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Chris: Thanks for joining us today. I’m Chris Malta.
Rob: And I’m Robin Cowie.
Chris: Have you ever worked with a supplier and found that you’re wholesale price on the product is more than what you see other retailers selling it for? Today we’re speaking with Codi Hall, CEO of www.DropshipDirect.com, an actual factory authorized wholesale distributor, to discuss how the pricing structures work between manufacturers and wholesalers and what it means to get true wholesale pricing.
Chris: Codi, welcome to the show.
Codi: Hi Chris, hi Rob, how are you?
Chris: Good, thank you. Let’s start with a general overview of the supply chain, Codi. Can you please just give us a basic description of the supply chain and how it works?
Codi: Sure, I’ll be happy to. In most cases a typical supply chain is going to involve a product manufacturer, a wholesale distributor like ourselves, the retailer, and the end consumer.
Chris: And on the last few shows here we’re doing a series on product sourcing shows and we’re talking about different aspects of wholesale and we mentioned on the show last week that a lot of people think that a wholesaler is actually a middleman, which isn’t true, right? I mean, a wholesaler is a necessary part of the infrastructure here, because manufacturers can’t really do all the work the distributors do, they don’t want to rebuild that infrastructure, they’re far too busy just making products, correct?
Codi: That’s very true. In fact, I think the reason why that stigma may be out there or that misconception may have to do with the fact that there are a number of different companies out in the marketplace that can sometimes make a claim associated with wholesale distribution where the reality is it’s not an actual manufacturer authorized wholesale price point and so I think that causes confusion for the marketplace.
Chris: There are just a few of those, huh Codi?
Codi: Yes (laughter).
Chris: Yeah (laughter).
Rob: So the manufacturer uses authorized wholesalers like yourself to distribute products to retailers, right?
Codi: That’s correct.
Rob: Without giving any actual numbers, what kinds of pricing structures do you deal with when you order shipments from a manufacturer? So, your relationship with a manufacturer, what kind of size are we talking about?
Codi: Well, without getting into, like you mentioned, exact specifics, I can say that there are certainly purchasing commitments and volume requirements that are involved that certainly a retailer that is looking to get into wholesale drop ship distribution might be challenged with. For example, instead of dealing with 1 or 2 quantity of a SKU, what the manufacturer ends up requiring is, more realistically, caseloads and in a lot of cases it ends up being pallet quantities or even containers, depending on where the origin is.
Rob: Sure. So in other words, large quantities in general.
Codi: Yeah.
Chris: Let’s take a second here to identify that word SKU, because you see that a lot when you’re dealing with wholesale. That stands for Stock Keeping Unit and basically that’s a model number or a particular product ID, right?
Codi: Sure. It’s essentially wholesale jargon for individual product, yeah.
Chris: So when you see SKU it just means a product model or product type or whatever you’re dealing with.
Codi: Right.
Chris: We said, without getting into actual numbers, Codi, I know that there are several different types of pricing structures. Key pricing is one that I’d like to talk about for a minute. Can you explain what key pricing is?
Codi: Key pricing is more of a general term that has to do with how the end consumer marketplace conceives the value of a given product at retail level. For example, if a consumer perceives the value of a sports collectible item which has a limited edition quantity available to it, the key pricing indicator would by what the marketplace could possibly bear in terms of a perceived value for that item.
Rob: So not only do you have to purchase large volumes of products at various pricing levels from the manufacturer, you have to warehouse those products and distribute the products to the retailers, right? Again, let’s move our focus from the buying with the manufacturer, and without actual numbers could you give us a general overview of what kinds of expenses you have in order to keep your operation up and running?
Codi: Sure. It can be pretty diverse and if you’re not careful your overhead costs can greatly increase faster than one would expect. For example, you have everything from labor overhead costs to actual warehousing leasing expenses in addition to office leasing expenses. So if you don’t necessarily have both your warehousing and office presence in the same location, which we don’t necessarily, then that cost is incurred when it comes to leasing. We have equipment capital associated with warehousing, so technology and some of the logistical equipment required to manage that inventory. There are a lot of direct and indirect expenses that are related to wholesale distribution inventory.
