Wholesale Products and the Middleman-Chain
There has been an explosion in the number of wholesale companies
over the past 5 years. A great majority of this growth can be
attributed to the growth of the Internet. The Internet offers
the small-time operator a place to market their products without
having to spend a fortune in a physical store front. The number
of people that can now sell products is no longer restricted to
the store owners, so we now have a huge population of Internet
entrepreneurs looking for products to sell. This big demand
created a very big supply of so-called companies claiming to be
wholesale companies specializing in selling wholesale products
to Internet entrepreneurs.
Are all of these new wholesale companies really selling
wholesale products? The short answer is absolutely not! Not even
close... but let's go over the longer answer so you can get an
idea of what types of operations the majority of these so-called
wholesale companies operate.
If I was forced to make my best guess of the percentage of true
wholesale companies behind all the Internet and Opportunity
magazine advertisements, I'd say that maybe, just maybe, 0.5% of
those companies is an actual lagitimate wholesale company.
Obviously that means I think that 99.5% are not true wholesale
compaines.
If a majority of the wholesale companies being advertised are
not true wholesale companies, then what are they and where are
they getting their products? They are likely just middleman
operating within a chain of middleman.
A Middleman-chain occurs when a business purchases its resale
products from one wholesale company, who in turn purchases the
products from another wholesale company, which may also purchase
the products from yet another wholesale company, and so on.
Note: I am using the term 'wholesale' very loosely here.
For example, let us say you have a resale business and you are
buying products from a wholesaler, who we will call
Wholesaler-A, at 20% discount. It is likely that Wholesaler-A is
actually purchasing the same products from another wholesaler;
let us call them Wholesaler-B. Wholesaler-B may get the products
for a 40% discount and then sell them to Wholesaler-A at the 30%
discount level, thus making 10% profit. There may even be
another level, Wholesaler-C, which gets the products for a 50%
discount and then sells them to Wholesale-B at 40% discount,
making another 10% profit. See a graphical representation of
this process at:
http://www.victorykey.com/images/middleman_chain.gif
As you can see from the diagram in the above link, there can be
multiple layers of wholesalers creating a chain of middlemen
that you simply cannot afford.
As a result of middleman-chaining, each layer adds on its profit
and you are left unable to compete because you are not buying
the products at a low enough price to stay in business. If you
do, by chance, get orders, each company in the chain is a point
of failure in your transaction.
For example, let us assume you have a source for a product which
is in high demand and you are paying what you believe to be a
true wholesale price, say 20% discount. You then launch an
advertising campaign that pulls in a large number of orders only
to find that one of your back-end suppliers somewhere up the
chain cannot handle the volume. Your customers obviously want
their money back (including shipping & handling) and you find
that you have lost a lot of money in advertising and created a
bunch of angry customers that will likely never buy from you
again!
One question you may be asking is why doesn't every wholesaler
just buy from the manufacture and get the deepest discount? The
answer is simple - not all wholesalers (or companies claiming to
be wholesalers) can afford to purchase the minimum bulk-order
requirements that a manufacture requires. Secondly, many
manufactures only do business with companies that are
established. So now you are left to do business with a level-1
wholesaler (Wholesaler-C in above diagram), which can be very
profitable if the products have demand. However, a level-1
wholesaler may also require a bulk purchase that is outside the
budget of many small home business operators, and/or they simply
may not want to do business with a small home business.
Eventually you may find that a higher-level wholesaler (level-2,
level-3, or higher) is all that is available to the home
business operator, and you simply can not make any significant
money at this level. Unfortunately, just about every wholesaler
you see advertising in the opportunity magazines or Internet is
a level-2 or higher wholesaler.
Now, armed with the above knowledge of middleman-chaining, make
sure you take a closer look at all those wholesale product
advertisements before taking out your wallet!
Sincerely,
Michael Ellis