Wholesale Product Distributors and the Ugly Middleman Chain

by Michael Ellis (1/09/2006)

Over the last five years or so there has been an extreme growth in the number of small businesses looking to purchase products for wholesale. And many of these small businesses are home business operators. This increased demand for wholesale suppliers can be directly attributed to the massive growth of the Internet.

The Internet has provided a huge pool of possible customers to the home business owner. It has given these home business owners the opportunity to easily market their products to potential customers around the world at a very low cost. The only problem is, these home business owners need products, and they need these products at the lowest possible purchase price to allow successful reselling. Unfortunately, the huge demand for resale products has created a whole army of new companies that claim to offer wholesale products. And very unfortunately, most of these companies are nothing more than middleman in an ugly middleman chain.

Are there any legitimate wholesale suppliers out there? Of course there are, but the legitimate companies do business differently than the so-called wholesale suppliers we see bombarding us with advertisements on the Internet and in small business magazines.

Let's go over how all this wholesale stuff works...

If someone were twisting my arm for an answer on what I thought was the percentage of true wholesale companies out of all the wholesale claims that we see advertised, I'd have to say less than 1%. Or said another way, I believe that over 99% of the wholesale merchandise claims are false – not true wholesale distributors.

If they are not true wholesale distributors, what are they and where are the products that they offer coming from?

Most of the wholesale suppliers we see advertising their products for 'deep' discounts are nothing more than middleman – middleman that are likely connected to a string of other middleman forming a middleman chain.

A middleman chain is created when one "wholesale distributor" sells products to another "wholesale distributor" who in turn sells products to the home business operator for resale. There could be several layers of so-called wholesale distributors that add a profit to the products before selling them to the next product distributor.

For example, let's say you're the owner of a small home business that purchases products for resale from Wholesaler A at a discount rate of 20% off of the suggested retail price. The situation is likely to be that Wholesaler A purchases the products it sells you from Wholesaler B. The discount rate which Wholesaler B pays for the products may be 40% off of the suggested retail price, which it then sells to Wholesaler A for a 30% discount off retail. There can even be a Wholesaler C that gets the products for 50% off retail and sells to Wholesaler B at a 40% discount. You can see that each wholesaler makes a 10% profit on each sale. (See graphically below)

As the above diagram shows, if you're a small business owner on the tail end of this middleman chain, you have a serious cost disadvantage to selling these products. Not only do you have a severe cost disadvantage, but you're very vulnerable to any delays from any of the middleman in your middleman chain.

For example, let us say you decided to sell a product which has a very high demand from a wholesaler on a dropship basis for a 20% discount off of the retail price.

Side note: dropshiping is a common option that some wholesalers offer in which you send your customer's order to your wholesaler and your wholesaler sends the ordered product directly to your customer with your business name on the box.

Once you factor in your cost of advertising and handling the orders you'll quickly notice that a 20% discount is not enough. Furthermore, let's say you get a ton of order due to the high demand of the product. If just one of your middlemen in your chain can't handle the volume, you're going to find yourself in a sticky situation with your customers, who will of course want their money back.

So why doesn't all home businesses operators just go directly to the product manufacture to purchase their products for resale? In most cases, they simply can't afford it. Many manufactures sell in bulk and only conduct business with vendors that are established and have a track record for moving large amounts of products. Most small home business operators don't fit this bill. So instead they turn to a level 1 wholesaler (Wholesaler C in diagram). However, even wholesalers at this level typically require a bulk order that most home business can't afford. So the home business operator moves on to a level 2 or higher level wholesaler. Unfortunately, out of all the wholesale operations that we see advertised throughout the Internet, I would say that over 99% of them are level 2 (or higher level) wholesaler.

In conclusion, be extremely cautious of any wholesaler that you find advertising for distributors. This can usually be a dead giveaway. Most true manufactures and low level wholesalers don't advertise. Also ask any potential wholesale product sources where they get the products from. Do they manufacture them? Or buy them from a manufacture or middleman?

Remember, stay as close to the manufacturer as you can get!

Author - Michael Ellis (Email: michael@victorykey.com)

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