When you are in need of a single light bulb, you might go to Home Depot or Wal-Mart, but if you need 100s or 1,000s of light bulbs and light fixtures, then these aren’t the places you’re going to go, because it’d be way too expensive. You’re going to find a wholesale distributor.
Generally, this is how wholesale works:
- Manufacturers make a high volume of products and they need to sell a high quantity of products to make a substantial profit.
- The Average Joe rarely needs a high quantity of products from any manufacturer, but millions of Average Joes are more likely to want at least 1 product… Consequently, manufacturers sell the high quantity of products they need to sell to make a profit by selling to a handful of wholesalers.
- The wholesalers sell the manufacturers’ products at slightly increased prices to end buyers and retailers.
Sometimes wholesalers require their customers to spend a minimum amount of money or pay an annual fee to access their wholesale prices, but this is not the case for every wholesaler. Either way, the benefits of purchasing products from wholesale suppliers include: reduced unit costs, convenience, and product mix.
Manufacturers do 2 things to make a substantial profit: they sell their products for more money than it took to make the products and they sell a high quantity of products to every buyer. Typically, manufacturers sell their products for twice the amount of money it took to make the products, which gives manufacturers a 50% Gross Profit Margin (GPM).
Wholesalers normally aim to make a GPM between 10 and 15%, which means they must charge customers 1.18 times the price they paid manufacturers for products.
When retailers, like Home Depot and Wal-Mart, buy products, like light bulbs, from wholesalers, they increase the prices of the products yet again. Therefore, if you purchase products you need from a wholesaler, instead of a retail store, then you’re going to get a better price from the wholesaler.
Furthermore, wholesalers often reduce the unit price even further for customers who make larger orders. They do this as an incentive for customers to buy more. Plus, when you buy more at 1 time, you can save money on shipping. Also, when customers buy more, it clears warehouse space, so wholesalers can buy more products and make more money.
Wal-Marts are basically in every town. This is a part of Wal-Mart’s charm: convenience, without excessive variation. You can walk in any Wal-Mart and find the same brands and pretty much the same things; however, you pay a little more for products because of this convenience.
It’s similar with wholesalers. While manufacturers have 1 or 2 locations, they sell to a handful of wholesalers across the country or around the globe in various locations. This means wholesalers can reach more customers easier than manufacturers can.
Wholesalers also have the ample space necessary to store a high quantity of products purchased from manufacturers and manufacturers don’t have this kind of space.
As a customer, you are going to pay a little more for products you buy from a wholesaler than you would if you purchased the same products directly from the manufacturer, but think of it this way: you’re paying a little more for convenience and you’re paying for product variation, because wholesalers don’t usually buy products from just 1 manufacturer.
Plus, manufacturers don’t normally sell directly to end buyers, so really you have 2 choices: wholesale or retail.
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