The Wholesale Misconception

By Chris Malta
Posted Monday, December 13, 2004

One thing that’s constantly misunderstood by people trying to run a home business on the Internet is the word “Wholesale”.

Some people think that working with a real wholesale supplier means that they will magically be able to sell products for less than anybody else on the planet, for ever and ever. They’ll be the only one who ever gets such good prices, and they’ll earn millions because no competition can touch them. They’re retire happily in a couple of months, and buy a big house in Beverly Hills, complete with a butler, a private chef, and a little satin doggie bed in every room for the casual use of the family Basset Hound, Duke.

Then they find that they may actually have to compete with companies who have more buying power and get better price breaks, and suddenly the honeymoon is over. They run around screaming that the supplier is not a real wholesaler, and is cheating them. The sky is falling, and it’s time to get Duke to the storm cellar because all their dreams are being blown away by bad, BAD people who claimed to be wholesalers, and really are NOT!

The truth is that they’ve simply been confronted with a perfectly normal aspect of retail sales that they had not anticipated, and need to be educated about.

Even when using genuine wholesale distributors, you're going to find some stores selling products at a "retail" price that is lower than your distributors’ "wholesale" price. There are VERY good reasons why you'll see this happen, and it's extremely important to understand why it happens and what to do about it in order to sell successfully on the Internet or anywhere else.

As I said, it happens for a variety of reasons; the most common of which is that the retailer with the "lower than wholesale" price is a large retail operation that bought THOUSANDS of the product at a dirt-cheap quantity price break, and also qualified for huge manufacturer's wholesaler rebates. You can't compete against that with a home business; no one can.

The term "wholesale" is relative, no matter who your distributor is or how you find them. What you're getting as a small business is a supplier's genuine "first level" wholesale price.

For example, one factory-direct supplier we work with has an initial wholesale price for 1 to 36 dart boards. Then the second price level is reached, and there's a lower price for 36 to 72 boards, for example, then a lower price for the next higher quantity level, etc. When dealing with single item orders in your home business, you are obviously going to be getting the "first level" wholesale price.

Again, wholesale is a relative term. Yes, genuine wholesalers DO sell at significant discounts below Manufacturer's Suggested Retail Price. However, you have to watch what you sell. Electronics, for example, are a very tough market, because EVERYBODY is trying to sell electronics on the 'Net right now. All these people are so busy trying to undercut each other that they have driven the "market price" of these items down so low as to make it very difficult to make a profit, even at wholesale.

For example, if the Manufacturer's Suggested Retail Price (MSRP) for a VCR is $149, and it is available at "wholesale" for $69.00, that's a 54% discount off MSRP. That's a pretty good profit, right? However, with everybody getting roughly the same price break, there are a lot of people out there who are ruining the market for everyone else by selling that product for, say, $79, thinking they will undercut everyone else and make money by selling volume. Pretty soon, everyone else sees this, and tries the same thing. Eventually, the Internet "market price" for this VCR BECOMES $79, and everyone is flooding the market with it at that price. That's only a 13% percent profit margin, and that product is no longer worth the effort for anybody.

So, even though the product IS available initially at a great wholesale price, its market value is ruined by those who (wrongly) assume that the only way to sell is to have the absolute lowest price anywhere.

Sales is much more of an art than that. 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 spend a little more to buy from you.

One of our retail sites is (http://www.ElectronicDartShop.com). We sell Arachnid Electronic Dart Boards there. We sell ONLY those products on that site; just 14 of them. Our site is clean and attractive. We have a page listing all the rules for all the dart games that can be played on those boards. We pay very careful attention to customer service. And guess what? We are NOT the lowest priced store for those dart boards, by any means. Yet we are one of the highest-volume Internet dealers of the products around, according to the factory. Why? Our customers trust us, and are willing to pay a little more because they feel they will get more value from us than they will from some guy who just throws up a cheap-looking site full of all kinds of unrelated products and only pays attention to price-cutting.

In fact, a few days ago, I went online and bought a couple of SmartMedia memory cards for my digital camera. I could have gotten them for a very cheap price that I found on the 'Net, but I chose to pay $5 more each for them because the cut-rate site looked cheesy, and I was not sure I could trust them. I was more than happy to pay the extra ten bucks total when I found the same products at a higher priced site. The site was well-built, easy to navigate, and went out of it's way to explain it's customer service policies to me. I'd rather spend an extra ten bucks and be confident that the cards would show up at my door than lose thirty bucks plus shipping to a site I didn't feel I could trust.

As a small business owner, you should remember to choose comparison areas very carefully. Too many people simply go to the big search engines and look for the absolute lowest price on earth, and then give up on selling that item if they can't beat it. That's the wrong approach, as I've mentioned above. You need to be comparing prices against sites that will be seen in the same places that your site will be seen, and even if your prices are higher, you can bring in sales by building a clean, focused site. Alternatively, you can simply sell the models that others are NOT selling. After you begin to earn some profit, you can then start to buy and stock the better sellers in quantity, lowering your price, if you really want to.

Even then, you're going to run into stores that stock a lot of merchandise, and are getting price breaks on greater quantities. This allows them to sell at a lower price.

Go around them. Sell models that they don't, from the same brand names. You don’t have to purposely go head-to-head with the big superstores. They don’t carry every product ever made on earth. Sell something in the same general brand and product lines that they DON’T have the shelf space for!

Besides the reasons mentioned above, there are also too many people who buy entire pallet loads of last year's closeouts, liquidations, and refurbished goods, and claim that they are NEW. They get that junk at "rock bottom" prices, and of course, sell them dirt-cheap, fooling the customer (and other Internet retailers) into thinking that they have the corner on the best wholesale prices around, when they DON'T.

The important thing is to work effectively within the framework of available products and prices, and work around those who have millions of dollars available to stock inventory. That's what THEY did in order to EARN those millions in the first place. You can do it too. I know it's frustrating to be just starting out, and thinking that you can't succeed because of competition from large stores. That's just not true. We're succeeding at it, and so are thousands of others. You just have to be willing to be flexible, and to make serious decisions for the good of your business. You may have to give up selling certain products that you personally like, in order to make money on other products whether you like them or not. You’re in business to make money, not to satisfy your personal taste.

One thing I tell people all the time is that it’s very important to “jump through the hoops” and form a LEGAL business. It’s the right thing to do, and it’s the ONLY way to work with GENUINE wholesale suppliers.

However, anyone in business will tell you that the hoops never end; not for home businesses, and not for big businesses either. Even the big guys spend much of their time "hoop-jumping" in order to be successful. Imagine how the purchasing agents at CompUSA feel when they spend a million dollars on 19" monitors so they can sell them for $329, and a week later, they find that Best Buy spent three million buying up the same monitor at a better price break, and is now advertising them for $298. Suddenly CompUSA can't compete.

Should they throw a tantrum, and berate the wholesaler for simply performing the normal function of a wholesaler?
Of course not. They can simply stop advertising that monitor by itself, and bundle it with an entire computer system that has it's own serious price breaks, and move the monitors that way. Adapt and improvise.

There are no magic bullets, even though there are plenty of people who will tell you that there ARE. Don’t believe them! When you’re in business you will always have to compete. It's all part of sales, on the Internet or anywhere else.

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's taught college-level computer courses in Western NY. 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.