What does Wholesaler mean?
A distributor that sells products to a retailer. A wholesaler will sell his product in bulk quantities to retailers, allowing the retailer to take advantage of a lower price than if he were to buy single items. The wholesaler will typically buy goods direct from the manufacturer, but could also buy from a reseller. In either case, the wholesaler gets large discounts for buying large quantities of goods. The wholesaler is rarely involved in the actual manufacture of a product, focusing instead on distribution.
A wholesaler requires a license to sell his product to the retailer, and his product will generally not be available to the customer at the same price as to the retailer. This is because the retailer makes their profits by marking up the price they pay to the wholesaler. In the case that a customer wishes to purchase a product from the wholesaler he will be charged for a drop shipment, this charge being charged to the customer as well as the wholesaler by a drop shipping merchant.
Often a wholesaler is a specialist in one specific product, or in a category of products. Other wholesalers will offer a wide variety of products. In addition, the wholesaler can focus on one type of business for their products, or they can offer items for sale to anyone.
Wholesalers also differ from distributors in that they are typically not associated with a particular good, and therefore they are not likely to offer the higher service level or support often offered by official product distributors. This is because the wholesaler is rarely directly affiliated with the manufacturer they buy from and are unfamiliar with the specifics and intricacies of the products they sell. Wholesalers can also offer competing products, which is not the case for distributors.
What is Wholesale Buying?
Quite a few business terms can be translated or used for different instances, especially when it comes to the wholesale marketplace.
For instance, a wholesale buyer could be a reference to an actual agent that negotiates between merchants and sellers in the wholesale market. However, you might also refer to a wholesale buyer as the merchant itself, considering that is the entity that is purchasing items from a wholesaler.
To start, we'll talk about a wholesale buyer as a profession.
This would be an agent or unbiased individual who is supposed to negotiate deals based on market trends to make sure that both the wholesaler and merchant come out ahead. The reason these types of wholesale buyers exist is because a business manager most likely has many other tasks to complete. This takes the responsibility of understanding market conditions and pricing and transfers it over to someone who is more of an expert on the subject.
Wholesale buyers have a wide variety of other titles. For example, some people call them purchasing agents, while others call them sales representatives. And to make things even more confusing these types of jobs could actually be filled in-house by a merchant or wholesaler.
Overall it's important to understand that a wholesale buyer could potentially be a third-party individual or employee who handles all wholesale research and transactions.
On the other hand, referring to a wholesale buyer could simply be talking about the actual company that plans on buying from a wholesaler.
Regardless of who is doing the purchasing, wholesale buying is one of the most common practices for obtaining inexpensive products to turn and then sell for a higher price. The basis behind wholesale buying is that a manufacturer, supplier, or wholesale company sells large batches of the same products to merchants. This means that the merchants have to have a certain amount of upfront capital in order to afford all of these items. However, it works to their advantage once they start selling the individual items, because they resell each product at a profit margin to either regular consumers or other businesses.
In general, the chain of sales works like this: a supplier or manufacturer sells large batches of goods or commodities directly to a wholesale buyer. The wholesaler then sells the products to the merchants. After the wholesale purchase, the merchant (whether it be an online store or a physical retail shop) puts a higher price tag on the individual products and sells them to the general public.
What's Wholesale Price?
If you're asking what a good wholesale price is, it completely depends on what you're buying and in which industry.
However, the definition of wholesale price is much easier to understand without significant research into your industry. In short, the wholesale price is the rate charged by wholesalers or manufacturers or suppliers for a group of products. That collection of products will cost a significant amount of money for the merchant, but when you break down the pricing per unit, the wholesale price is only a fraction of the cost of retail price.
So, let's say a merchant spends a thousand dollars for 100 units of shoes. The total of $1000 is the wholesale batch price, but the wholesale unit price would come out to $10 per unit. This is going to be significantly cheaper than the unit retail price. Now, let's say the merchant marks his retail price per shoe at $50. That's a profit margin of $40 per shoe when you subtract the retail price and the wholesale price. If the merchant were to sell all 100 shoes, she would make a total profit of $4000.
The reason the wholesale price is so much cheaper than retail price is because the retailer is providing a service to the consumer. That service may be knowledge of the products, the retail location, accessibility, or a wide variety of other things that make it easier for customers to gain access to certain products. On the other hand, the wholesaler can purchase products for cheap because it relies on volume to make its own profits.
