What does wholesale mean, and how can companies charge a lower price per item because of it?

Question

What does wholesale mean, and how can companies charge a lower price per item because of it?

In: 3

Answer 1

A couple other comments are correct-ish.

You make paper swans by hand. They cost you 10 cents and people buy them for $1 each. It’s a relaxing hobby and you sell about 10 paper swans per month.

Now you make a paper-swan making machine. It makes 1,000 swans per batch. You buy boxes that hold 1,000 paper swans per box. It now only costs 1 cent to make each of them because you made a good machine with large batches that saves you on labor costs and it uses a bit less paper per swan.

But now there are not 1,000 people in your town who want paper swans. So you call a wholesaler who buys 1,000 swans for $250 dollars (25 cents each).

You now made a 25 times return on that original penny you spent to make the swans. You deduct the cost of the packaging and the labor costs it took to box them up from your profit margin and you’re still only spending less than 2 cents per swan, for perhaps a 15-20 times return, depending on the specifics.

But now you can sell 1,000 swans in one batch instead of 1 and they cost you less than 2 cents instead of 10 cents. And you can now sell as many as you can distribute instead of 10 per month and making only $9 per month after expenses.

The wholesaler sells a box of 1,000 paper swans to department store chains for $500 per box. He doubled his money.

The department store unboxes them and sells them for the original price of $1. They double their money, minus their overhead costs, which they pay anyway because adding one product makes no difference since they sell 800 different products already anyway, and they already have all the staff and shelves and other things ready to sell stuff.

Now you find distributors across all continents. You build a factory full of paper-swan making machines. You open a factory store and host tours. You make millions from being the most efficient and celebrated maker of paper swans in the world.

You do not care that you share the money with other people, because setting up a worldwide distribution system and retail stores is very expensive, might not turn a profit, and other businesses have proven their systems work great.

And now you are super rich because you knew how to delegate everything you were not good at and you focused on the thing you do best.