The wholesale business model is one of the most traditional business models in the business-to-business segment. In a typical product supply chain, the goods flow from raw material suppliers to manufacturers, then to distributors and/or wholesalers, after that to retailers and, finally, they get to the end customers. Each of these parties stands for a kind of business model.
What is the Wholesale Business Model?
If you take a look at the typical supply chain mentioned above, the wholesale business model involves the intermediaries who sell the products from manufacturers to businesses – they very rarely sell to the end consumer. Therefore, wholesalers won’t sell small quantities of goods – that is done by the retailers, instead. On the opposite, they will sell large amounts of products to the retail businesses, at a lower price. The bigger quantities the retailer buys, the less they will spend pay per unit. Operating as producer-consumer intermediaries, the wholesalers are responsible for transport, separation, storage, and sale of goods which are, later, going to be presented to customers.
They are particularly important to small retailers. Because, while large retail companies, that have their own warehousing centers, will buy directly from the manufacturers, smaller retailers, with limited resources and space, will rely on intermediary wholesalers. At the same time, the wholesale business model is also essential for producers, due to the fact that they expand the manufacturers’ market, in geographical and consumer purchasing potential. An advantage of selling the products to businesses is that it generally provides more stability, as the responsibility for selling to consumers rests with the retailer. Also, the expenses tend to be smaller, since wholesalers ship products in bulk (which lowers shipping costs) and don’t need to invest a lot in marketing. On the other hand, the greatest concern (and time investment) in the wholesale business model will be concentrated on supply chain management and logistics – in order to maintain all processes working fine and the inventory well balanced –, as well as on cash flow – once they won’t typically receive up-front payment.
Wholesale Business Model’s Functions
- Guaranteeing products in great quantity and wide variety;
- Ensuring good geographical reach;
- Maintaining a standard in resold merchandise, from size to product quality;
- Being a quick and accessible link between producer and retailer;
- Providing adequate, organized transportation, with attractive time and costs for retailers.
Differences between the Wholesale Business Model and Retail Business Model
The wholesale business model can be better understood when we compare it to the retail business model, which we – as consumers – are usually most familiar with.
Wholesale Business Model Canvas
Let’s take a look at how the wholesale business model can be designed using the business model canvas
How Wholesale Business Model Makes Money
As mentioned above, the wholesale business model is based on buying in bulk with a significant discount from the producer/manufacturer. This way, the wholesaler will be able to sell the products to retailers on a nice margin, making a profit, thus, through markup.
Wholesale Business Model’s Benefits
A wholesaler will deal with several suppliers and, so, can compare prices and get to the cheapest one, being able, thus, to resell the goods at a higher margin. Also, as they will buy large amounts from producers, they may get nice discounts.
Partnership with Suppliers
When a wholesaler builds a strong and trustful relationship with its suppliers, it will have the products delivered on time, with a fair price and a nice quality.
As the wholesaler will deal both with producers and retailers (and, in some cases, even customers), it will have a better and faster understanding of the demands and trends of the market, making it possible for it to launch and upsell new products in advance.
The wholesaler knows the ins and outs of the industry, knows what suppliers to rely on, the timing and organization of the supply chain. So, it will be recognized as an expert by its customers.
The wholesaler’s knowledge of the market and industry will also allow it to perceive the connections and opportunities that others may miss. This will make it easier for it to upsell and cross-sell, once it has already established partnerships with both its suppliers and buyers.
Types of Wholesalers
- MERCHANT WHOLESALERS
- AGENTS, BROKERS, AND COMMISSION MERCHANTS
They are individuals or businesses that will deal directly with suppliers, store the inventory, establish pricing and strategies, and sell to retailers (online or brick and mortar stores). So, they will do every process themselves, physically handling the goods in large quantities and selling smaller ones. These are the majority of the wholesalers and they are usually specialized on particular types of products, customers, and geographical areas. They are commonly called wholesalers, distributors, supply houses, assemblers, importer/exporter, jobbers, etc. This kind of wholesaler acts as a middleman for suppliers. They will work on behalf of the producers and make the connection between the producers that don’t have their own sales force and retailers. These wholesalers don’t have inventory and don’t own the products they are selling. They only negotiate between the parties involved in the transaction. So, they are usually paid in the form of commissions on sales. This is the case when manufacturers have branches and offices separated from manufacturing plants. They will be responsible for stand for wholesalers, by selling and distributing goods directly to retailers – and, sometimes, end customers. The factories will usually opt for having their own sales force when they notice that the current wholesalers are requesting lots of units on a regular basis. That’s a way to improve their own margins. This type of wholesaling is generally employed only by large companies that can afford the expenses and risks involved.
Successful Wholesale Business Model
As you may have noticed, the success of any wholesaler will rest on its capacity to build close and strong partnerships, both with suppliers and retailers, in order for the business to be long-term sustainable. To achieve that, nowadays, the market is asking for more than simply providing good prices and timing. It’s important to have qualified customer service, efficient supply chain processes, and updated strategies.