If you make your own goods, your goal is to sell as many as possible, spread awareness about your items, recoup your investment and collect a profit. That's fine and many folks do well making and selling their own goods exclusively by themselves.
The businesses you sell your goods to work hard to reach as many customers as possible. If they don't, their money is tied up in an inventory of your goods
Others, though, are left wishing they could extend their reach, grow the presence of what they offer and sell more. While the per-item profits are typically highest when you sell for yourself, the net profits can sometimes go higher when you offer your goods at wholesale rates to other sellers or retailers.
Is this a good idea? Won't this cause competition in the marketplace, brought on by your own actions, if you enable other retailers to also sell what you're already selling? Not necessarily.
The ABCs of B2B
When you're selling direct to customers, that's a Business-to-Consumer business model. It generally works fine and allows customers to buy directly from the source—that's you. As mentioned, you can typically gain the highest profit margins on your goods since you only need to cover your per-item cost of goods sold (the actual cost of each item plus amortized costs to market and deliver the goods).
But even though you're gaining the best profit margin possible, you might find this to be a limiting model. You can only sell as much as you can market and fulfill yourself, and you might not be able to easily reach larger audiences of consumers, domestic and international.
The other model to consider is Business to Business in which you offer your goods to other businesses—other sellers—so they can market and sell them direct to customers.
You can save the overhead marketing costs and the labor costs associated with individual item handling and order fulfillment. The businesses you sell your goods to work hard to reach as many customers as possible. If they don't, their money is tied up in an inventory of your goods.
Determine a wholesale price
Your wholesale price needs to be set properly so businesses will recognize they can make a profit on the units they purchase from you. If they can't, they won't buy
As you probably guessed, selling your goods to other businesses means you'll be selling to them at less-than-retail pricing. How else will those businesses make a profit?
This means you'll be establishing "wholesale pricing"—a per-unit price that allows retailers to purchase at a discount so they can offer your goods at the retail price while recovering all of their costs and gain a profit. There's nothing very tricky about establishing your wholesale price since it's derived from your break-even cost plus your desired profit margin. It goes like this:
- Begin by accurately capturing your break-even cost, that is the cost of the goods themselves plus any overhead costs necessary for you to have and store an inventory of the goods.
- Determine your profit margin, that being a percentage above your break-even cost that allows you to make a profit when you sell at wholesale prices (because you're still in this to make a profit for yourself).
- Your wholesale cost can be the sum of your break-even cost plus your profit margin. Be aware, though, that retailers typically expect to sell wholesale goods at around a 100% markup (that's the wholesale cost they paid multiplied by two). This being the case, you'll need to anticipate this to properly set a market-acceptable suggest retail price.
Your wholesale price needs to be set properly so businesses will recognize they can make a profit on the units they purchase from you. If they can't, they won't buy.
The good news in this, though, is they'll typically buy in volume, especially if you've set your retail price within what the market will bear from the consumer's perspective. The more reasonable your retail price, the more attractive the item will be to consumers; that helps retailers sell more of your items at a faster rate, hopefully leading them to reorder from you very soon.
Sellers are your new customers
Just as you'd make the effort to give consumers the feeling their business is valuable to you, you'll need to do the same for the sellers who become your "wholesale customers."
Offer volume incentives such as deeper discounts on the wholesale price when they order larger quantities
Provide them timely and accurate information about your goods, including a bit of pitch from your end to help them decide they should invest in your items. You'll want to have a convenient method of delivering the goods so they'll arrive on time and undamaged.
Remember, they need to convince their customers to make the purchase, too. And, as a most important element in the relationship you'll establish with your wholesale customers, you'll need to offer bulk pricing and even volume-buy incentives:
- Set a minimum order quantity as a pre-condition for offering your goods at wholesale prices. Then set "multiples," the quantity steps above the minimum order quantity. This is usually based upon case pricing (if your items ship 12 to a case, perhaps a minimum order quantity of 36 and multiples above that of 12—that's one full case).
- Offer volume incentives such as deeper discounts on the wholesale price when they order larger quantities. This helps you move more goods in a single sale while allowing the retailer to have more room to make a profit.
- For retailer loyalty, you can also offer breaks on freight costs at certain order quantities and even forego freight costs for retailers who order from you at a certain level of frequency.
When you step up to selling your goods to other sellers, you're making the move to becoming a higher-volume supplier. Yes, you can still sell direct to consumers, but never offer your items at prices lower than the other retailers who are also selling your goods. That would be "undercutting" and it doesn't sit well with your wholesale customers.
But if you have the ability to produce goods in quantities that allow you to set a profitable wholesale price, by all means let the other retailers do the marketing and order management for you. You just might find it's the answer to your question: Should you sell wholesale to other retailers?
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Dennis L. Prince has been analyzing and advocating the e-commerce sector since 1996. He has published more than 12 books on the subject, including How to Sell Anything on eBay…and Make a Fortune, second edition (McGraw-Hill, 2006) and How to Make Money with MySpace (McGraw-Hill, 2008). His insight is actively sought within online, magazine, television and radio venues.
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