As a business owner, you’re undoubtedly looking for ways to keep costs low. Selling physical goods is competitive, so your margin needs to be high enough to make a profit. That's why it's important to know the wholesale definition.
If you haven’t considered how to become a wholesaler yet, it’s worth looking into. This is especially true as DTC marketing is on the rise. Wholesaling is when a business purchases goods from a manufacturer and resells those goods at a profit.
Let’s look at the wholesale definition, how to run a wholesale business, how to run a wholesale distribution business, and how multiple types of eCommerce businesses can use it.
What Does Wholesale Mean?
There are at least three definitions of the term wholesale.The definition depends on the context in which a business is using wholesale goods.
One, the word wholesale itself can refer to a complete or partial product that was acquired from a manufacturer.
Two, wholesale can refer to a B2B wholesale business that buys wholesale goods and resells them to another business as B2B sales. These wholesalers are often referred to as brokers. They usually don’t own the wholesale products--like wholesale dairy, wholesale produce, wholesale meat, and wholesale seafood--and are a middleman between clients.
Three, wholesale can mean a business that sells wholesale products to individual consumers at a profit. These are called merchant wholesalers because their sales model is similar to customers’ experiences in a retail environment. In all of these instances, wholesale products are bought and sold in bulk quantities.
Wholesale Business Definition
The definition of a wholesale business is a company that purchases partial or complete products from manufacturers in bulk. Whether the wholesaler is a broker or merchant, the business makes a profit by reselling goods that originally came from a manufacturing inventory.
Wholesale Distribution Definition
The wholesale distribution definition that applies to you depends on the type of buyers you work with. Fundamentally, wholesale distribution refers to the entire process from raw material sourcing to final sale. There are intermediate stages between the manufacturer or grower and the eventual consumer. Wholesale alcohol distributors are one example of this in the alcohol industry.
After the wholesaler obtains raw goods, there may be assembly, modification, and/or repackaging of products. Wholesalers then turn to a retail or consumer market to sell the products.
If a wholesaler works with retailers, the parties discuss pricing, market intelligence, net 30 payment terms, B2B payments, supply trends, and more. It’s advantageous for retailers and wholesalers to have strong relationships with each other because both parties can sell more products.
Wholesalers who sell directly to consumers have a shorter distribution chain. This can apply to a vast range of products, including goods like vegetables and shirts. A direct to consumer (DTC) wholesaler usually has their own storefront, website, and eCommerce software.
Merchant Wholesaler Definition
A merchant wholesaler is a company that sells wholesale goods to consumers. They may create a wholesale catalog if they want to continue selling goods in bulk, or set up an eCommerce site after looking through eCommerce website examples. A merchant wholesaler may have learned how to sell produce wholesale, and decided to build their business around this.
Merchant wholesalers purchase products in bulk from manufacturers at a low cost and sell them in smaller amounts at a higher cost. They also use a wholesale purchase agreement to transfer ownership of products to retailers and protect themselves from legal battles.
How Does Wholesale Work?
It’s easy to understand how wholesale works once you become familiar with each of the relationships involved in the process. Here is what it usually looks like:
- The raw materials provider sells their product to the manufacturer. A manufacturer is any company using raw goods to produce a partial or complete product.
- The manufacturer sells their goods to a wholesaler. The wholesaler may be a merchant or broker, but in either case, wholesalers buy products to be sold at a later date.
- The broker or merchant then sells the wholesale goods to another manufacturer, consumer, or B2B online marketplace. This stage depends entirely on the business model of the wholesaler and the sales network they’ve built.
- If the wholesaler is a broker, this means the goods are shipped to a retailer, who sells them at a higher profit margin. If the wholesaler is a merchant, the end user is a consumer. Wholesalers that sell directly to consumers may use this as a competitive advantage. Consumers who buy from wholesalers often have access to goods at prices lower than retail stores.
How Does Wholesale Distribution Work?
Wholesale distribution refers to the services wholesalers provide between private sellers or manufacturers and retailers. This is a crucial stage in demand management, as each party benefits from the following steps.
First, the wholesaler acquires goods from a private seller. This seller may be a large manufacturing company or a handmade product creator. Usually, the wholesaler has sales and wholesale marketing advantages that the private seller does not.
Second, the wholesaler identifies relevant retail opportunities through which to sell the manufacturer’s goods. Small manufacturers may not have the resources to sell their products directly to retail. Both of these reasons are why wholesalers are critical in supply chains.
Third, the wholesaler sells the goods to direct to consumer brands in smaller quantities. They are the link between the original seller of goods and the company providing goods to consumers.
How Does Wholesale Pricing Work?
