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Being a wholesale distributor can be a lucrative profession, one that accounted for $6 trillion in 2018 alone. Hearing numbers like that can be mind-blowing, but someone just entering into this business segment has a lot to learn to ensure he or she is ready to grab a piece of the pie.
To become a wholesale distributor, there are important steps to follow. These steps include securing the proper amount of capital funds, obtaining an EIN from the IRS, and establishing partnerships with relevant manufacturers and retailers. Researching the wholesale distribution industry beforehand is essential to this process.
Take a look at our comprehensive guide below to learn the steps to success in becoming a wholesale distributor.
A wholesale distributor handles the distribution of products from a manufacturer and then sells those products at wholesale prices to a retailer. The wholesaler always sits in the middle portion of the supply chain.
Wholesale distributors deal in large quantities of goods and are set up to have a warehouse, distribution center and shipping logistics to get the items to the next phase of the distribution channel.
The vast majority of the time, the wholesale distributor will then ship directly to the retailer, who has purchased the item and will decide on how it will disperse the goods to its customers. A less common method is dropshipping, which is where the retailer buys the product from the wholesaler but the wholesaler is still responsible for processing and shipping the order to the customer.
Dropshipping is most common in e-commerce, where a company like Amazon or eBay will see a portion of its sales employ the method. So even though Amazon (for instance) is responsible for the entire customer experience, the trillion-dollar company uses dropshipping for as much as 33 percent of its business and is still culpable for any hiccups in the product reaching its customers.
It is rare that a wholesaler would sell directly to consumers but it is possible. There are some hurdles associated with selling directly to customers but it can also be profitable under the right conditions.
A retailer sells the manufactured product directly to the customer. Because of this, the retailer is also responsible for having a retail store if it does in-person sales or a website or a presence on an e-commerce retailer’s website.
A wholesale distributor’s customers are the retailers. The wholesaler is selling its product to the retailer and then shipping it either directly to the retailer or on behalf of the retailer to the customers. Even if using dropshipping, a wholesaler will never deal directly with the retailer's consumer though — the retailer will always be fulfilling that responsibility.
An example of this dynamic is if the customer has a problem with its order. Even though the wholesaler filled the order and the retailer never handled the product, the retailer is on the hook for making it right with the customer. This means it’s on the retailer to work with the wholesaler to correct the mistake and get the right item in perfect condition to the end customer.
Conversely, the wholesaler is never going to deal directly with an average person walking into a big-box store to buy soap. At that point in the distribution channel, the wholesaler has already sold the soap to the retailer for the retailer to sell.
Starting a wholesale distribution business is really like starting most kinds of business. You have to begin by formulating a solid initial plan to put yourself on the right path. Of course, there are going to be some moments of trial and error but the time before taking the business live should involve careful planning.
Once that occurs, you will need to compile a list of all of your expenses — warehousing, staff, packaging, shipping, etc. Only once that happens will you have a list of your projected total expenses. From there, you can set a profit point you want to hit in order to make the entire enterprise worth it to you.
Next, do market research to see if you can sell the items for the price you want to achieve desired profits.
Hypothetically, it would be most advantageous to be close to the manufacturer (s) of your products. Also, this is a time to consider carving out administrative operations at the warehouse and purchase office equipment.
Once you’ve checked off those boxes, it’s time to put in your first order to a manufacturer and start moving product.
The same steps for starting a wholesale business above will be applicable here as well. So let’s go over additional tips that are specific to launching a wholesaling solution from your house.
Developing an online presence is probably important all around, but a critical factor that will help your business if you’re running it at home. You will be responsible for building or having someone build a website, which should load quickly and be aesthetically pleasing while also being easy to navigate. The last thing you want as a business is to run a sluggish or unattractive website that frustrates customers and makes them look elsewhere. Your contact information should also be included.
You will need to register a domain name for your new website and also further build out your brand on social media.
If you are starting out a small operation, you can probably use your garage, a large shed, an attic or a basement on your property, at least initially until your business grows. This will cut down by lowering some of the overhead costs but will be very limiting if your operations need to expand.
You can also try dropshipping. In this scenario, you would take the order and forward it to a supplier, who would then ship the product. This approach has its pros and cons though.
The biggest pro is that you can start up your operations for very little upfront cost. The downside, though, is while your cost might be lower, so will your profit margin since you are doing less of the actual work.
Registering your wholesale business is not challenging but steps need to be taken in a certain order to complete the process:
The basic way wholesalers make money is by purchasing products from a manufacturer at a low price and selling it to retailers at a higher price than it was purchased. The way the wholesaler gets lower prices is by purchasing in large volumes.
