What Is the Definition of a Wholesaler?
Wholesalers are a vital part of the supply chain
Whether you want to sell online or from a retail storefront, if you're not manufacturing products yourself, you have to get products to sell from another source. While you might be able to buy directly from a manufacturer, you'll most likely buy from a wholesaler.
What is a Wholesaler?
A wholesaler is essentially a middleman between a manufacturer and a retail establishment. Wholesalers obtain large quantities of products at a lower price and sell them to retailers or other businesses, which sell them from their e-commerce sites or storefronts, usually to end consumers.
How Wholesalers Make Money
Wholesalers buy products from manufacturers at a lower price than other businesses because they receive discounts for volume buying. They make money by selling these products to retailers for more than they paid, but still at a better price than the retailer can get directly from the manufacturer.
For example, a small business buying 100 dolls per month to sell in its store might have to pay $10 per doll to buy directly from the manufacturer. If the doll is sold for $12, the retail store makes only $2 per doll.
However, a wholesaler who buys 50,000 dolls a month from the same manufacturer can negotiate a better price of $4 per doll. If the wholesaler sells the doll to the retailer for $8, the wholesaler makes $4 from the doll, but so does the retailer selling that same doll to a consumer for $12.
Wholesaling in Practice
The practice of wholesale buying and selling is more complicated than indicated above because there are many other factors involved in the buying, selling, and distribution of products, such as:
- Business partners: The product supply chain between wholesalers and manufacturers can vary depending on the types of businesses they want to work with. They may choose to deal only with businesses that are able to buy particular volumes of merchandise or sign contracts to supply goods for definite periods of time.
- Import availability: Some of the most affordable products for retail sales come from wholesalers in other countries, and importing may be your best option for getting the products you want to sell. However, some wholesalers may not be willing to ship products to other countries, which could make it difficult for you to import products into a U.S. import business or a Canadian import business.
- Product distribution: Another factor is how products are distributed. Wholesalers don’t just sell products they receive to the next retailer. Some wholesalers break products down into smaller units, which are then sold to different retailers. Other times, they assemble goods as part of the wholesaling process.
While the most common type of wholesaling is between manufacturers and retailers, an increasing number of wholesalers sell to other wholesalers. A wholesaler may also sell materials to make goods, buying them from one manufacturer and selling them to another.
Note that wholesaling has also become a retail business model. Chains such as Costco operate on the premise that goods are sold to consumers “factory direct,” cutting out the wholesaler and passing on the goods at lower prices.
Reasons to Use a Wholesaler
A common question about wholesaling is, "Why have one at all?" Why not buy direct from the manufacturer at the discount price? Using the doll example, buying the dolls directly from the manufacturer at $4 each, the retail store would make a whopping $8 profit on each doll it sold for $12.
The reason this doesn't happen is that manufacturers give wholesalers better prices because they buy in greater quantities. For a small business to work with a manufacturer, it would need to buy in volumes that most retailers cannot afford. A small store may not be able to sell 50,000 dolls to its base of consumers, whereas a wholesaler generally sells to other retailers.
Along with buying large quantities of a product comes the need for storage. Most retail establishments don't have a warehouse in which to store 50,000 dolls.
Is Wholesaling a Good Business?
Whether or not wholesaling is a good business for you depends on your goals and resources. In general, it's a viable business option if you have the capital investment to get started and maintain your inventory, as well as contacts with retailers that will purchase your products.