As a new entrepreneur, you will make many early business decisions daily.
For instance, you might have to figure out the right distribution partner. Or if you plan to integrate different sales channels, finding an optimal omnichannel order management system will be a decisive step. Based on the type of business, you may have to figure out B2B fulfilment, B2C fulfilment, and likely both.
But the first thing you should do is to choose the right business model—B2B wholesale or B2C retail.
Wholesale Vs. Retail…we’ve all heard these terms frequently. But very few know the ins and outs of them. If you aren’t already an expert, no worries. Our guide will help you understand what sets apart a wholesale business from a retail one. We will also breakdown how they function, and the benefits of each model.
What is Wholesale?
A wholesale business buys bulk goods from manufacturers or distributors at discounts and then resells it to individual retailers, offline or online, at a higher price. Retailers then sell the products to the end customers. Some wholesale businesses manufacture their own products and sell them straight to retailers.
For instance, a local grocery store buys bulk goods from wholesale businesses. Because the order is in bulk, the wholesaler gets their stock at a reduced price. Then, the store owner adds the markup on the wholesale price and earns profit on sales. The markup factor is the difference between the product cost and the selling price.
The customer base of a wholesaling business includes:
- Individual merchants, etc.
Because wholesalers buy goods in bulk at once, manufacturers offer them considerable discounts. That’s why wholesalers are able to pass these discounts to their retailers also. But the selling price for retailers is still higher than the original buying price. That way the wholesalers still manage to earn a significant profit.
Wholesalers are one of the essential channels in the distribution chain of goods. They enable manufacturers to focus on building innovative products and get them efficiently to retailers and consumers. Sometimes, wholesalers act as raw material suppliers for manufacturers or even dropshipping providers for eCommerce retailers.
How Does Wholesaling Work?
A wholesale business acts as a liaison between manufacturers and retailers. They play a vital role in the product supply chain. Wholesalers are responsible for:
- Acquiring products
- Splitting the bulk into smaller lots
- Repacking and storing in a distribution centre and
- Delivering to the retailers
It’s common to find a wholesaling business that specialises in a single product category or that deals in a variety of goods. Nonetheless, a wholesaler stocking a wide range of products can be an added advantage to the retailer. That’s because it not just simplifies the retail supply chain but also allows retailers to obtain a variety of products without the hassle of maintaining relationships with multiple suppliers.
What’s more, wholesalers often contract with retailers to maintain a constant inventory of their products and create a steady source of recurring revenue.
Either way, if you want to build a thriving wholesale business, having a finger on the pulse of market trends is key. That way, you are able to capitalise and supply the most trending products.
Also, finding the right products for wholesaling comes down to understanding your capabilities and limitations as a seller.
Additionally, a successful wholesaling business hinges on a reliable partner who can consistently supply or manufacture quality products at reasonable costs. And supplier research is key to that. It's a time intensive but worthwhile process.
Lastly, the best wholesale products are ones that generate high sales and profit potential. But equally important is its demand. It won’t matter if there is no market for the products. Hence, the trick is to find a high-demand, low-competition product.
Can a wholesale business also be taken online?
It’s long thought that B2B customers avert online channels. And the conventional wisdom also suggested that the wholesale buying process is too complex for going online.
However, recent research reveals a significant shift in B2B buyer behaviour. With the global B2B eCommerce market growing annually by 11.8% over 2021-2030, it is estimated to reach $ 47,772.6 million by 2030.
Clearly, B2B eCommerce platforms are gaining popularity. They have made it easier for wholesalers to sell products online and expand their reach. Some popular online wholesale marketplaces that have democratised wholesale eCommerce are eBay, Amazon, Alibaba, Handshake, TradeSquare, Trada, etc.
What is Retail?
A retail business sells merchandise in small quantities from a single point of sale to an individual customer. The sale qualifies as a retail sale only when the buying customer happens to be its end user.
A retailer may be the manufacturer of the product or may procure products from a wholesaler or a distributor. They then sell the products in smaller quantities to consumers at a higher unit price than a wholesaler.
The single point of sale for retail can be one of the many sales channels such as:
- Brick-and-mortar retail store
- Online shopping website
- Mail-order houses
- Vending machine operators
- Direct-selling establishments
In essence, a retail business is more than a final link between manufacturers and consumers or a place to purchase goods. It offers manufacturers an outlet to focus on producing their products.
Whereas, from customers’ viewpoint, the retail industry is a linchpin for the convenience they need to fulfil their daily shopping needs.
In fact, a strong retail sector reflects a strong economy. In 2020-21, the retail industry contributed an economic value of $ 89,856 m in Australia.
