In nearly every business, buying goods in large quantities means you can buy the goods at a lower price. It's known as the wholesale price. If you need to buy small quantities, especially single units, you have to pay the higher price, usually known as the retail price.
But how is it then that a company like GemSelect can sell single gemstones at wholesale prices? Are they really wholesale prices? Why should the gemstone business be different than any other business?
To understand the economics, you need to understand a bit about wholesale prices in general and why they exist at all. So here's a short tutorial.
First, consider why in most businesses there are wholesale prices. The manufacturer puts his work into making a product, but selling the product to customers who will be the actual user of the product (the "end-user") is a huge job. The end-users are geographically dispersed and they may not know the manufacturer. So the manufacturer has a problem about how to reach the market.
His solution is to sell the goods to a distributor who will then arrange for the goods to get to market. The distributor adds value by his contacts in the retail sector - he knows who can sell and provide product support to the end-user. The distributor buys the product in bulk from the manufacturer and then sells it at a higher price to the retailer. So there are actually two wholesale prices; the one paid by the distributor to the manufacturer, and the one paid by the retailer to the distributor.
The reason why there are different wholesale and retail prices is actually not an issue of quantities bought and sold. It's rather due to the need for an expensive distribution chain for goods to reach the market. Each link in the chain extracts a profit, and it is the end-user who eventually bears the cost of the distribution.
Being able to buy at the wholesale price means bypassing the distribution chain and going to the source to make your purchase. In most businesses that isn't possible. The manufacturer is not set up to sell to and support the end-user, and the distribution chain won't allow him to do it anyway. The manufacturer can't risk alienating the distributor or the retailer, since he needs them to reach his market. So the distribution chain creates barriers to the consumer.
In some business sectors, electronic commerce over the Internet has made it possible to do away with this expensive distribution chain. But it's not as simple as it sounds. Anyone can set up a website and display products to sell. However, if the manufacturer is also reaching the market via a retail channel, he can't offer wholesale prices on his website. He would undercut the retail channel and those stores would stop selling his product. It's called channel conflict and it's a sure way to destroy your business.
So any manufacturer who wishes to go down the e-commerce route has to do it exclusively. You can't sell at one price on the web and sell at another price through another channel. We've chosen to reach our customers directly via the Internet, and we sell at the same price regardless of customer and quantity. We produce many of our own gemstones and buy the rest from local factories here in Chanthaburi, Thailand. This is about as simple a distribution chain as one can have in business these days, and is how we are able to sell at wholesale prices.
- First Published: March-13-2008
- Last Updated: October-09-2014
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