wholesale-business-model

What Is The Wholesale Business Model?

The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Understanding the wholesale model

Wholesalers receive attractive prices from the manufacturer because they deal in large minimum order quantities (MOQs), with larger order quantities reducing handling time and cost and increasing profit. In some cases, the wholesaler and the manufacturer are the same company.

In a traditional wholesale model supply chain, goods may flow from raw material suppliers to manufacturers, distributors, wholesalers, retailers, and finally to consumers. Since most wholesalers do not sell directly to the consumer in small quantities, they sell bulk goods to retail businesses for a profit. 

The wholesale model is a business-to-business (B2B) process since wholesalers buy from a manufacturing business and sell to a retail business. This differentiates the model from the retail model, a business-to-consumer (B2C) process where retailers buy from wholesale businesses and sell to individual consumers.

Functions of wholesalers in the wholesale model

Many companies utilize wholesalers and the wholesale model because of the impracticalities of selling direct to consumers. This is particularly true of large retailers, who may operate thousands of stores in hundreds of different regions.

To that end, some wholesalers act as middlemen for retailers and are vital cogs in the supply chain. Here are some of their functions:

  1. Sales and promotions – wholesalers are typically responsible for meeting sales targets for their particular region through promotional campaigns. 
  2. Inventory management – maintaining sufficient inventory is a critical function of any supply chain. Experienced wholesalers understand that different products sell at different rates. They then use this information to avoid overstocking and understocking issues across the supply chain.
  3. Breaking the bulk – when a wholesale company receives a bulk order, it must necessarily break the order down into smaller cartons or consignments ready for delivery to the retailer. 
  4. Warehousing – to supply a whole region, wholesalers require a large warehouse space to store inventory. Warehouses must be large enough to accommodate the extra demand for stock during holidays such as Christmas. The warehouse itself must also be economical to operate and not eat into margins.
  5. Risk management – in most cases, wholesalers are also responsible for inventory losses incurred because of theft, fire, or accidental damage. This makes risk management a priority.
  6. Market information – wholesalers have a good understanding of the size and potential of a market and share this information with intermediaries up and down the supply chain. Some may also have information on how strong a competitor’s business is in a specific region, which is valuable information to retailers and other wholesalers alike.

The benefits of buying and selling under the wholesale model

Let’s take a look at some of the benefits of buying and selling under the wholesale model.

Buying

  • Cost and time reduction – as mentioned earlier, buying in bulk helps a business save money on most product ranges. For the retailer, the purchasing process is also more efficient. Wholesalers deal with multiple suppliers for every product, but the retailer only needs to do business with one wholesaler.
  • Better deals – dealing with multiple suppliers, the wholesaler can quickly identify reputable companies who deliver high-quality products on time and at a reasonable price. This work also saves the retailer from finding reputable suppliers themselves.

Selling

  • Higher margins – selling under the wholesale model may require dealing with multiple suppliers and comparison shopping to get the best deal. However, this allows a business to buy low and sell high. Selling direct to consumers will earn the highest margins, while selling to retailers usually attracts a slightly lower (though still attractive) margin.
  • Responsiveness – sellers also have a better understanding of high-demand products since they work with both retailers and customers. With supplier relationships already in place, wholesale sellers can also launch new products more quickly than competitors. What’s more, some wholesalers have a deep working knowledge of the timing and organization of the entire supply chain, which gives them a competitive edge.

Key takeaways:

  • The wholesale model is a selling model where products sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price.
  • The wholesale model helps larger retailers with the impracticalities of selling direct to consumers. Wholesalers perform several critical functions relating to sales and promotions, inventory management, warehousing, risk management, and the divulging of market information.
  • For buyers, the wholesale model reduces the time and cost associated with securing multiple suppliers. For sellers, the ability to buy in bulk increases margins when dealing directly with the consumer. Wholesale sellers also have a deeper understanding of the market and supply chain itself, which increases competitiveness.

Read Also: Costco Business Model

who-owns-costco
Costco runs a high-quality, low-priced business model powered by its memberships that draw customers’ loyalty and repeat purchases. Top institutional investors comprise The Vanguard Group, with 8.55%, and BlackRock with 5.39%. Top individual shareholders comprise Craig Jelinek, Charles T. Munger (Warren Buffet partner and co-owner of Berkshire Hathaway), James Murphy, and more.

Read Also: Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Read Also: Food-Delivery Business Models

food-delivery-business-model
In the food delivery business model companies leverage technology to build platforms that enable users to have the food delivered at home. This business model usually is set up as a platform and multi-sided marketplace, where the food delivery company makes money by charging commissions to the restaurant and to the customer.

Wholesale vs. Retail

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

Where the retailer takes the risks of dealing with final customers, the wholesaler primarily deals with intermediaries/retailers that will take care of dealing with the final customers.

This, of course, has an advantage in terms of sales and marketing expenses. As the wholesaler will have fewer business risks, compared to the retailer. However, the wholesaler will need to spend a substantial amount of effort in developing its logistics infrastructure.

On the other hand, as the wholesales deal with the intermediaries, and at higher volume, and in some cases, for raw goods, it will also make fewer margins per product, as its business model will be based on volume.

The retailer, on the other hand, will enjoy wider margins per product, and it will have to carry a higher risk in terms of meeting a wider customer base. Therefore, a good chunk of its efforts will be spent on sales and marketing activities.

Wholesale vs. Direct-to-consumer

direct-to-consumer
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

Similar to the distinction between wholesalers and retailers, the direct-to-consumer business will have to take the risks of dealing with the final customers. Usually, this requires a bigger effort, in securing this customer base, in supporting it before and after the sale.

Thus, the direct-to-consumers expenses related to customer acquisition, retention, and referral will be substantial. Thus, here you’ll see this projected on the balance sheets.

Where the wholesaler will have most of its expenses as “cost of sales” (meaning the costs needed to sustain its infrastructure), the direct-to-consumer might have most of its expenses tied to sales and marketing activities.

Wholesale vs. Private Labeling

private-labeling
Private labeling involves one company selling the products of another company using its own branding and packaging. In most instances, a retailer purchases products from a manufacturer that are then sold to consumers with the manufacturer’s brand and packaging visible. In private labeling instead, the retailer might have a third-party manufacturer produce goods and sell them under the retailer’s brand. Therefore the manufacturer acts as a private label, not showing its brand toward consumers.

In the case of the private label, the retailer sells to final consumers the products that the manufacturer has passed along with its own labels. The main difference with the wholesaler is that the private labeler does show its brands to final consumers, and therefore there might be some activities of post-sales support who go with the manufacturer.

On the contrary, in most cases, the wholesaler only sends over goods that might be unlabeled or labeled with other brands’ names (related to third-party manufacturers) and therefore, it doesn’t have to carry the expenses related to post-sales support.

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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