When your wholesale business is growing, it is essential to anticipate and protect your business from any potential challenges that might arise. Key challenges for any wholesale business include keeping a steady cash flow, vetting retailers’ creditworthiness, and nurturing your existing customer relationships.
A good set of wholesale terms and conditions helps you deal with these challenges. It streamlines logistical processes and ensures clarity on payment terms. As a result, you can keep your cash flow steady while making things easy for your retailers—which will get them to continue to purchase from you. At the same time, you ensure your business is best equipped to reap the benefits of wholesale like reduced overhead spending, lower marketing costs, and the ability to produce and sell at scale.
This guide will give you an overview of all the important things to include in your wholesale terms and conditions, taking into account both new methods and technology, as well as time-tested best practices.
1. Minimum Order Quantity
The fundamental principle of wholesale commerce is that you operate at scale. Through keeping cost low by ordering materials and creating products in bulk, you can get a high revenue stream from selling in bulk.
For this reason, a successful wholesale business model relies on minimum order quantities (MOQs). In short, these are the smallest quantities that retailers can buy to qualify for wholesale prices (more on this below). An MOQ may apply to an individual product (i.e. buy at least 100 units of Product A to get the wholesale price) or, less often, to orders taken as a whole (i.e. buy at least 100 units combined from Products A, B, and C to get wholesale price).
Let us take a look at one of the most common variation of minimum order quantity- minimum order price.
A) Variation: Minimum Order Price
Another variation used by many wholesalers is the setting of a minimum order price. A minimum order price is the lowest total price of all products that a retailer must purchase in order to qualify for wholesale prices. Wholesalers can impose minimum order prices either on top of MOQs or as an alternative.
There are two ways to implement minimum order price for your products.
- A retailer has to purchase the MOQ of a specific product.
- A retailer can purchase multiple product types that meet a certain pricing.
The benefit of selling at a minimum order price is the guarantee of a certain amount of revenue, regardless of the combination of products a retailer purchases.
So how do you know what is the minimum order quantity you should set for your products? We will cover it in the next section.
B) Determining Minimums
A good MOQ will be one that’s high enough for you to benefit from the reduced costs by buying materials and processing them in bulk. This usually means matching the MOQ to the quantities in which you order the materials.
A rough guideline is this: if your materials are expensive or your product is labor-intensive, go for a higher MOQ; if your product is cheap and easy to make, go for a lower MOQ.
Note that MOQs may also discourage certain customers, especially newcomers. To incentivize new clients to purchase from you, you may want to waive your MOQ or offer another guarantee, like a buyback policy (see Return and Exchange Policies below).
2. Wholesale Pricing
To entice customers to make bulk orders, wholesale prices are always lower than retail prices. Your business needs to balance your wholesale prices against recommended or estimated retail prices.
Wholesalers usually take one of two broad approaches to pricing: absorption pricing or value pricing.
Absorption pricing is based on the cost of production modified for other factors. It’s called “absorption” because all costs are absorbed in the product’s final price. This is a variation on the full cost price pricing concept. Roughly speaking, it follows this equation:
Materials Cost + Labour Invested + Other Overheads + Profit Margin = Wholesale Price
Value pricing, on the other hand, refers to various strategies that are based on market value rather than the cost of production. It’s a viable strategy for wholesalers because this allows them to appeal directly to retailers’ interests.
In practice, value pricing means setting the wholesale price at a fraction of the retail price. It strikes a balance between maintaining your margins while ensuring your retailers turn a profit selling your products.
One example of this is keystone pricing, in which prices assume a markup of 50% of the retail price: Retail Price x 0.5 = Wholesale Price
For a look at the different ways these wholesale pricing strategies are implemented, check out this blog article: 4 Of The Best Wholesale Pricing Strategies For Your Business.
But how will your wholesale customers know what price should they sell your products to their end-customers? Then, read on to our next section.
A) Minimum/Suggested Retail Price
Most wholesalers also set a minimum or manufacturer suggested retail price (MSRP). An MSRP is a resale price that wholesalers suggest to retailers. It’s typically based on market studies, profit projections, or other similar calculations. In some cases, wholesalers are stricter and enter into an agreement with their retailers to enforce a minimum resale price (or price floor).
MSRPs and minimum resale prices serve multiple functions:
- They control public perception of your products (i.e. keeps them from being perceived as too cheap or too expensive). Retailers will handle most of your products’ marketing, but the MSRP is one way to keep the products’ image consistent.
