Pricing Decisions – Should Your Online Store Offer Wholesale?

wholesale-tomatoes
The Lure of Wholesale Markets

For an online store it can be a competitive advantage to create a brand yourself. In this scenario, more often than not the idea of wholesaling, selling to retail stores, gets put on the table.

I have had only limited experience with selling products under my own brand, but in most cases the startup cost is significant. The promise of large revenues from wholesale can be appealing.

I have had more experience with established brands in both exclusive and non-exclusive deals. For exclusive deals where they agree not to supply anyone else in your territory (in my case Australia). There is usually something you need to give back to get this exclusivity in the way of purchasing commitments. If you can’t buy enough stock then it is not in their interest to refuse supply to other would-be distributors.

For non exclusive deals, there is may still be a  motivation to sell as much as you can to receive discounts based on quantity purchased. Or the potential – if you can sell enough of their products – to nail down an exclusive agreement.

The Tough Reality of Wholesale Markets

I have had varied success selling products to re-sellers, and have ended up using wholesale accounts for objectives other than profit.

The times I have had an exclusive deal on a brand, then wholesale has had some benefit in market penetration and exposure, i.e, getting the brand out in the marketplace and known.

Wholesale has helped with increasing turnover and meeting supply commitments, and increasing stock turns. Increasing stock turns or inventory turnover helps with cash flow. Keep in mind that slow paying retailers can reverse this benefit quickly, so a strict 30 day or tighter terms are needed.

For one of my businesses, IOTA Designer Planters, the wholesaling of garden pots to garden centers made pricing difficult. The retailers generally want a 100% markup and then I needed my own 50-100% markup. This meant I needed to set a recommended retail price (RRP) above what I thought was optimal. Price elasticity of demand

In this situation, everyone lost as the RRP was too high to sell enough volume to optimize profits. Once I realized this, I slowly closed all my wholesale accounts except two. These were high the high profile Garden centers where I was meeting my non-profit objectives of increased turnover and exposure.

Alternatives to Wholesale

There are other pricing models that don’t require as large a discount as wholesaling to retailers.

Most of these are business to business (B2B), like trade pricing and B2B direct. But if your products are consumer only then you can look at bulk discount pricing.

Trade Pricing

This is known as price differentiation or discrimination and is an effective part of B2B transactions. I loosely call these wholesale, but only because it makes the customer feel like they are getting the best price. In reality they are not offering the exposure that “real” wholesale accounts do so can’t justify the same discount. Also they are not reselling it in the same way a retailer would so they don’t need anywhere near the margins. Generally, 15-25% is a win for a consultant or contractor buying on behalf of their client.

B2B Direct

This includes sales to businesses, corporations, governments and councils. These can often be the most lucrative since they are using the product themselves and there is no one adding any margin. They are also conservative in their procurement so will often be happier to pay slightly more to a supplier they trust. Orders can also be of good size, where you will have your next decision on what discount to offer for bulk purchases.

Bulk Discounts

Again this could loosely be called “wholesale” but unless the quantities are really high, it is unwarranted to give a true wholesale price of 40-50% discount.

Pricing here would be dependent on competition. If it was a generic or mass market product you would have to be more price competitive than if you were the only one to hold that brand.

If you were the only one to hold the brand then it will be less price sensitive, but competition from brands of similar products would have to be taken into account.

Some knowledge of the depth of stock your competitors kept would help. If someone needs 50 widgets by Friday and you know you are the only one that has that many then there is no need to discount too heavily.

Conclusion

There is certainly an appeal to the big numbers that wholesale can generate, but there are alternative models that require a smaller initial investment and much larger margins. For some, exclusive supplier deals wholesaling can be a necessary evil. However, tread with caution as the cost of “sell in” can cripple your business much quicker than not meeting your purchasing commitments.

Keep in mind that your suppliers exporting model has risk, and debt collection is much harder across international borders. If you can build trust with your suppliers they may end up being satisfied with a lower turnover than originally agreed to deal with someone they trust.

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