Having a good relationship over a long period of time with a manufacturer could pay dividends in the form of additional discounts. If you prove to be a stable partner who buys a lot of their products, the supplier will view you as a reliable way to make a guaranteed profit and slightly lower their price. Also, the more a wholesale distributor orders at once, the lower the price will be per unit, allowing the wholesaler to bump up its overall profit.
At the same time, it’s simply good business to constantly evaluate your relationships with your suppliers. If they are not fulfilling your needs or a better price can be had elsewhere, it’s worth exploring.
But making money can be achieved by finding ways to reduce your own costs at every turn. Some tips include:
For office supplies and packaging materials, buying in bulk — surprise! — will save money in the long run. In fact, try to go paperless in any instance you can. That will be a potentially sizable source of savings.
If you are using a company credit card or took a business loan from the bank, the interest rates could even be renegotiated after a period of time to a more favorable rate, saving you additional fees.
Also if you’re starting a wholesale distribution business, you can try to look for second-hand equipment, which would be cheaper than brand new.
Leveraging Facebook, Twitter or even your company’s newsfeed on LinkedIn are all free and might be able to reach a good amount of people. If you really feel like you need to spend money on job postings, Craigslist offers job postings for as little as $10 depending on the area.
Once you have employees, also ask them to refer people they know to apply for open jobs at your business. This will be a free way to find workers and comes with the added benefit of a bit more certainty in who you’re hiring.
You can consider doing your own marketing as well, which will eliminate the cost of paying for outside help.
Manufacturers need to concentrate on producing a great product, often in vast quantities. In many cases, they don’t require the additional headache of trying to ship it to retailers and also shipping it to retailers in more manageable units.
That’s where a wholesaler comes into play. There are myriad benefits for the manufacturer’s relationship with the wholesaler.
A wholesaler, on the other hand, is much more likely to cover a smaller area and will know the current market conditions for their specific zone.
There’s no way around it — wholesalers add more cost to the end product consumers buy at the retail level. But if a manufacturer had to hire its own sales team and then worry about additional logistics, the added cost of that expense to the manufacturer would inevitably be passed on to the customer anyhow.
This suits manufacturers and retailers too, since manufacturers can get their products closer to retailers. The retailers also experience less interruption in their supply chain. Also wholesalers are in constant contact with retailers, taking another thing off the plate of manufacturers. These examples in the floral industry highlight why wholesalers are used.
There is no restriction on who a wholesaler can sell to. And if selling directly to a customer is profitable, a wholesaler should at least consider it.
Anything that builds your brand as a business has to be seen as a positive and you could legitimately be offering a solution to a customer’s problem that can’t be solved immediately by a retailer, like a last-minute need for a large amount of one item.
However, there are a few aspects of wholesaling that could make selling directly to consumers less than ideal. If you’re selling directly to a customer, chances are it will not be in the volume a wholesaler would enjoy in dealing with a retailer. Wholesaling is often a high-volume setup with low-profit margins per unit, so selling 50 picture frames to one customer might not be worth the time and effort.
A wholesaler would also run the risk of alienating or harming the business of their retail partners. In actuality, the only reasons a customer would choose to deal directly with the wholesaler is to get a product in very large quantities or to get a cheaper price. Other than those two instances, there’s little reason for a consumer to go directly to a wholesaler.
Furthermore, this undercuts the wholesaler building relationships with the retailer and it’s not a good business practice for a wholesaler to possibly eliminate its biggest customers.
Another possible pothole for a wholesaler is the expectations of an individual customer. It might be a one-off order but the individual may have different customer service requirements than a retailer would, like individualized care and constant communication. This is not very efficient for a wholesaler.
None of this is to imply a wholesaler should not sell to the public. But it might be wise to take a big-picture view before you decide whether it is truly beneficial to your operation.
Wholesalers have a place in the supply chain for valid reasons. While the practice can be simplified by being called a “middleman”, manufacturers and retailers would not use a wholesale distributor unless there were true advantages.
Allows access to goods: This is beneficial for retailers and customers, especially those that are not in very heavily populated areas.
While Amazon is unique in the world of e-commerce and is not a like-for-like example, the setup in place is to shorten the timeframe of each step in the supply chain, including wholesale distribution.
Amazon uses the same principle so it can have a product to any consumer in the country in two days. It has distribution warehouses all over the United States in strategic locations to be able to react quickly to nearly anything a customer can order.
