What is Wholesale? Definition, Types, and How Wholesaling Works

When it comes to buying and selling merchandise, wholesale and retail may be terms you hear often. But what’s a wholesale business model and how is it different from retail? Which model should you elect for your new business venture? Wholesale plays an important role in the supply chain for both businesses and consumers. Whether you’re starting your first business or you’re a seasoned business owner, keep reading to learn more about wholesale, how the wholesaling model works, and tips for increasing your sales.

What is wholesaling and how does the wholesale process work?

In a wholesale business model, you purchase products in bulk from manufacturers. Then your company sells those products to retailers, who then sell them directly to consumers. You can think of wholesalers as intermediaries between manufacturers and retailers. Most wholesalers don’t produce the goods they sell themselves. Instead, they buy them from a manufacturing source. This allows wholesale businesses to focus their efforts on the sales and delivery aspects of wholesaling.

Wholesalers purchase goods from manufacturers in bulk, usually at a discounted rate. Then, wholesalers sell the goods to retailers at a higher price to make a profit. However, this price still offers a bulk discount to the retailer overall. Then, the retailer sells the goods to the customer at an additional mark-up. Buying in bulk allows wholesalers to purchase products at a discounted price and then sell to retailers at a higher price. This is how wholesalers make a profit. It’s more cost-effective for a wholesaler to buy in bulk from a manufacturer than it would be to buy the items individually. Wholesalers often specialize in a single product or category or can offer a variety of products.

This process enables the distribution of merchandise from manufacturers to retailers. Wholesaling is one part of the supply chain. Wholesalers typically have a smaller profit margin than the retailers they’re selling to. Wholesale companies are typically B2B (business-to-business), and they typically sell to retailers. This is where the difference between wholesale vs retail can get muddied, but we’ll cover that in more detail later.

Wholesale definitions

Wholesalers play an important role in the supply chain by bridging manufacturers and retailers, ensuring efficient distribution, bulk sales, and often offering services like storage, shipping, and product assortment. First, let’s explore common definitions of the supply chain so you can better understand where wholesale falls into the mix.

What is wholesale price?

Wholesale price is what manufacturers charge for bulk orders. It’s the cost paid by the retailer to the wholesaler. By purchasing in bulk, wholesalers can request a significant discount from the manufacturer, profiting from retail markups. Retail markup refers to the difference between a retailer’s price for a product and its wholesale price.

Wholesale price vs retail price

Goods are purchased and sold at different prices in a wholesale business. This can make the difference between the wholesale price vs the retail price confusing. Because wholesalers can take advantage of economies of scale, the wholesale price is often lower than the retail price.

The retail price is the cost the retailer charges to the end consumer. This price will be higher than the wholesale price because it includes the retailer’s costs like shipping costs, rent, staff wages, and profit margin. Adding a retail mark-up to the wholesale price allows retailers to cover their costs and make money. 

Wholesale vs distributor

Wholesalers and distributors commonly get mixed up, but are often separate groups. The difference between wholesalers and distributors is tricky as they both interact with manufacturers and retailers, but they have different purposes. Wholesalers and distributors both play crucial roles in the supply chain, but their functions and relationships within the chain differ. Let’s further examine the difference between wholesale vs distributor:

• Wholesaler: A wholesaler is a middle person who buys a product from a distributor and resells it at wholesale price to a retailer. They sometimes assemble goods or repackage them into smaller bulk lots, reducing complexity and inventory risk for a retailer. They usually warehouse goods for a short period of time and do not interact with the end user.
• Distributor: A distributor sells a product to wholesalers or retailers. They often have a lot of product stock – and seek to offload it through other channels. In addition, distributors work more closely with manufacturers to help push the product to market.

Distributors often have formal contracts with manufacturers that outline how they can sell the products either to wholesalers or retailers. They often provide more services than wholesalers, like marketing, inventory management, and technical support. You can think of distributors as a manufacturer’s “sales partner.” A wholesaler’s relationship with a manufacturer is generally just transactional.

Wholesale vs retail

Retailers vs wholesalers are another nuance to cover. The difference again lies in the function in the supply chain. Where wholesalers are the middle men, the retailers are at the end of the line. They sell goods to end users, or consumers, to make a profit. Retailers use wholesalers to find the products. They make money by reselling the goods at a higher price to their customers than what they purchased them for. Brick-and-mortar stores, as well as online retailers, are classified as retailers.