The only way the wholesaler makes any money is if merchants are willing to buy large quantities of items. Otherwise, if the wholesaler sold single items it would be far more costly for them in the short and long term. If a wholesale company is purchasing from a manufacturer, the prices are only slightly marked up when turning around and selling to the merchants. But once the merchant receives the items and breaks them up into individual sales, the profit margins increase to maybe double the price or even more.
What is the Average Wholesale to Retail Markup?
This is a wonderful question, because your profits depend on how much your markup products from wholesale pricing.
There are several ways to figure out how much you should mark up your wholesale prices as a merchant. However, we will cover that in the section below. Under this question, we will outline how much retail and online stores mark up products based on industry.
As we explained a little bit in the previous section, a markup is the ratio of gross profit next to sales price. For example, if you have a product that costs you $5, and you sell it for $9, the gross profit ends up being $4. The $4 gross profit is also considered your product markup.
In the business world, there is no normal markup. Some industries, like fashion, are able to slap thousand dollar price tags on clothing that only costs a few hundred dollars. On the other hand, many retail shops like hardware stores and grocery stores are known for having extremely small margins– in other words, their markups are pretty small per unit.
If you're curious about typical markups in different industries, let's walk through some of the industries that have higher markups and some of the industries that have lower markups.
Jewelry is consistently one the highest marked up products in the world. You can read case studies about how diamonds and many other gemstones are virtually worthless until they get into retail stores. It would be rather uncommon to find a piece of jewelry that is not marked up at least 50% of the wholesale price. The clothing industry has a similar structure for marking up products. And it's not just your top-of-the-line, high-fashion clothes. When you walk into Walmart, or any other budget retailer, those shirts and pants are typically marked up from 100% to 400%.
Even though margins are often slim in the restaurant industry, food is generally marked up about 60%. The drinks are even worse, considering they are very inexpensive to create. It's not uncommon to see 400% markups on beverages. The slim margins can be attributed to the overall high costs of running a restaurant.
The pharmaceutical industry is known for having extreme markups. This typically ticks off most people who aren't working in the pharmaceutical industry, considering markups have been known to go past 6,000%. Even the cheaper generic prescriptions see markups of over 1000%.
Technology is an interesting animal because some types of technology yield large profit margins. However, many tech companies, such as those selling cell phones, have trouble reaching markups of 10%.
Many small businesses make their product-selling decisions based on which items can bring in the largest markups. That's not a bad idea if you have limited capital and you're just getting started with an online store. However, you shouldn't rule out small margin industries, since with the right execution you can still make a significant amount of money. The only problem is that it's often harder to get into those small margin industries.
How Do You Mark Up Wholesale Prices?
There are several ways to price your retail products after purchasing them at wholesale. We have a guide covering three of the best practices for pricing, but there are so many other options to choose from.
Here are some of the most common strategies for marking up wholesale prices:
- MSRP – MSRP, or manufacturer suggested retail price, is a common practice where the manufacturer recommends a certain price point for the retailer to list for its customers. This used to be a far more common way to price wholesale products, since it allowed the manufacturers to standardize groups of certain products depending on the retailer selling them and locations. That said, you'll see the MSRP being used most frequently when the item is more mainstream. So, if it's a brand-new product or unique piece of jewelry there's really no way or no reason to use the MSRP. Overall, the MSRP makes it easier for the retailer, but you also may have a disadvantage over competitors that make their pricing better for customers.
- Keystone pricing – The Keystone pricing process is also a simpler way to mark up your wholesale items. It typically involves the retailer doubling the wholesale cost and potentially adjusting that price depending on certain market factors. For example, you might realize that simply doubling the wholesale cost is not quite enough because of your potential shipping and handling costs. Most retailers will realize that doubling the wholesale cost is usually too expensive for consumers. However, unique items should have a much higher markup. It all depends on the industry and how competitive that product is going to be.
- Multiple pricing – Multiple pricing is also called bundling, where you pair several products together and sell that bundle at a slightly lower cost for everything combined. This generates a higher perceived value, since the customer is getting more for their money. This wholesale markup strategy is very common in the apparel industry and with grocery stores. The only problem is that it can be difficult to sell the individual items at regular prices after you remove them from the bundles.
- Discount pricing – A sale or discount on a certain product, or group of products, happens on occasion. In short, the retailer has already marked up the wholesale price, only to remove a chunk of that price so as to push more customers through the check out and potentially drive traffic during certain seasons. Most companies have discounts throughout the year. The rule of thumb is to not create a reputation for being a bargain retailer–that is, unless that's the overall goal (like Walmart.)
