How to Ruin a Perfectly Good Product Market

By Chris Malta
Posted Monday, December 13, 2004

Those of us who own retail Ecommerce sites are always looking for wholesale pricing from the suppliers of the products we want to sell.

Unfortunately, many people don’t know what a wholesale price IS, or even what to DO with it when they find one.
By definition (Merriam-Webster's Dictionary), the word "Wholesale" means "the sale of commodities in quantity, usually for resale (as by a retail merchant)". That definition has been around since the 15th century.

It does NOT mean "the absolute rock-bottom most dirt cheap price ever so that you can beat everyone else's prices no matter what".

There are some very good wholesale suppliers of brand name products out there. We publish a Directory of those who are willing to Drop Ship those products directly to your customer from the warehouse, one at a time, at wholesale. It’s an excellent way to do business without spending a ton of money on stocking an inventory. However, to be successful in business, you need to understand what "Wholesale" really means.

A Wholesale distributor is a company that owns their own warehouse (no middlemen) and supplies you with products at prices that are significantly lower than Manufacturer's Suggested Retail Price (MSRP). That's what wholesale means.

So why do you sometimes find wholesale prices on some products that may be very close to the RETAIL prices for that same product on the Internet? So close, in fact, that there is not enough of a profit margin to make it worth selling?

Here’s one very big reason:

Chopper Bob has opened a store on the Internet. He thinks he's come up with an original idea. He's going to chop prices right to the bone on the products he sells. He thinks that because his prices will be so low, EVERYBODY will buy from him, and he'll make lots of money by selling large numbers of products. All those small profits will add up to a lot. Chop, Bob, Chop! See Bob Chop!

Chopper Bob is essentially chopping his own throat, although he does not see that yet.

Chopper Bob finds his first product to sell. It's a brand name VCR. This VCR has a Manufacturer's Suggested Retail Price of $149. This is the retail price that the manufacturer suggests it be sold at in order to make a good profit.
Chopper Bob has found that the wholesale price on this VCR is $69. At that wholesale price, the profit margin to be made by selling it at MSRP (Manufacturer's Suggested Retail Price) is 54%, which comes out to an $80 profit on each sale. That manufacturer has made a pretty good suggestion, wouldn't you say?

However, Chopper Bob believes that he is the first human being in history who has decided to sell at dirt-cheap prices and make money on volume sales. Because he is Chopper Bob, he's going to Chop the price on that VCR on HIS web site all the way down to a mere $79.

People are going to flock to his web site, and buy thousands of VCRs for $79. Chopper Bob is sure that he will get rich from all those $10 profits, once they begin to add up. Internet Retailers will tell stories of his success for years to come.

Pretty soon, some people DO start to come to his site, and they start ordering VCRs for $79. Chopper Bob is happy. He was right!

However, people who want to order VCRs are not the ONLY people coming to his site. There are also people coming to his site who want to SELL VCRs.

You see, Chopper Joe has also decided that he is going to undercut everyone else and make big money on volume sales. Surprising? Not at all. Most people who decide to open a business entertain this idea at least once. Chopper Joe searches the Internet for the absolute lowest-priced competitor, and finds Chopper Bob selling the VCR for $79. Chopper Joe puts it on HIS site for $78.98.

Now, along comes Chopper Jane, also searching for the lowest priced competitor. She finds that it's Chopper Joe, and SHE starts selling the VCR for $78.88.

Pretty soon, this turns into a feeding frenzy that would scare a Great White Shark.

The result of all this? The market price of the VCR (the price that it's generally available for sale at) plummets from the MSRP of $149 all the way down to about $78.

Suddenly the original genius, Chopper Bob, finds himself undercut at every turn, and everybody is selling the VCR dirt-cheap. Now that there is so much competition at that same price level, nobody is making any money.

As long as you're dealing with a genuine distributor, like the ones we list, you will always find a good margin between Wholesale and MSRP. It's the fact that some people drive down the market prices on certain products that causes the problem.

The manufacturer and the wholesale distributors of the VCR don't care about this. They are still selling the VCR at their wholesale price of $69, and now a LOT of them are being sold, because of all the price-choppers who are killing the market price of the VCR, and their own businesses along with it. In a few months, the manufacturer will change the color of the VCR, slap a new model number on it, and the whole cycle will start all over again.

Please don't make the mistake of thinking that YOU can't sell that VCR for a higher price than Chopper Bob. You can. What you have to realize is this:

The Internet is a very big place. Not everyone is going to FIND Chopper Bob's site. In fact, the vast majority of shoppers WON'T find it.

Most shoppers are very leery of sites like Chopper Bob's. People who get themselves involved in pricing wars tend to spend all of their time being mad at their competition, and to forget about customer service. You and I both know that we have paid a little more to purchase a product at a store we trust, rather than just going for the absolute rock-bottom price.

Thankfully, I see this type of situation mostly in just one area right now...consumer electronics. There are hundreds of thousands of other products that can be sold at very good profit margins without running into Chopper Bob and his buddies.

However, that does not mean that you can't sell consumer electronics. You can sell anything you want to, no matter what the competition's prices.

Sales is a bit of an art form. If selling something were simply a matter of the absolute lowest prices, Wal-Mart would be the only store on the face of the Earth.

Without going into too much detail, sales is a mixture of choosing the right product, or combination of products, for your web site. It's presenting a clean, attractive, focused site. It's giving the customer some little value-added bonus at your site. It's providing the absolute best customer service that you can. All these things help a customer to trust you, and when they trust you they are willing to buy from you, even if in some cases, some of your prices are a bit more than they find on other sites.

We never sell the products on our Ecommerce sites at the lowest price, and we do just fine.

If you feel that you must Chop something, Chop your customer service response time. Chop a few kilobytes off your graphics, so your pages will load faster. Chop the “dead wood” out of your site by getting rid of products that are overexposed on the ‘Net.

Leave the price chopping to Bob and his buddies…they’re only hurting themselves, not you.

Chris Malta
WorldWide Brands, Inc.
For more information, visit (http://www.YouCanDropship.com)

About the Author
Chris Malta is a Microsoft Certified Systems Engineer. He has worked with computer Systems for 18 years. He's been involved in eCommerce systems, networking and site design for more than 6 years. He developed The Drop Ship Source Directory, and he and his partners at Worldwide Brands, Inc., publish the Directory and run eCommerce sites of their own using Drop Shipping as their only business method.