6 questions you need to ask before you start wholesaling
You know you’re doing things right when business is booming and customers’ cash is flowing fast. But consumers can be fickle things, and markets can shift overnight. So how do you make sure your business is robust and able to withstand market downturns?
If you went looking for personal financial advice, your adviser would probably have just one word for you: diversify. When you diversify your investments, you generate multiple different income streams. This means that if one source of income is reduced by a market downturn, others should remain unaffected. Some income streams may even increase.
Retail business owners can achieve a similar effect by diversifying their revenue streams, focusing on different markets that operate independently and therefore are likely to move independently. Ideally, you’ll do this by leveraging your existing retail investment to service those new markets. And the most obvious way to achieve this is to expand into the wholesale market.
Here’s everything you need to know, including how to get started.
What is wholesaling?
When you wholesale, you’re selling directly to other businesses (B2B sales), and those businesses will on-sell your products to their customers. As the name suggests, wholesaling is selling in large quantities, usually at a discounted (relative to retail) price.
Why is wholesaling a good option for retailers?
Despite selling at a lower unit price, wholesalers still make solid profits on their goods sold because they’re selling much higher volumes. This has flow-on effects, including more negotiating power with their suppliers and freight providers. Further, wholesalers benefit from
- a widespread retail presence through your distributors’ stores
- lower advertising costs—it’s up to the retailer to connect with customers
- high stock turnover, leading to fewer write-downs and write-offs.
Is wholesaling right for my business?
Not all retail businesses will translate to a wholesale business, and it’s important to assess whether it’s a good strategy for your store. For example, if you sell bespoke items directly from independent craftspeople, you may find it difficult to scale up your supply to meet wholesale demand. If your suppliers are based overseas, increasing your order volume may result in additional import duties and taxes that eat into your profits.
Other challenges associated with wholesaling may be offset through clever use of third-party providers. For example, if you sell high-value products or large items, the cost of storing and insuring wholesale inventory may be unfeasibly high. You could instead reduce these costs by engaging a drop shipping provider.
Where do I start?
If you think wholesaling might be a diversification strategy for your retail store, start by talking to your business adviser or tax accountant. They’ll be able to tell you about any taxes or customs duties you’ll need to pay, and any tax implications. You’ll also find free information available on local, state, and federal government websites.
As a wholesaler, you’ll need to find distributors for your products. You can work with many or few distributors or even just one; as with most business decisions, there are pros and cons. You might negotiate higher prices if you offer products to a sole distributor, but if you sell through several distributors, you’ll be less affected if one distributor stops buying from you.
The higher rate of sales associated with wholesaling means you’ll need to be able to deliver more products, so check your existing supply chain will be able to meet demand. Because you’ll be buying more raw materials, parts or products from your suppliers, you’ll be in a strong position to renegotiate agreements with them.
With all the formalities taken care of, you’re ready to start selling to your distributors.
Do I need a new sales platform?
That depends. You’ll need specific features to suit your wholesale strategy, such as
- separate pricing lists for different groups of customers
- quantity-based pricing for volume discounts
- a way to limit access to parts of your online store so that only logged-in users can see sensitive information (such as wholesale pricing)
- a way for your distributors to request a login
- the ability to take orders over the phone and send quotes online
- pre-ordering and backorders
- customer accounts that let you set credit limits and invoice terms
- fulfilment options that suit your distributors, including the ability to drop-ship products directly to their customers.
That’s a big list, and if your retail platform doesn’t offer these features, you’ll be making a lot of extra work for yourself. But if you’re with Neto, you’ll have everything you needed to get started straight away.
How about pricing?
You’ll hear the general rule of thumb that your wholesale prices should be about half your retail price, but that’s thinking of it backwards. If you want your business to be profitable, you need to make a profit on your wholesale transactions, too, so this is where you should start. Set a wholesale price at which you’ll make a net profit you’re happy with—one that allows you to keep growing your business after paying all your operating expenses.
Then set your recommended retail price from your wholesale price. Don’t undercut your wholesalers’ prices—remember that they’re your customers, not your competitors. And don’t offer them a wholesale price that’s so low you can’t afford to match their retail price. Finally, the market knows best: if your wholesale or retail customers are willing to pay more than the minimum price at which you’d make a profit, the market is sending you a strong message!
For many retailers, adding a wholesale revenue stream could be an excellent way to diversify your income while growing your business.
Neto is the only Australian retail management platform that provides a complete solution for ecommerce, point of sale, inventory, and fulfilment, for both wholesale and retail stores. Our integrated back-end technology enables exceptional and consistent customer experiences via any channel, be it in-store, online or through a marketplace. We automate repetitive tasks and integrate with multiple sales channels to manage orders and shipments. See how easy it can be to add a wholesale revenue stream to your retail business—start a Neto free trial.