- Loss-lead pricing – This type of markup strategy actually involves you selecting some products to discount on an occasional basis. You know this will get people to your store because of the discount. However, the goal is to have several complementary products that the customer is bound to buy while at the shop. A great example of this would be selling men's razors at a discount, then presenting shaving cream and aftershave at full price.
- Anchor pricing – This type of psychological product pricing allows you to mark up wholesale prices to a certain point while still showing that a discount has been applied. Whether a discount has been applied are not, the practice still reveals a crossed out original price along with a sale price. It has been shown that this type of pricing triggers a response where consumers are far more likely to buy.
- Above the competition – Another way to mark up your wholesale pricing is to purchase the products from the wholesaler, then immediately look at what your competition is selling similar products for. You could price these products slightly above your competition to create the perception that your products are actually of better quality. A good example of this would be how Starbucks or Apple create, more or less, the same products as the competition–but people think they are better because of the up-charge. Now, Apple might make better computers than some manufacturers–much of it is subjective. But, it's hard to argue that Apple's computers are worth a $1,000 markup next to a comparable Dell computer.
- Below the competition – The other option is to go below the competition. You analyze your wholesale pricing and make sure that you can negotiate with these wholesalers to consistently provide lower costs. This can prove difficult considering you may have to compete with some of the largest low-cost retailers in the world. However, this type of pricing can still work out with some creativity–take Dollar Shave Club for example.
With all of the pricing strategies, you still have to start by going to your wholesaler and understanding just how much you can markup your products to make it worthwhile in the long run. Testing is often required, along with market research. After that, you can adjust your prices to get a better understanding of how much profit you can make for each of your products.
What are the Three Types of Wholesalers?
As always with the wholesale business. a variety of terms are used to refer to certain job titles and categorizations. That said, we can still break down wholesalers into three general categories, even if some people call them different things.
Here are the types of wholesalers:
- Merchant wholesalers – This is the type of wholesaler that you would typically think about when hearing the term “wholesaler.” The merchant wholesaler engages in purchasing larger quantities of products, storing them, and then selling them in somewhat smaller batch quantities for a markup. These smaller quantities are still considered wholesale, but they're broken up so that retailers can purchase them at reasonable quantities. The traditional wholesaler doesn't actually manufacture the products in which it sells. Instead, it has a strong knowledge in which products are most likely to sell in large quantities as well as on the retail level. A wholesaler is often called different names including importers, exporters, jobbers, and distributors. In addition, wholesalers may focus on selling to dozens of different industries, or they may focus on one or two.
- Agents/brokers – The wholesale agents and brokers typically don't own the products they're selling. Instead, the agent actively negotiates deals to ensure that the wholesalers get the best price possible. Many of these agents and brokers will actually work for the wholesaler, but it is not uncommon for them to simply get a commission for every sale that goes through.
- Sales and distribution for manufacturing – Manufacturers also have sales teams and full offices of distributors who represent the manufacturers in getting products out into the wholesale market. These sales teams and other representatives usually have nothing to do with the manufacturing process. In fact, the offices are generally far away from the warehousing facilities where products are stored and manufactured. Because of the association, these types of representatives are often considered wholesalers as well. The reason for this is because they put together wholesale deals and have the responsibility of distributing products on a wholesale level.
How to Find the Best Wholesale Suppliers for Your Online Store
Image credits: Oberlo
When looking for a wholesale supplier for your online store, it's important to understand how the system works and where you should be looking.
The main problem is that wholesale is not a well structured system or industry at all. In fact, most of the wholesale market is a collection of random suppliers and manufacturers that are scattered all around the world. The good news is that we live in the digital age so you don't have to constantly be on the phone and looking through physical directories to locate the best wholesalers out there. Instead, you can turn to online marketplaces like AliExpress or AliBaba.
In both of these options, you can navigate to each website just like you would with Amazon, and browse around to decide which of the most popular products you would like to sell on your own online store. What's also great about these types of directory websites is that you can filter your products based on what they look like and even sift through pictures or check out details on each supplier.
Overall, your goal is to partner with reputable suppliers who will answer your phone call or emails, provide quality products, and deliver those products on time. Many online stores partner with suppliers in places like China and India, since the pricing is usually lower and you can typically find the suppliers on websites like AliBaba.