- They keep your retailers from questioning your practices (i.e. “How come your other buyer sells your products much cheaper? Are you charging them differently?) If your retailers trust that you treat them all fairly, they’re more likely to continue doing business with you.
- They help you calculate your wholesale prices to match if you are using value-based pricing.
B) Pricing Tiers
You might also choose to implement pricing tiers, which let buyers take advantage of further discounts if their orders are large enough. For example, you could offer a wholesale price of 50% MSRP for an MOQ order, but offer a wholesale price of 45% MOQ if they order at five times MOQ, and so on. As long as you still have a decent margin, it can be an effective way to guarantee sales.
3. Payment Terms
You can make a lot of money selling in bulk—but at the same time exposes you to the potential to incur heavy losses. Ensuring you have sound wholesale payment terms is one way you can prevent such losses and maintain a steady cash flow.
Because of the large quantities involved in wholesale transactions, not all retailers can pay in advance or upon delivery. Doing so would put too much of a gap in their cash flow. Instead, many wholesale transactions are made with net payments or, less often, consignment.
Here are some example of common wholesale payment terms.
A) Extended Terms
Extended terms allow a retailer to pay their wholesale invoice within a specific period after receiving the order. This gives your customers time to sell some of the products to cover the cost of their purchase. Extended payment terms are usually noted as Net-[Number], where [Number] is how many days they have to pay the invoice (e.g. Net-30, Net-60, Net-90).
Setting the window for extended payments is critical to safeguarding your own cash flow. To encourage quicker payments, some wholesalers offer discounts if the invoice is paid earlier than the full net period. For example, wholesalers could offer extended payments with prompt payment discounts. One such representation is 2/30 Net 60 where customers have to pay their invoices within 60 days but can get a 2% discount if they make their payment within 30 days. It’s also important that you allow extended payments only to buyers after confirming their reputation and financial history.
This refers to a sales agreement in which a wholesaler provides a retailer with products to sell, which are paid for only once they have been sold. Instead of purchasing the products outright, retailers agree to take a smaller percentage of the profits (e.g. 30% of retail price, instead of 50%). While this means lesser profits for the retailers, they also carry less risk. This, in turn, means they’re more likely to carry your products.
4. Shipping Costs
Your terms and conditions should be clear on who shoulders the responsibility of the shipping costs and the shipping service provider.
If your buyers shoulder the cost, it might make sense to let them choose the shipping vendor. However, depending on how fragile your products are, you may want to restrict options to specific shipping vendors.
Conversely, if shouldering the payment is your responsibility, you will want to look for a shipping service that is both reliable and affordable. When looking for a vendor, keep in mind that many of them are open to discussing arrangements beyond what is stated on their websites. Another point to pay attention to is when they do order pickups. A service that does pickups that line up with your production schedule will let you complete orders more efficiently.
Let us take a look at a shipping method that has been rising in popularity and how it might affect your shopping cost.
A) Drop Shipping
Drop shipping is an arrangement that has gained popularity recently. In this setup, retailers don’t stock up on inventory. Instead, they handle the marketing and sales. When the retailer makes a sale, they will send the transaction details to the supplier(the wholesaler) who will then fulfill the order and send it directly to the customer.
In this method, it’s possible to make customers directly shoulder the cost of shipping. This shipping cost will be factored in and reflected on the retailer’s website. Alternatively, you can work the cost of shipping into the MSRP of drop shipped items.
5. Delivery Methods
Your terms and conditions should be clear about the limitations of your shipment or delivery methods. Generally, your buyers will be concerned about orders arriving intact and on-time. Your business needs to be able to address their concerns.
Again, finding a good shipping vendor depends largely on each business’s requirements. Thus, your delivery methods will depend on your arrangement with your chosen vendor.
Once you do have an arrangement, you can make your delivery limits and stipulations clear. It should state clearly the locations you can and can’t deliver to. This can be broken up by the level of municipalities, states, or countries. It should also state clearly how long it would take you to ship to any area that you cater to.
A) Shipping Window
A shipping window is the time during which an order must ship from its port of origin. It runs from the start ship date up to the cancel date.
For example, assume your shipping window is two weeks(a common duration for a shipping window). If the shipping window is set for August 1, you’d have until August 15 to ship it. You could ship it at the start, or as late as the last day.
