewhere.
Some merchant wholesalers offer warehousing and fulfillment services, similarly to many dropshipping platforms. Beware for the potential hidden costs here, though.
Opting to work together with a wholesaler means that you will be able to save on the unit prices and, in most cases, have access to a wider range of different products.
You will also have better chances of negotiating a good price for your business since you’ll be acting as the wholesaler’s partner.
And if you ever want to start developing your own products, having a good standing with your wholesalers will help you find the right manufacturer for your product.