In order to find the best wholesale suppliers, you should walk through a few simple steps:
- Research and find reputable wholesale suppliers through online directories or sites like AliExpress.
- Make a list of your favorite suppliers based on reputation in the products they provide.
- Contact each of the suppliers through email or phone.
- Make sure that the first contact is as productive as possible. If someone isn't replying to you, or it's impossible to understand what they are saying, you may have trouble with communication in the future.
- Ask each wholesale supplier for samples of certain products. Most wholesale suppliers require you to pay for your samples, so you should decide on a handful of products that you are almost guaranteed to sell. Then, you can check the quality of these products for yourself.
- Think about bargaining for better prices. You will need some leverage for this to work at all.
- Avoid dropshipping arrangements at the beginning.
Many online store owners will start contacting suppliers through the phone or email and find that this works out quite well. You don't really need any training from us to do this, since all you have to do is start researching local wholesalers and contacting them about your business.
However, you might not know exactly where to look to find the suppliers online. Therefore, we have a list of several directories and e-commerce stores that connect you with multiple wholesalers all at once. These are some of our favorites:
Comparisons with Other Fulfillment and Selling Options
As you may have noticed already, the term wholesale can be confused with many other selling and distribution methods. Because of this, we want to clarify exactly how wholesale compares to some similar fulfillment options. We'll even talk about when you might use one over the other.
What is the Difference Between Wholesale and Retail Sales?
The basic answer to this question is that a retail business owner sells her products directly to the consumer. This means that the retailer is typically purchasing products from a wholesaler. Retail sales either come in the form of selling through an online store or through a physical brick-and-mortar retail shop.
On the other hand, a wholesale seller has retailers as clients, selling its products in bulk for a lower per unit price. Essentially, the retailer would be considered a middleman, since they are bringing the product closer to the customer and providing the convenience and service you typically find on an e-commerce store or a retail shop.
Wholesale and retail sales also differ in other ways. For example, the business of wholesale revolves around selling a large number of products–which often requires savvy salespeople who are willing to manage B2B clients. Retailers focus more on individual sales with cheaper price tags (when we say this we mean selling a shirt for $20 instead of 100 shirts for $1,000). The sales process is often less cumbersome, but they also have to deal with consumers either on a face-to-face or digital basis.
What is the Difference Between Wholesalers and Distributors?
Depending on the industry and the companies in that industry, these terms could be jumbled to mean different things. However, distributors, wholesalers, and manufacturers should have separate responsibilities. Wholesalers are typically larger companies that are more interested in finding potential retail buyers as opposed to manufacturing the products. Manufacturers, on the other hand, are more interested in building products, as opposed to going through a tedious sales process.
Because of this, manufacturers usually partner with a distributor. This means that there is actually yet another middleman in the entire sales flow. So, a pair of shoes would get created in a manufacturing warehouse, then the distributor would go out and find wholesalers that might want to purchase those shoes in bulk. The distributor is then done with their job until the next batch of sales to a wholesaler.
Wholesalers buy a large quantity of items directly from these distributors who represent the manufacturers. The more products the wholesalers buy the cheaper per unit cost they have to spend. As we've learned earlier in this article, the wholesalers then turn around and sell in bulk to retail businesses, whether online or brick-and-mortar. The wholesaler does include a small markup, but it's not until the retailer sells to consumers where we see a significant markup because of the individual product sales.
What is the Difference Between Wholesale and Dropshipping?
There are many pros and cons to wholesaling. There are also many pros and cons to drop shipping. We will walk through the different elements of each in the next few paragraphs, but we would also like to outline the basic differences that may make your decision on how to supply your products.
In short, buying wholesale means that you are purchasing a large number of items for lower per unit pricing. Because of this, you have to figure out a way to store those products, package them, and send them out to customers. It becomes a much bigger operation than drop shipping, however, you save significantly on per unit pricing–therefore improving your profit margins.
Drop shipping doesn't require you to store, package, or ship any of the items that your customers buy from your store. Instead, you partner with the supplier or manufacturer that is willing to drop ship products. What this means is that your company sets up a website with product pages and checkout modules for accepting payments. The main work you have to do is managing your website, handling customer support, and marketing to your customers. Once a user comes to your website and makes a purchase you receive that purchase order. Depending on your set up, you may have to send that purchase order to your drop shipper to complete the order. However, many website builders will seamlessly link your online store to the drop shipper, meaning that when an order is submitted the supplier is automatically notified, so that the product can be sent out immediately.