For retailers and customers, a wholesale distributor follows those lines in the sense that it has purchased the product and can more quickly get it into the hands of retailers, who can now turn around and sell more quickly to customers.
Theoretically, this also benefits consumers because they have access to a greater variety of specific products. This allows the consumer buying choice and also increased buying power, because manufacturers and retailers both have to offer more competitive prices if there is a huge selection on the market. It also allows small businesses to get their hands on goods they otherwise would not be able to access.
Provides manufacturers market reach: This is like a trickle-down effect for makers of goods. Manufacturers can concentrate on producing its items and then instead of worrying about how to get it to all corners of a country, or even globally, it can sell its finished product for a profit to a regional or national wholesalers in a much quicker manner and immediately continue production.
Manufacturers don’t have to spend additional time, money and effort figuring out how to get its products into the hands of consumers.
The biggest disadvantage to being a wholesaler is the large amount of capital that could be required at any time.
Buying products in enormous quantities can be risky if you’re not able to move the product in a speedy fashion. The wholesaler will have laid out a lot of money upfront to the manufacturer for the goods.
In the same vein, many wholesalers give retail businesses goods on credit and payment can take anywhere from 15 to 30 days after delivery of the items to the retailer. This can be frustrating and your business should be set up in such a way that it can account for this delay.
At some point, space could become an issue. Both the amount of real estate needed to house vast amounts of the type of product you’ll sell and the high cost of commercial rent could combine to make warehousing a big expense.
The goal of setting your price as a wholesaler is two-fold: move your product and turn a profit. In order to do that, picking the price you charge is a very delicate balance between trying to realize the biggest profit possible without scaring off your customers.
The wholesaler’s opening move should be to do market research to see what it could possibly sell its item for. This will dictate what it can charge the retailer and how much of the product can be moved at a time.
The simplest way to quickly calculate how to set your price is by figuring out your cost per unit from the manufacturer and the profit margin you’d like to see.
For example, you spent $10,000 on 1,000 items. The price you paid per unit is $10 each and you want to make a profit margin of 20 percent on each item. So $10 x 1.20 means you’d need to charge the retailer $12 for each item in order to realize your 20 percent profit goal.
That is a basic way to understand the principle, but competitors’ pricing will also play a huge role in how you’re able to set your prices.
There is also differentiated pricing to consider. This is where the same product costs different prices to different customers due to various circumstances. Supply and demand is one of these: if you are the only one with the availability of an in-demand product, you can set the price higher. Or if a retailer is ordering in a smaller quantity and you’re not able to disperse the shipping costs as much, you might charge a higher per-unit price.
This works both ways: if a customer is buying 100, you might charge $15 an item. But if that same customer tells you they want 10,000, it might make financial sense for you to charge them $12 an item because you can ship it all in one order and you can pass on some of the savings to your customer without affecting your profits.
Overall, wholesale distributors look for 15 to 20 percent profit margins on sold products.
Let’s say you buy $80,000 worth of products from the manufacturer and sell them to the retailer for $100,000. That is a gross profit margin of 20 percent.
The way that is calculated is ($100,000 - $80,000) ÷ $100,000 x 100 = 20 percent.
This gross profit margin doesn’t mean your business will realize 20 percent overall profitability. You still need to factor in all your overhead costs (like labor, delivery and warehousing) for the net profit.
The net profit margin a business should aim for is about 10 percent. There is no certain number you have to hit; you might be under that mark and be fine, or able to achieve greater.
But 10 percent is a good number to hit for a couple of reasons: a wholesaler might want to expand operations later or reinvest money in the business in some other way. Most likely, that will be a reinvestment of profits. If it’s not, then you need to be able to show a lender you either have a plan for solid profitability or that you’re currently profitable.
Also the profit margin is really going to depend on what you’re distributing. An example of this can be seen in different kinds of beverages: alcoholic drinks saw a 24.35% net profit margin while soft drinks were at 8.76 percent.
Also, conditions completely out of a wholesaler’s control can negatively impact its bottom line, like the economy and the stock market.
Now that you’re becoming a wholesale distributor, let R+L Global Logistics help you with your warehousing and logistics needs.
R+L Global Logistics can offer you valuable information on how to set up your wholesale business. Once you’ve set up your wholesale distribution operations, you can lean on our more than 30 years of experience in the industry via the following services:
To schedule a consultation with one of our distribution and logistics experts to discuss order management, wholesale distribution and more, give us a call at 855-863-7672. We’re ready to help you launch your wholesale business.
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