Establishing Terms for Wholesale Distribution and Direct Retail Sales


Figuring out how much to charge a wholesale distributor is a tricky matter. As a general rule, they will expect 55 percent to 65 percent off of the Manufacturers' Suggested Retail Price (MSRP). With larger orders they will expect free shipping. That's a lot of ground. Here's what you have to consider.


Listing Your Price

It's best to list your MSRP in your catalogs, as you'll want to offer a variety of different terms to different parties, all based off of the MSRP for a product, so list that always.


On average, wholesale distributors will expect to get somewhere around 60 percent off of the MSRP. Note whether your discounts are a percentage off or a percentage of. So, if something costs 2/5 of normal price that's 40 percent of MSRP or 60 percent off of MSRP. I recommend listing it as a percentage off.

Vary the discounts based on payment terms. Depending on your profit margins, try to get people 65 percent off if they pre-pay when ordering.

If they pay within ten days after an order is invoiced, maybe they get 60 percent off.

Maybe they just get 55 percent off if they expect to pay more than 10 days after the invoice date and under 30 days.

You'll want to come up with a listed penalty for accounts which aren't paid on time.

Note how the days are calculated. For example, you invoice on January 1st. I receive the invoice on January 7th. I cut a check on January 9th. You receive it on January 16th. Is the payment discounted on the date of the postmark or the date of receipt? I recommend the date of postmark for money orders that are mailed (that is if you are willing to accept money orders).

Minimum Orders

Are there some orders too small for you to be bothered with? If so, list minimum orders. There also may be minimum orders to qualify for certain discounts or for free shipping.

Shipping & Handling Fees

Perhaps there are no minimum orders, but there are minimum order sizes in order to get discounted or free shipping. Is the shipping fee the actual shipping cost? If so, note where they can find shipping rate information and you'll probably want to include shipping weights, etc. Easier is to include a shipping rate with each product description or a flat shipping rate for the first item (regardless of its weight) and an additional charge for each extra item ordered. Figure out what won't drive you bankrupt. You'll get larger orders if larger orders come with free shipping.

If you are offering free shipping, always note the limitations on it (first domestic address an order is shipped to each month, etc.). Realize that unless this is precise, somebody is going to try to tag you with incidental handling charges, freight forwarding charges, etc. Be careful about offering worldwide free shipping, or the same flat rate handling charges that you offer inside the continental U.S. Heck, be careful about offering the same shipping rates for people in Alaska and Hawaii, unless your company is headquartered there.

Return Policy

Can people return them items? Under what terms? Full refund in cash? Full refund as credit toward future orders? List the terms. List how long people have to return the items. Always make sure that you note that items must be returned in condition that allows for re-sale, and note that damaged goods will either be returned or only a partial refund will be offered.

Return policies get you higher orders, since there's less risk associated with them. But since your sales can be returned, it's harder to figure out what's going on with your cash flow until months after a sale.

Big stores like Wal-Mart love return policies and may demand them unless discounts are steep.

Note who will pay for shipping on returned goods (i.e., maybe say: "No refund will be made on original shipping costs, nor the shipping paid to return the goods. All shipping costs are the responsibility of the ordering party in all cases."


Requirements to Qualify as a Distributor

Can any Tom, Dick, or Harry qualify for a discount? If so, nobody's gonna order in a store, they are going to order from you. Lots and lots of tiny orders.

Do you require a business certificate? Proof of physical address? A sample from the list of retailers who order from the distributor? Their most recent product catalog?


Payment Terms

If you are a U.S. publisher, always note that all values are in U.S. Dollars, so that nobody is confused.

As noted above, you can give different discounts based on the due date, but note that you never want to give any random guy net 30 days terms unless you've run a credit check on him first. If you don't know somebody and can't run a credit check (or if their credit check is bad), then demand pre-payment.

Note how you are expecting to receive your money. Paypal? Checks? Money orders? Wire transfer? Credit cards (which brands)? Note what happens in each of these cases, particularly with regards to international money orders and checks.

If a Canadian check can cost fees to cash in the U.S. Note that the distributor ordering bears all responsibilities for international checks and money orders.

Shipping Procedures

Are you going to ship instantly upon receiving an order? Do you ship only on Tuesdays? Say this so that people can get what they expect.

If you only ship once a day, date your invoices for the date of shipment. Don't run your invoices 5 days prior to shipment, 'cause that's bad form.

Penalties for Late Payment

Note what penalties exist for late payment. You may want to check with a lawyer in your area to see what the maximum penalty you can assign without the late fee being considered usurious. Usury is illegally charging an arm and a leg on a debt. It can get the whole debt cancelled if you aren't careful.

Retailer Terms

Retailers often buy for between 45 percent off and 50 percent off of the MSRP. Now, you can pick up some extra business by giving them the same discounts you give to distributors, but doing this can also cause you to lose business from your distributors, which is generally a larger piece of pie than what you get from a single distributor. So, for starters, keep a list of distributors who carry your products on your website, and ask people to order from the listed distributors. If a retailer doesn't do business with any of your distributors, then give them a discount, but keep the discount between 50 percent off and 55 percent off. Set that discount keeping in mind that it's generally more of a hassle to handle lots of smaller orders than a handful of huge orders. So, while direct sales to retailers seems like just extra profit, keep into account all of the handling costs you will accrue as a result of dealing with smaller retailers.

As with wholesalers, you'll want to establish a system of proving that people are retailers (instead of just random people looking for a discount).


Parting Thoughts

When non-retailers and non-distributors order from you, don't be afraid to give them free shipping on certain larger orders, but don't bite the hand that feeds you. If you offer free shipping on small orders, and if it's faster to get stuff from you than to wait to get them at retail, then why wait for the retailer? Make ordering direct from you attractive, but no so attractive that it sinks the business of retailers and distributors. If 90% of your business is direct sales, however, like for some really niche market games, then maybe these aren't your concerns.

Whatever your terms are, make sure that they are clearly posted on your website and that everyone who orders has read them, so that it's clear what the terms of the deal are even if you choose not to have distributors sign a contract. Maybe worth your while to get people to email you saying they have read your terms and policies (or setup a web form for people to agree to before ordering).

In parting, remember that a lot of production methods are sufficiently cost effective if you don't sell through distribution. In distribution, there's the rule of 5. If the retail cost is less than 5 times your manufacturing cost, you'll either lose money or you won't make money. Why? Because wholesalers often buy from you at 2/5 of the retail cost. So, you don't have a lot of room to pay for layout, design, artwork, marketing, etc. if your manufacturing cost is above 20% of the total. Some people have a rule of 4 instead, saying that you can spend up to one fourth (25%) of retail on total production costs (including art, layout, printing, design, etc.). The bottom line is, that there are always hidden expenses, so if your costs go above a certain level, then you won't make money at wholesale.