Are you thinking about starting a new business? Perhaps you’re considering starting a wholesale distribution service. But you’re now quite sure how does wholesale work?
Don’t worry. You’re in the right place. Keep reading to learn everything you need to know about the wholesale distribution model and how the process works.
What Is a Wholesale Business?
A wholesale business acts as the middleman between the manufacturer and the retailer. They purchase items in bulk direct from the manufacturer and hold them in a warehouse until the retailer is ready to buy them. The product is then shipped to the retailer who sells the items to the consumer.
Most retailers don’t have the space to store thousands of every item they sell. So, they buy in smaller amounts, such as a t-shirt company buying 300 t-shirts from the wholesaler who purchased 10,000 from the manufacturer. The wholesaler can negotiate a great price from the manufacturer due to buying so many at once.
Who Do Wholesalers Buy From?
Wholesalers usually buy from the manufacturer; however, some buy from other wholesalers and serve as the middle man with the retail stores. Manufacturers don’t want to hold onto their products in warehouses after they’ve produced them. This would increase their expenses and decrease their profit margins.
They then find a wholesaler who is willing to store thousands of items in a warehouse. They offer a great price as they need to move their products so they can manufacture more. The wholesaler then holds the items in their warehouse until the retailer is ready to purchase them.
How Does Wholesale Work?
A wholesale business model is run off the idea that a retailer doesn’t have an adequate warehouse space to store mass quantities of all their products. Wholesalers such as this supplier of wholesale fashion jewelry offer lower prices on their products to the retailer.
They then act as the warehouse middle man willing to store the mass quantities of products and then sell them at a small enough mark up that the retailer will still make a profit. They also need to make a profit, so the key is to find the right amount where they make money and yet still offer a reasonable price to the final retailer.
This Goldilocks Effect means that you need to find the perfect price that is just right. If you pay too much to the wholesaler, you won’t make enough of a profit when you sell to the retailer. If you don’t negotiate a high enough rate with the retailer, you won’t turn a profit for your expenses of warehousing all the products.
What Does It Mean to Sell Wholesale?
When you run a wholesale business, you aren’t working with the final customer. You’re instead, working with other businesses. You’re in the B2B business rather than direct to consumer business model.
This can have many perks as well as disadvantages. The nice part of working with other businesses is that you don’t have to focus on customer service. However, as you’re working with other businesses, everyone is out to make the largest profit possible.
Since you’re working in the middle between the manufacturer and retailer, it can sometimes feel like you’re juggling many relationships. However, as you build solid working relationships with other businesses, you’ll find that you can run a very profitable business by offering the service of housing the items between the manufacturer and the retailer.
What Is the Difference Between Bulk vs. Wholesale?
While used interchangeably, bulk and wholesale are different. The difference comes in the intent and sheer quantity of the products purchased. When considering buying in bulk, you’re usually referring to someone purchasing for themselves in large amounts.
Instead of buying one pound of rice, they buy 25. Or instead of buying their products at Safeway, they purchase from Costco, which runs a direct to consumer wholesale distribution model.
Whereas the wholesaler is purchasing thousands of pounds of any item to sell it to another retailer. They aren’t the final consumer but rather the middleman who stores the product until they sell it to the retailer.
What Are the Benefits of Running a Wholesale Business?
As the middleman, there are many benefits to running a wholesale business. You can negotiate great prices from the manufacturer as you’re willing to hold their products so they can focus on creating more products. Additionally, you offer a deal to retailers who can’t store too much of any one item in their limited space.
As the wholesaler, you offer a service to both the manufacturer and the retailer due to your warehouse capacity. Your service can then be negotiated into prices that favor you in both buying and selling the products.
Another benefit of running a wholesale business is you will have a consistent income source. You’re not as worried about the whims of the final consumer. As you build your network of several retailers who purchase your products, you will have a consistent income source when each one purchases from you consistently.
Your Guide to Success
So, now you no longer have to wonder how does wholesale work? You’re an expert in the wholesaling business. Now you know everything you need to about how does wholesale distribution work.
This is your comprehensive guide to the buying and selling process of a wholesale business. We’ve answered all your questions about the wholesale business model. So, be sure to bookmark this site so you can refer to it often as you build your business.
For more great information on this and other topics, check out the rest of our blog.