What does wholesale mean? Is it purchasing in bulk and at lower prices? What else is there to it?
Whether you’re a retailer looking to broaden your product procurement channels, or a manufacturer hoping to acquire a new sales avenue, you’ll come across the term “wholesale” at some point.
In this post, we’ll dive into the definition of wholesale, its different types, and key terms.
What does “wholesale” mean?
To understand wholesale, you need to consider what it means from different points of view.
Traditionally, for retail stores, buying wholesale means acquiring goods for your business in large quantities, at lower prices. You would then stock these items in your store and resell them to the end customer (individual consumers).
From the vantage point of a manufacturer, selling wholesale would put you at the other end of the process, where you would offer your products in bulk to a middleman (known as a distributor, but more on this later) or directly to retail stores.
It’s important to note that even though nearly all wholesale definitions talk about bulk orders, this is not a rule that’s carved in stone, although it is very often the case. There are wholesalers (usually manufacturers themselves) who are happy to sell their items in smaller quantities, especially when they’re dealing with a retailer for the first time.
For instance, some suppliers listed on Faire have no minimum order requirements.
What’s a wholesaler?
Wholesalers buy goods from manufacturers or producers in bulk and resell them to retailers. Basically, they’re middlemen between manufacturers and retailers, offering bulk products at a discount.
Types of wholesalers
Distributors acquire products in large volumes from manufacturers and then sell them off (also in bulk) to retailers. They play no role in the production process of the merchandise. Oftentimes, they also own their own storage facilities to hold these products.
Distributors are less known to the public. Sysco, for example, is a distributor that sells food products. If you run a restaurant or health care facility, you know of Sysco. If not, you may not even know they exist.
In some cases, wholesalers are manufacturers who make the goods themselves. Manufacturers selling wholesale products are both suppliers and makers, so they can sell to distributors or deal directly with retailers.
Ashland Conveyor Products, for example, manufactures and sells specialized conveyor equipment and material-handling solutions through its ecommerce site.
In the context of wholesale, both distributors and manufacturers are suppliers, which are essentially businesses retailers source their products from.
Beyond wholesale, however, a manufacturer may not necessarily be a supplier. Wholesale suppliers typically engage in B2B (business-to-business) ecommerce—that is, they sell to other businesses (like a distributor or a retailer). Meanwhile, some manufacturers also sell B2C (business-to-consumer). In such cases, they would not be considered suppliers.
TKB Trading is a good example of a supplier. Since 1997, the brand has sold materials for cosmetic products, especially for those looking to create their own makeup line. It provides pigments, bases, and other ingredients.
Merchant wholesaling is what most people think of when coming across the term “wholesale.” It’s the most popular method of wholesaling, which involves a distributor purchasing goods in volume from a supplier/manufacturer, storing them in their own facilities, and then reselling them in smaller bulk quantities to retailers.
Since they’re distributors, merchant wholesalers do not produce the goods themselves. They also tend to specialize in certain types of products, which makes them very knowledgeable about the merchandise they trade.
A broker or agent is an independent intermediary, just like a merchant wholesaler. They don’t buy goods from manufacturers, though. Agents and brokers don’t own any of the wholesale products they deal in, unlike merchant wholesalers.
Their job is to set up deals between wholesalers and businesses interested in buying from them (like distributors or retailers) while making a commission—like real estate agents.
Brokers and agents are mostly used by manufacturers/suppliers who don’t have the financial power to handle their own sales.
Manufacturers’ sales and distribution teams
This type of wholesale selling is similar to wholesale agents and brokers in that they are in charge of securing buyers for the manufacturer and have a vested interest in doing so.
However, these sales and distribution teams are not separate entities. They’re owned by the manufacturer themselves and are responsible for distributing the merchandise on a wholesale level (to distributors or retail stores). The offices of a manufacturer’s sales and distribution teams are usually kept physically apart from the production plant.
What does “wholesale price” mean?
“Wholesale price” refers to the cost at which retailers would secure their goods when buying in bulk from a wholesaler. As mentioned above, because wholesalers can also be distributors, “wholesale price” also refers to the price distributors pay manufacturers to procure their products in large volumes.
Wholesale prices are always lower than the retail prices a store sets for its consumer. That’s because businesses markup the wholesale price in order to make a profit from the end-sale transaction.
Manufacturers or distributors are able to set their wholesale prices at a reduced rate because of volume buying. This lowers the time and costs involved in the handling/production of each unit, which, in turn, boosts profits.
Wholesale price vs. retail price example
A wholesale candle supplier or manufacturer offers its candles in large volumes at a wholesale price of $19 per unit to a business selling home décor products.
After purchasing from the wholesaler, this retailer then re-sells these candles at $26 per unit to its customers, pocketing $7 in profit for every candle sold.
Setting a retail price
One of the easiest methods to decide on a retail price is via keystone pricing. It’s a simple strategy that basically involves doubling the wholesale price.
In most cases, it’s a safe way to ensure all business costs are covered and allow for a healthy profit margin at the same time.
In essence, this is how keystone wholesale pricing works:
- Wholesale price per unit: $25
- Retail price per unit: $25 x 2 = $50
That said, as straightforward as this strategy is, it may not be optimal for all types of business.
For instance, it’s recommended for new candle businesses to list their products at a 25% to 50% markup, while the markup for clothing retailers can range from 100% to 300%.
That’s because the amount of markup a retailer needs to add to earn a profit depends on a host of factors that can vary greatly, according to the product, market, and wholesaler. These include:
- Wholesale cost
- Supplier-to-retailer shipping costs
- Marketing costs
- Product type
- Retailer-to-consumer shipping costs for online businesses
Benefits of wholesale
In 2022, wholesale trade in the US brought in nearly $6.4 trillion in revenue. Selling bulk can bring many financial benefits for wholesale businesses, including:
- Economies of scale. Handling products in large quantities can lead to cost savings in procurement, storage, and transportation. You can offer more competitive pricing for customers and reap higher profits for your company.