However, its most significant contribution represents the employment it generates. Being the second largest employing industry, it generated 1,331,900 jobs in November 2022 across the Australian economy.
How Does Retailing Work?
Retail relies on a retail supply chain that enables them to supply the merchandise to market to the consumers.
The retail supply chain consists of four major players, namely:
- Manufacturers: Produce goods from raw materials.
- Wholesalers: Buy bulk goods from the manufacturers and sell them to retailers.
- Retailers: Sell goods in smaller quantities to end customers at a higher price.
- End-users: Buy from retailers for personal use.
However, you will find some exceptions to the traditional supply chain. For example, retail behemoths like Amazon and Walmart deal directly with suppliers without requiring wholesalers as intermediaries.
Note that each step of the retail supply chain has a markup. That means manufacturers calculate their cost of manufacturing the goods and add the profit margin before selling to wholesalers. Likewise, wholesalers markup their prices to generate profit. Finally, retailers have their own profit margin before selling it to the end users.
At first glance, this might cause price inflation for consumers. Quite the reverse, it keeps prices in check as manufacturers do not have to market their products and offer a shopping experience to their customers.
As a retailer, you must operate your retail business through various functions to make the merchandise available to the end consumer through a convenient channel. Not to mention, it should be done while keeping the margins profitable. In this context, taking the time to chalk out a solid retail planning strategy helps retailers stay competitive.
The key activities in a retail business model are:
- Sourcing products from one or more manufacturers and suppliers.
- Merchandising to ensure the right quantities at the right time.
- Marketing the products to drive traffic to the store, brick-and-mortar or online.
- Operating the store and selling the products.
- Warehousing and logistics.
- Replenishing stock for seamless business continuity and the best customer experience.
- Having a suitable Point of Sale system (POS) to complete the B2C transactions.
- Maintaining customer relationships through customer service.
Wholesale Business vs. Retail Business
You now have a complete grasp of the primary difference between a wholesaler and a retailer, which goes like this:
- Wholesalers purchase goods in bulk from manufacturers/ suppliers/ distributors, store them and sell them to retailers in smaller quantities.
- Retailers buy smaller quantities of these goods from wholesalers and sell them directly to the end user.
Now, let's further break down the wholesale vs retail riddle once and for all.
Wholesalers vs. Retailers: Types
Now, let’s look at the different types of wholesalers and retailers.
In addition, shopping malls, franchises, and online retailing are also widely established types of retail businesses.
Wholesale Pricing vs. Retail Pricing
Wholesale pricing is the pricing that manufacturers charge wholesalers who buy products in large quantities.
For example, if it costs you $10 to make one product, you may set a wholesale price of $15. It earns you a per unit gross profit of $5.
The wholesaling businesses have access to wholesale pricing. Hence, the price at which they buy goods is way lower than the retail prices. Besides, bulk shipments allow them to pay smaller fulfilment costs. Moreover, if wholesalers make it to long-term deals with retailers, they also enjoy added advantages of continual income and higher average order value.
Retail pricing, on the other hand, is the price retailers set as a final selling price for end-users.
Retailers are in touch with the end customers. So, they inherently enjoy the convenience of a flexible pricing strategy. It enables them to have the freedom to set prices based on their target profit margin. To do so, retailers must factor in their overhead costs, labour, and advertising charges while calculating their prices. For the same reason, retail prices are typically higher than wholesale prices.
Say, as a retailer, you buy certain products for $10 and want a gross profit margin of $10, then you would charge your end customers $20 for the in-store products.
Another approach to retail pricing is ”Suggested Retail Price”—the price manufacturers recommend to retailers, though retailers are not compelled to follow SRP.
Plus, if the current rates are not generating the expected profits, then retailers can balance their retail prices with the marketable prices.
Coming back to the same example, if a retail product priced at $20 is low in demand, then a high gross margin can cancel out the low volume. But if the product does not sell at the initial retail price blocking the store shelves, the retailer eventually has to run a discount sale to clear stock. The objective is to encourage purchases that lead to profit outcomes in the short or long term.
A crucial pricing element that both wholesale and retail pricing strategies should heed is the markup factor. Here’s an example:
If you want to add a 60% markup to a product that costs $100, calculate what 60% of $100 is ($60), add that amount to the original cost ($100), and get a markup price of $160.
The optimal markup factor enables businesses to nail the sweet spot that covers costs and makes a profit while ensuring a fair price for their customers.
Wholesale vs. Retail: Location
As one might expect, its location is the most critical factor for a retail business's ultimate success. It’s that unique feature that is hard to imitate for your competitors. By just being in a good location with high footfall, retailers can notably ease off on local marketing expenses. Plus, a retail location also serves as a storage and fulfilment hub and impacts the delivery efficiency of the inventory.