What are some of the pros of buying wholesale?
First of all, almost all of the products that you purchase are going to be cheaper through a wholesaler. That is, the per unit price is going to be cheaper. Therefore you can boost your profit margins and hopefully run a more successful business.
Furthermore, you're purchasing from a wholesaler who was already bought these products from a manufacturer. So, they know that these products have a proven track record and are most likely going to be successful when sold to consumers. You get to minimize your own risk in that respect.
Finally, wholesaling typically allows you to have more control over the entire process. From adding shipping labels to branding your packages, and even seeing your products before they get shipped out to customers. The amount of control is more prevalent when working with a wholesaler.
What are some of the cons of buying wholesale?
The main downside of purchasing from a wholesaler is that you almost always have to purchase in large quantities. Because of this, you need to find a place to store this big batch of inventory. In addition, you have to spend money on packaging, more employees, postage, and everything else that goes into the storage and shipping process. Although you do make more profit margins there are several additional costs that come along with storing and shipping your own products.
Lastly, there is a certain amount of risk that goes into buying wholesale. Although you're assuming that the wholesaler likes these products and knows that they sell well, you are being forced into buying larger quantities of the product. If, by chance, you can't sell all of the items you bought, your company is stuck eating that cost.
What are the pros of drop shipping?
Drop shipping is a somewhat newer concept that has quite a few benefits, especially for small businesses. First of all, the initial investment could potentially be close to nothing. You are most likely going to build a website and spend some money and time setting the entire operation up, but you don't have to pay for a large batch of wholesale items.
Also, there aren't any costs involved with unsold inventory, shipping, packaging, and storage.
A final benefit is that established retail businesses can test out the e-commerce waters while still running their primary business as well.
What are the cons of drop shipping?
The main reason you might see some problems with drop shipping is that you lose control over the entire sales process. Yes, you complete the actual sale on your website, but that's where the majority of your control ends. Your drop shipper is the one that stores the product and packages it up to send to the customer. So, if the drop shipper doesn't send the product on time, you're the one that has to bear the brunt.
You'll also find that it's more difficult to brand your packaging and the products inside that packaging. Luckily the majority of drop shippers will allow you to see samples of the actual products before sending them out to your customers. However, e-commerce stores with thousands of products will not test out every single one of them, making for a risky investment when some of the items might not be the highest quality.
The last downside of drop shipping involves profit margins. Since the suppliers are sending out products to your customers individually, you don't get remotely close to the margins that you would with wholesaling. Luckily, you get to save some money by not paying for shipping and storage facilities. However, you will find that your profits are often extremely slim or you have to raise prices so that it's difficult to compete with larger e-commerce stores with similar products.
What is the Difference Between Wholesale and Self-fulfillment?
Self-fulfillment is often a term you might stumble upon when building an online store. It actually doesn't have any relation to wholesaling, rather it's what you would do as a merchant after purchasing from a wholesaler. In fact, it's quite the opposite of drop shipping (as talked about in the previous section,) where you purchase all of your inventory from a wholesaler, then complete all of the fulfillment work with your own time, money, and resources.
Fulfillment, in itself, is the process of taking a product after a sale and getting it to your customer's doorstep. So, this involves wrapping, packaging, inserting a receipt, storage prior to the sale, shipping, and providing some sort of tracking number. Self-fulfillment means that your company has done all of these steps itself. The wholesaler is still in the equation, since you bought your inventory from them.
What is the Difference Between Wholesale and 3rd-party Fulfillment?
Once again, wholesale and fulfillment are separated in the sales process. If you were to opt for third-party fulfillment, there's still a good chance that you would buy all of those products from a wholesaler.
A better question would be what the difference is between third-party fulfillment and self-fulfillment. In our definition of self-fulfillment, we talked about how the entire packaging, storage, and delivery process is handled in-house. Third-party fulfillment is where you would partner with a logistics company to handle things like storage and shipping. Third-party fulfillment is becoming more and more popular because of how expensive and difficult it is to ship products yourself.
It benefits your company by freeing up time for other things like web design and marketing. Of course, you have to pay another company to complete this fulfillment for you. In addition, you might end up compromising on the quality of your packaging or how much time it takes to send those items to your customers.
Overall, many companies find that self-fulfillment is their best option. Third-party fulfillment is also a viable solution, especially for online stores that create their own products. This way, you can focus on product development and then send all of those items off to a fulfillment company to handle the rest.
How Do You Become a Wholesaler?