- Volume sales. Selling bulk means higher revenue from single transactions. Wholesalers have higher AOV and volume orders, versus retailers that ship hundreds of lower-priced orders to customers.
- Stable client relationships. Wholesalers often establish long-term relationships with retailers and other businesses. Recurring orders and more predictable revenue are more common in B2B wholesale because profit is fixed. You know how much you’ll make every month.
- Higher brand visibility. If you sell branded products, customers will sell items as they are. This gives you more visibility as they distribute the products.
- Lower promotional costs. Wholesalers generally don’t have massive promotion budgets, so you save more money in marketing and advertising.
Overall, wholesalers can operate with more freedom and control in the supply chain, which makes them more efficient and productive. They influence product quality and can choose the manufacturers and suppliers to work with.
Challenges of wholesale
As with every industry, wholesales comes with a few challenges you’ll face:
- Thin profit margins: Wholesalers see between 15% and 30% profit, where retailers typically make between 20% and 50% profit on the wholesale price. This makes operations more sensitive to cost or sales fluctuations.
- Inventory management: Holding large inventories allows you to meet demand, but it can also tie up capital and run the risk of inventory becoming obsolete or deteriorating. Good inventory management software is key to successful wholesaling.
- Increased competition: The rise of global trade and ecommerce platforms mean wholesalers face competition from local and international suppliers.
- Capital intense: Wholesaling takes a lot of money to kick off, requiring significant investments in inventory, warehouses, logistics, and more.
- Payment and credit risks: Wholesalers usually offer credit terms to their customers, which can lead to cash flow challenges or bad debts if those clients default or delay payments.
Knowing these challenges is important for sustaining a wholesale business. With the right strategies, you can navigate these challenges and thrive in your market.
Wholesale terms to know
If you’ve previously done some research on wholesale, you may have come across certain terms and acronyms that look foreign to you. Even though the world of wholesale is new to you, these terms are easy to understand.
Plus, if you’re serious about wholesale—regardless of whether you’re looking to sell or purchase—you’ll need to get yourself acquainted with them.
MOQ in wholesale stands for “minimum order quantity.”
Even though it’s not always the case, most wholesalers require a minimum number of unit orders from a buyer to be able to offer their prices at wholesale (lower) rates.
MOV is “minimum order value” and its concept is similar to MOQ.
The difference between MOV and MOQ is that the latter deals with unit quantities (e.g., an order for at least 500 units of candles), while the former refers to order amount in dollars (e.g., an order of at least $2,000 worth of candles).
Both MOVs and MOQs can vary greatly, depending on the manufacturer/distributor you work with, the product, and the sector you’re in.
Tip: As a retailer, if you’re using online wholesale marketplaces to source for suppliers, make sure to check whether their directories provide details on minimum orders for you to sort, filter, and make an informed decision.
MSRP refers to the manufacturer’s suggested retail price.
This is the price a wholesaler recommends its products be sold at by the retail business to the end consumer (i.e., the price listed in the retail store), which is higher than the wholesale price, as it takes into consideration markups by retailers.
Note that this is only a recommendation and it is up to retailers to decide whether or not they want to abide by it.
For instance, they are free to list their prices higher than the MSRP for products in high demand to boost profits, or set them lower during sale seasons.
The MSRP is also commonly referred to as the RRP (recommended retail price).
4. White/private label
White or private labeling is when a store agrees with a manufacturer to sell its product(s) under the retailer’s brand name and logo.
This can either be for wholesale items that the manufacturer is already producing or a new product that the retailer commissions the manufacturer to develop. In both cases, the retailer would almost always have exclusive rights to the product(s).
A good example of a private label brand is Nardo’s Natural. The company specializes in organic skin care products and has created a separate website just for private label business. On the site, it helps with everything from conception to the creation of your skin care products.
5. Wholesale only
“Wholesale only” is a term suppliers use when they’re selling only B2B and not to the general consumer.
6. Back order
Back orders refer to purchases from retailers that have been placed but are yet to be shipped. This is usually due to the lack of inventory from the wholesaler/manufacturer.
Buybacks take place when a wholesaler re-purchases unsold products that were originally bought by the retailer.
Conditions for buyback are usually set in advance and agreed upon by both parties. This includes time limit, re-purchase price, circumstance, and more.
8. Purchase order
A purchase order is a document containing the details of the items being purchased.
It usually includes:
- Item quantity
- Item description
- Price per unit
- Total price
- Payment terms
A purchase order is used to generate an invoice.
9. Net payment terms
This refers to a type of payment plan agreed upon by the retailer and the wholesaler.
It allows the retailer to make payment only after having received the goods and time to sell them.
The most common payment terms are 30, 60, and 90 days, although it can also be as short as seven days and as long as 180 days.
A consignment is a special arrangement between the retailer and wholesaler in which the retailer only pays for the products after they’re sold.
Under this arrangement, retailers do not purchase the items from the wholesaler. Instead, they simply place the manufacturer’s merchandise in their store and take a small cut from any sales that may happen.
Any unsold products are returned to the wholesaler.
11. Lead time
Lead time is the length of time between the moment a retailer places an order with a wholesaler and the goods’ arrival.
This is also known as turnaround time.
Sell wholesale on Shopify today
It’s clear selling wholesale is a lucrative opportunity for any online retailer. Shopify is built to streamline the B2B sales process with a robust set of tools for managing inventory, processing bulk orders, and maintaining customer relationships.
You can create a password-protected wholesale page on your ecommerce site, or you can integrate with wholesale marketplace Faire to reach a wider audience and sell in bulk online.