Types of wholesalers

Wholesalers operate in different ways, fulfilling different needs of the supply chain. Here are a few of the most common types of wholesalers:

• Merchant wholesalers: This is a common type of wholesaler. Merchant wholesalers don’t produce the goods themselves but resell them to retailers.
• Brokers: Brokers typically act as intermediaries between the manufacturer and retail businesses that want to sell their products. They set up deals between wholesalers and retailers. They earn a commission for facilitating that transaction.
• Dropshipping wholesalers: Dropshipping wholesalers are responsible for storing, managing, and shipping products on behalf of retailers AFTER an order has been placed via the retailer’s online store.
• Manufacturers: Manufacturers can sometimes act as wholesalers by selling their products directly to retailers or end consumers. Other times, they work with distributors and wholesalers to build the supply chain that moves their products to retailers and ultimately consumers. They produce their own products for resale.

Advantages and benefits of wholesale

There are several reasons why you may want to become a wholesaler or, if you’re a retailer or manufacturer, work with a wholesaling business.

Some of the advantages of using wholesalers are:

• Lower prices
• Increased sales
• Higher brand visibility
• Simplified distribution
• More efficient inventory storage opportunities
• Market expansion
• Diverse product access

And, if you want to become a wholesaler, here are some benefits:

• Stable client relationships
• Higher volume sales and revenue in fewer transactions
• Large customer base
• Global expansion

Potential challenges of a wholesale business

There are, of course, some challenges when it comes to wholesaling.

1. Lower profit margin: As mentioned, the profit margin for wholesalers is generally small. So, your wholesale operation is more susceptible to risk from cost or sales fluctuations.
2. Limited customization: The wholesale market can also be highly competitive, with many wholesale businesses offering the same products.
3. Supplier dependence: Wholesalers are dependent on retailers. So, any issue at the retail level can affect wholesale sales.
4. Minimum order quantities: Wholesalers often have large minimum order quantity requirements from manufacturers. You might have to purchase more product than desired, leading to extra inventory and more of an investment.
5. Inventory management: Buying products in bulk requires more storage capacity to manage and organize the inventory. As such, you could incur extra overhead costs for warehousing and handling bulk inventory.

Ways to increase your wholesale sales

If your wholesale business is looking to attract more retail buyers, here are a few tips:

1. Offer specials: Wholesaling already offers retailers a slight discount. Building in additional sales offers into your prices can attract more business. Retailers will take notice of added savings from deals and incentives. Consider providing limited-time offers that encourage retailers to buy by a deadline, a one-time discount to new buyers, or a free gift for repeat customers after a certain quantity of purchases.
2. Provide exceptional customer service: Provide the best customer service to all of your buyers. This will help create strong long-lasting relationships. It will also make your buyers more likely to recommend your business to others in their network.
3. Streamline all operations: Make working with you a breeze. Make sure your ordering, delivery, and billing processes are as efficient as possible for retailers. Also optimizing your internal business operations and manufacturer ordering relationships.
4. Offer merchandise recommendations: Give retailers suggestions for additional merchandise that may fit their needs based on their previous orders.
5. Price it right: Find that sweet spot between profit and what your buyers find irresistible. A bit of strategic pricing can work wonders.
6. Stay flexible: Market trends change like the wind. Be flexible, tweak your strategies, and stay ahead of the game by staying on your toes.
7. Understand your consumer: Dive into the end consumer’s world — understand their needs, desires, and quirks. Tailor your products to hit their sweet spot and you’ll attract retailers who recognize the value of your strong base of customer knowledge.

How to get started in the wholesale market

If you’re new to wholesaling but want to get started, here are the basic steps you should take:

1. Choose a product category.
2. Conduct market research.
3. Develop a business plan.
4. Register your business.
5. Source your products and develop a reliable supply chain.
6. Build a relationship with your customers.
7. Start marketing your business and establish an online presence.
8. Manage finances and day-to-day operations.

How Block Advisors can help you manage your small business and more

If you’re just starting out, understanding wholesale can help you better understand the process of buying and selling products. Or, if you already own a business, understanding wholesale can help you make better buying decisions and help your business grow. So, whether your business is just getting started, or you’re a seasoned owner, Block Advisors is here to help.

Get back to doing what you love and let our experts lighten your load, in person or virtually, year-round — as always — backed up by the Block Advisors guarantees. Our taxes, bookkeeping, payroll, and incorporation services are designed with small business owners like you in mind.

Speak with a certified small business pro today!

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This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.