If you confirm the receipt of an order on August 1, your buyer would have up to August 15 to cancel the order. After that, the order must ship. Failure to ship goods by that date means the order is canceled
6. Ordering Process
Your ordering process should make it as easy as possible for potential buyers to submit an order. This means providing them with necessary information, an intuitive transaction process, and clear provisions on how to track or modify that order.
The terms and conditions we’ve mentioned above (and a few more we’ll detail below) should all be easy to find on your website. For added convenience, you can also offer your policies in downloadable documents, such as PDFs.
Buyers may have follow-up questions or other concerns you can’t foresee. As such, it’s important your contact details are also readily available on your site. A built-in contact form may help streamline the process for them as well as for yourselves.
To make it easier for them to file the orders, it helps to have a well-organized wholesale order form. This should have clear fields for all of the important information as well as the terms and conditions. Hyperlinks can be used for quick access to important information.
Sales software can also make the process quicker, especially for return customers. Smart forms, for example, can greatly expedite the process. You can also look into more specialized B2B eCommerce solutions and techniques, such as tools for price quote configuration or cart-to-cash plugins.
Finally, your order process should be clear about when and how buyers may modify their orders. The window of opportunity for this should be aligned with your own preparations, accounting for turnaround times on materials shipments and product assembly.
6. Exclusivity Policies
Some buyers may negotiate to become exclusive retailers of specific product types. You should have a policy ready for such requests, including adjusting MOQs, payment terms, and other conditions to ensure that the exclusivity is profitable for you as well.
It may seem daunting, but there are ways to make this less restrictive. For instance, you could update an existing product and offer it as an exclusive item, while maintaining a separate but similar line for general distribution.
On the other hand, note that an exclusive deal may have benefits beyond immediate sales. If an exclusivity agreement is your ticket to a new, substantial account—one that might carry more of your products later on—it may be worth the cost of forgoing other retail opportunities.
7. Return And Exchange Policies
Returns and exchanges are an inevitability in wholesale businesses. You can hope to minimize them, but not eliminate them entirely. As such, it’s good to have a clear policy on when and how buyers can return or exchange items.
Determine how much time buyers have to return items starting from the moment they receive them. It might be seven days, 30 days, or some other duration, depending on the nature of the item.
Furthermore, be clear about what counts as grounds for returns. Factory defects are the most obvious grounds for returning products. But what about damage from shipment? Or other disputes in quality? Make sure the standards are clear.
Under a buyback agreement, retailers can sell unsold stock back to a wholesaler after a certain period of time. This reduces the risk that retailers take on, making them more likely to engage in wholesale buying.
To minimize risks on your own part, you can place restrictions on the buyback agreement. For instance, you can limit the quantity that retailers can sell back to you, generally measured in a number of units. Keep a reasonable number to discourage retailers from buying outrageous quantities only to sell them back.
You can also require that retailers shoulder a shipping and restocking fee for items they sell back to you. This will protect your business from unnecessary costs accrued when retailers can’t sell their full orders. It’s a standard practice, so most retailers will agree to it for the security it offers them.
This list will suffice for those beginning their wholesale enterprise or those double-checking to see if they’ve covered their bases.:
- Minimum Order Quantity (MOQ): what is the smallest unit quantity (and/or total order value) that qualifies for a wholesale purchase?
- Wholesale Pricing: what is the wholesale price relative to the retail price?
- Payment Terms: When and how will the retailer pay for the invoice?
- Shipping Costs: Who shoulders shipping costs?
- Delivery Methods: Which shipping vendor will be used?
- Ordering Process: What information must be included to process an order?
- Exclusivity: Will you be entering into exclusive deals with certain retailers?
- Return and Exchange Policies: What are valid reasons for returning/exchanging a product? Until when can a retailer return/exchange products?
Of course, there’s more to wholesale than this. There are other ways to grow your wholesale business, such as by building customer relationships or improving your business processes and frameworks.
Digital solutions for wholesale and B2B enterprise have an especially positive outlook. According to Forrester, B2B eCommerce will be worth $1.1 billion by 2020, bolstered by increasing developments in digital and cloud-based resources for such businesses.
One digital upgrade worth considering is inventory management. Tracking your bulk orders—whether these are materials coming in or finished products being shipped out—is essential for any wholesale business.
Manage your wholesale business swiftly and efficiently with Sweet’s next-level lot tracking system. Sweet can provide you with smart inventory management software that can help you automate and streamline your inventory processes. Our solutions are designed to scale with your needs and are viable for businesses of any scale.
To find out how Sweet can help you, request a free demo today.