Wholesale pricing can be more complicated than it looks. Here are the factors wholesalers include when determining their pricing:
- Raw Material Cost. Whether a wholesaler sells imported goods to a retailer or assembles products before sale, a cost is incurred for the parts. Wholesalers aim to keep their material costs as low as possible.
- Labor Cost. Any product that needs to be assembled or modified has a labor cost associated with it. Labor costs are often one of the largest expenses for wholesalers. As a result, many wholesalers emphasize operational efficiency.
- Overhead Costs. Overhead costs include any expense not directly tied to a product or labor. Examples include warehousing expenses, product advertising, employee benefits, utilities, and office amenities like snacks. It’s important to minimize overhead when possible or these costs can surpass monthly profit. Make sure to include your eCommerce packaging and eCommerce shipping costs here as well.
- Shrinkage. This is the percentage of products that were acquired as inventory but got lost, destroyed, stolen, or damaged. Shrinkage plays a major part in financial planning because any product that isn’t getting sold undermines your profit. It’s wise to eliminate shrink whenever possible.
- Competitor Pricing. Smart wholesalers always consider competitors’ pricing. The price offered by a wholesaler to a retailer or customer should be similar to that of comparable products. If your wholesale price is too high, retailers are unlikely to stock your product. If your wholesale price is too low, you’re leaving money on the table and your competition is going to win.
How Does Wholesale Retail Work?
The wholesale retail process involves many steps from the overall wholesale distribution process. Here is a basic overview of how wholesale retail works:
- The retailer communicates with the wholesaler to request the appropriate quantity of products.
- The retailer receives goods, unboxes them, and either repackages or stocks them for sale.
- The retailer sells the products to end users (consumers) at a higher profit than the wholesaler’s selling point.
- The wholesaler continues supplying the retailer with the right amount of products, based on sales data.
- The wholesaler and retailer both watch sales trends on either side of the supply chain. Wholesalers watch the trends from their suppliers; retailers watch trends from their wholesalers. They use this information to communicate any unexpected fluctuations in demand or supply, and improve metrics like fill rate.
How Does Buying Wholesale Work?
Understanding how to buy wholesale doesn’t have to be a complicated or overwhelming experience. In fact, it can be quite rewarding when you know what to look for. Here are the basic wholesale buying steps to be familiar with:
- Get your paperwork in order. The government requires entrepreneurs to have certain documents filed to run a business. These can include a sales tax ID, licensing agreements, business insurance, a reseller’s permit, and an eCommerce business license. It may seem like a lot, but getting this handled first will save you legal headaches later.
- Browse directories, forums, and groups. One of the best ways of learning how to find vendors is through supplier or manufacturer directories. These are lists of companies that sell from a raw materials inventory to wholesalers. You can also find suppliers in online groups and forums; just remember to do your research before partnering with anyone. Another point to remember is that a wholesale directory that only offers popular products may or may not be the right fit for your business.
- Maintain a budget. This principle is true no matter what you sell. Wholesalers usually need to sell large volumes of product to turn a profit. Use historical sales data or create realistic sales projections before you purchase too much. The last thing you want is dead stock in a competitive industry.
- Prepare your workspace. As a wholesaler, you’re going to be dealing with significant volumes of products. You and your employees need an efficient system to handle goods in order to remain profitable.
- Research ethical suppliers. Today’s consumers care quite a bit about where their purchases came from. Complete your own due diligence before contracting with a supplier, as it can make or break your success down the road. Ethical goods are major player in the eCommerce trends.
How Does Selling Wholesale Work?
Once you have your buying and inventory management process figured out, it’s time to determine what wholesale items to sell. Here are the building blocks of a successful wholesale selling approach:
- Identify your target market. Whether you’re selling directly to consumers, a retail environment, or in a wholesale marketplace, have a clear idea of who you want to work with. You should be asking yourself who your ideal customer is, what their pain points are, and where you can find them. The clearer you can get in this area, the easier it will be to sell.
- Develop your retailer network. Successful wholesalers have robust relationships with the retail stores and chains they sell to. Take the time to understand what your retailers’ needs are so you can supply the right products at the right time. The type of products you sell should be matched to a retail environment that the final customer shops in.
- Create an effective pricing structure. This is of paramount importance as a wholesaler because your wholesale sales depend on it. Many wholesalers price their goods at 2.5 times higher than production cost, but this isn’t a hard rule. Take your own business’s expenses into account before settling on a pricing method.
- Offer bulk discounts. Part of success as a wholesaler is encouraging your clients to buy frequently. Providing bulk order discounts is a great way to incentivize this behavior. You can achieve this by giving retailers an MOQ, or minimum order quantity.
That’s the Whole Deal
It takes firm background knowledge to be successful in a competitive field like wholesaling. Once you have the right foundation, you can make headway on learning how to get a wholesale license, business relationships, and sales. Continue reading more in our complete wholesale management guide.