When you want to start a business, a wholesale distributorship has the potential for making large sales quickly. This is in contrast to a retail business that requires a steady stream of low-end transactions just to stay in business.
Starting a wholesale distribution business requires less overhead to maintain than a retail operation. However, the rapid buying/selling nature of wholesale makes it a highly competitive market. Being successful requires a varied job background, including customer service and sales.
Adam Fein, president of Pembroke Consulting Inc. told Entrepreneur.com, “Operating very efficiently and turning your inventory over quickly are the keys to making money. It’s a service business that deals with business customers, as opposed to general consumers. The startup entrepreneur must be able to understand customer needs and learn how to serve them well.”
If you’ve made the decision to start a wholesale business, here are some of the most important factors to consider before jumping in:
1. What kind of distributor do you want to be?
There are two broad categories of distributors:
- Direct (retail) distributors. These distributors sell directly to consumers (the end users).
- Indirect (merchant wholesale) distributors. These distributors buy products from the manufacturer (or other source) and deliver them to other companies who will either sell them to end users or use the products themselves.
Within these two categories of distributors are three sub types: intensive distributors, selective distributors, and exclusive distributors.
Intensive distributors work with several vendors, selling goods in higher volumes at lower prices. This type of distributor generally chooses products based on the profit potential. The profit margin for intensive distributors is lower, but the inventory moves quicker, meaning better cash flow.
Selective distributors have successful experience with distributing their products. In an effort to better serve their target market, some manufacturers or vendors limit the number of retailers a distributor can supply with their product. This actually increases the profit margins for the entire distribution channel, since quality is prioritized.
Exclusive distributors are in a well-defined niche market. These distributors usually have their own territory. Manufacturers and vendors prefer exclusive distributors when they want to maintain control over their brand image and maintain higher price points.
2. Create and maintain highly organized systems
Highly organized systems are essential for any business owner, but if you’re new to an industry or niche, organization will serve you even more. If the wholesale business you’re starting doesn’t have organized systems in place, your workload will be heavier than it needs to be.
For instance, if you use Excel spreadsheets or other Word documents to collect orders, the forms you receive will be inconsistent and difficult to decipher. Your customers might even reformat them.
The good news is that it’s easy to create an organized order process online with Brandboom. Rather than creating complicated order forms in Word or Excel, Brandboom allows you to create professional, custom line sheets to organize your products and receive orders in a consistent format. You can also send your buyers direct links to your catalog of products, and they can order from you directly.
3. Be ready to make yourself available to vendors and drop shippers
Looking for vendors is part of the job, but they’re also looking for you. Make sure you list yourself in appropriate trade magazines and industry newsletters. Many wholesale distributors make a good amount of money from drop shippers. Drop shippers frequently search these publications for quality products to resell.
4. Be prepared to face consolidation in the future
Consolidation is common in the wholesale distribution industry, affecting some sectors more than others. For instance, the pharmaceutical industry has experienced some intense consolidation recently.
Independent distributors never expect to face this situation, but it does happen, so it’s a good idea to acknowledge the possibility from the beginning.
Although consolidation is common, when you’re starting a wholesale business there are ways to mitigate the risk. For instance, choosing the right niche market within an industry can make all the difference.
It’s expensive for the larger, national companies to provide service to niche markets. These smaller customers are then left behind. The good news is what’s not profitable to the large companies can be profitable to you.
One way to mitigate the potential risk for consolidation is to provide service to the smaller customers who get left behind by big companies only interested in large profits. Those niche markets will come to rely on you, and the market won’t be big enough for corporations to buy you out.