You have an amazing product that customers love and the buzz is building. Maybe you have been approached by a retail store or are possibly just looking for ways to expand your business. Selling your product wholesale (selling in quantity to retailers so they can distribute through their stores) can be a great way to build awareness of your product, and grow your business, but it is a very different business than selling direct to customers. Here are the basics of selling wholesale and what you need to consider before wholesaling your products:
1. Pricing and Profit Margins: Do The Math And Set Goals
It is fairly standard to sell wholesale items at two and a half times your cost for production which is often about half of what you would charge the end customer. You can expect that a retailer will “mark up” their cost of the product at least 2x when pricing for their customers so make sure that the the cost makes sense to the end buyer. You may even want to offer a “suggested retail price” for your item. For example, if your suggested retail price is $30.00, one would imagine it costs about $5 to produce. When selling to retailers, you might sell the item at a wholesale price of $15 each. Your profit margin is less than it would be if you sold direct to the consumer, but you will make more money overall because the wholesale buyer may buy 6 bags at a time instead of just one.
When you consider your costs for product production, marketing, and overhead for your business, what do your financials need to look like to cover costs and keep your business growing? Put all of your expenses on paper and make sure you account for those expenses when pricing your products.
2. Wholesale Marketing: Your Customer is Still Your Customer
When you are selling direct to consumers, you market directly to your customer. When you are selling through retailers...you might be surprised to know you will still need to market direct to consumers. Why? Retailers like to stock what they know will sell. If you market your brand and products to the end consumer and drive demand for your products in stores (i.e. they go into their local stores asking for your brand) you will drive wholesale orders and ensure reorders from retailers. It is important to note one crucial difference here though...you must be careful to drive interest in your product, but not compete with your retailers on cost or availability of items.
A retail store that carries your products should be regarded more as a partner than a customer. You must build relationships and help your retailers have success selling your products to grow your business.
3. Taxes and Reporting
You know that tax id number you need for your own business? It is important that you get tax id documentation from your retailer buyers as well. When you sell wholesale you do not charge sales tax on the order (the retailer will tax the customer for each item at time of purchase and that will be paid to the state as sales tax on that item.) Tax laws vary from state to state but in general, you must keep a copy of each of your retailers resellers' licenses and must not sell wholesale (without sales tax) to anyone without one.
There are also resources available with critical information as well in addition to the forms you will need to start a business.
4. I'll Just Sell to Target and Live Happily Ever After, Right?
Many business owners think getting into a mass market retailer like Target, Walmart, or QVC could be the “big break” that makes their product a household name. It can be – but it isn't as easy as simply making a killer sales pitch to a big account. You will need to be aware of the costs and liability associated with selling to large accounts before you make it your strategy.
Often selling to large accounts means floating large debts temporarily and that means having capital. Consider this: many large retail stores insist on Net30 payment terms with the businesses they buy from. This means they will pay for inventory within 30 days of purchase/invoice. Say a large customer orders 10,000 units of your product, each costs you $1.00 to produce. Unless you can float $10,000 for 30 days (and be prepared for possible returns, charge backs or fines for not following their shipping procedures, or even manufacturing defects which happen more than you might think) you should probably wait on trying to land huge accounts. You might consider testing the waters with smaller stores first and establishing really strong retail partners. Often with smaller accounts you can insist they pay for stock at the time of purchase and determine a minimum order ($100 - $250 is pretty common). Start small and grow with your retailers - you will be able to test products in stores and make improvements without taking on a gamble you may not be able to afford.
Molly Fisher has more than 10 years experience building brands and social networks for leading companies such as Schooldude.com and Burt's Bees as well as several other clients. She currently runs Craft Ideas Weekly Facebook Community, the Craft Ideas Weekly Blog, and works as an eCommerce and Social Marketing Consultant in Chapel Hill, NC.
Main image courtesy of Annadriel.