Rob: We’re doing a series right now where we’re going around and actually interviewing and videotaping a lot of the suppliers that we work with and we were just in a warehouse this past Thursday over in Tampa, Florida. And I was actually amazed at the different kinds of equipment that people have and maybe you can help illustrate for us the types of equipment, but I mean, there were all kinds of pallet loaders and forklifts. Can you describe just some of the physical gear that you need?
Codi: Sure, and it also really depends on the level in which you’re managing the inventory. So there’s always bigger and better equipment out there when it comes to being able to effectively manage wholesale inventory. But a specific example would be actual infrared barcode equipment, so that would entail hand scanners that have to do with maintaining in-house inventory counts as accurately as possible. And that cost incurs barcode thermal printers, software, I mean, there are a lot of built-in costs associated with that functionality alone.
Rob: Wow.
Chris: And of course, the greatest cost for any business is the human cost, right, the employees.
Codi: Yeah, I would say easily that for our organization the labor cost actually is pretty much proportional to our actual inventory overhead cost in terms of the budgetary level.
Chris: Right.
Codi: So it’s certainly probably the biggest overhead expense.
Chris: Yeah. I think it pretty much is for any company. As far as pricing, how do you determine what the wholesale cost of an item is? When you get something in the door how are you actually going to figure out what you’re going to sell it for at wholesale?
Codi: That’s a good question and it’s not always as black and white as making a decision at that point. Oftentimes it involves a lot of feedback from the manufacturer. So depending on the product line some manufacturers have very established wholesale and tiered pricing structures already in place. So in those situations, especially with established brands, we simply emulate that into the marketplace.
Chris: Right, when you get your manufacturer’s wholesale pricing they’re going to have suggested retail prices, obviously, right?
Codi: Correct.
Chris: Okay. And you can work around those suggested retail prices a little bit here and there. You can’t go crazy and cut them tremendously. I think most people don’t understand that wholesale really is a pretty tight margin business, isn’t it?
Codi: It’s amazingly tight. We as a company realize very tight margins only because we expect that to be offset, I mean, our business model is predicated on moving large volumes, so that allows us to be able to justify having very small single digit margins versus other situations where the retailer might realize anywhere between, depending on the product industry, 10% to 50% as a markup. But one thing that seems to be a growing trend is something called the minimum advertised pricing, or MAP, and that phrase is certainly becoming more prevalent in the marketplace when it comes to the manufacturer indicating, okay, this is the suggested retail price for an item, but because the retailer may or may not be stocking product, the manufacturer would like to be able to see that the key price or the target price is no lower than a certain threshold. And a lot of that has to do with maintaining value within the product.
Chris: Yeah, I mean, if a manufacturer is going to sell to several key wholesalers around the country or maybe a master wholesaler, you can’t have the same product being sold at wildly different prices in different parts of the country or from different businesses, right?
Codi: That’s correct.
Chris: I mean, you have certain wholesalers that work with only retail companies that are physical and some that work with internet and you can’t have the internet retailers undercutting the physical retailers all the time because then the physical retailers will stop buying the product and the manufacturer has a problem then.
Codi: Yes. The one thing about the supply chain, especially these days with the advent of the internet, is it’s becoming more and more sensitive because of the fact that so many individuals and small businesses can penetrate the marketplace.
Chris: Let’s talk a little bit more about that after the break. If you want to stay up to date with the latest product sourcing news, check for upcoming tradeshows in your area, and find spotlighted suppliers you can use in your ebiz, then you’ll want to subscribe to our free product sourcing newsletter at ProductSourcingNews.com. We’ll continue with Codi Hall from DropshipDirect.com when we return. I’m Chris Malta.
Rob: And I’m Rob Cowie.
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