Naturally, the perfect spot comes with a hefty price tag. Whether it’s a brick-and-mortar retail store, a shopping mall, or a business park, setting up a retail business in such locations is incredibly expensive and needs a strategy of its own.
Wholesalers usually do not face this issue, as they are not too dependent on appealing stores and good locations to sell their items to different businesses. However, since wholesale businesses handle bulk quantities of product, plenty of warehouse storage space and easy access to highways and main roads for transportation do matter for them.
Wholesale vs. Retail: Marketing
Marketing is indispensable for retail. That isn’t to say that wholesalers do not have to market their products at all. They do, but unlike retail, their advertising and marketing approach does not rely on flashy and expensive campaigns.
Instead, wholesale businesses depend more on traditional marketing methods such as outreach, business partnerships, and liaising.
At the other end of the spectrum is retail businesses that must do everything to stand out from the crowd.
For instance, by the end of 2022, the Australian retail market was flooding with over 9000 supermarkets and grocery stores.
With so much competition out there and few barriers to entry, it’s absolutely critical for retailers to devote greater resources to marketing their goods.
Retail businesses must develop a strong marketing strategy to stay ahead of a sea of retailers. Since they sell directly to consumers, they must invest in branding, packaging, marketing channels, social media presence, competitor analysis, and many other campaigns.
Moreover, they always have to be on the lookout for ways to improve their practices to analyse their customers’ buying habits and attune their advertising and marketing campaigns accordingly.
Wholesale vs. Retail: Customer Interaction
A wholesale business is a Business-to-business (B2B) company, which means they sell goods to another business and not to a single consumer. Alternatively, retail businesses are Business-to-consumer (B2C) companies offering products to end customers.
This difference between wholesale clients vs. retail clients gets reflected in the extent of their interaction with the end customers.
Wholesalers are not the customer-facing side of a supply chain. This very nature of wholesaling does not require wholesalers to interact directly with the end users regularly. In fact, the only customer a wholesaler typically interacts with is the retailer. For the same reason, wholesalers are comparatively less concerned with the customer experience.
But retailers have the opportunity to directly interact with the end users as they shop in their brick-and-mortar or online store. They must answer customers' queries with varying pain points, process returns, exchange, and market their products. It allows them to gain access to first-party behavioural data and subsequently refine their marketing and procurement strategies.
On the flip side, this also means that retailers must spend much of their time and resources on ensuring excellent customer service.
Benefits of Wholesale vs. Benefits of Retail
Wholesale Vs. Retail: Final Say
If you are starting small, you might not be able to meet the wholesale demands of huge capital and large storage space. In such a case, retailing will likely be more profitable.
You can sell online and ship your products directly to your customers. You will have the best shot at success as a retailer by having the right sales and marketing skills, as retail is all about brand visibility. As your retail business scales, you can use it as a launchpad to put yourself into your own brick-and-mortar stores.
Like many brands embracing omnichannel strategy, it's equally possible that you see lucrative opportunities in adding wholesale to your retail mix. And that’s great too! Such a diversified distribution strategy is an amazing move to expand your customer base and create additional revenue streams. Either way, it’s wise to carefully gauge your resources before choosing the apt business model.
Whether you launch into wholesale, retail, or both, a streamlined fulfilment operation will be non-negotiable. That’s why PACK & SEND’s B2B and B2C warehousing and fulfilment services take care of every aspect of business’s fulfilment, so you are ready for just about anything!
Frequently Asked Questions (FAQs)
What is the difference between wholesale and retail?
A wholesale business purchases bulk goods from manufacturers at discounts and resells these products to retailers at a higher price. It is a business-to-business (B2B) model.
A retail business purchases goods from wholesalers and resells them in smaller quantities at a higher price to individual consumers. It is a business-to-customer (B2C) model.
What is the difference between wholesale and retail when it comes to prices?
A commonality between wholesale and retail business models is that they both buy products for a lower price and sell it for a higher price. It is called “markup.”
But the difference is that wholesale price allows manufacturers to earn profit by putting a markup on the costs of producing goods. On the other hand, retailers markup the cost of acquiring inventory and make a profit.
Can I combine wholesale and retail for my business?
Why not? By being both wholesaler and retailer, you distribute products through your own virtual or brick-and-mortar retail store. It’s a great way to remain in direct contact with your end customers and have an alternate revenue source in the face of disruption.
However, there are some negatives too. Since you will be competing against your own resellers, you need to be absolutely sure that your retail prices are not underselling your wholesale business.
Thus, ensure a really effective pricing strategy and reliable warehousing and logistics partnership. It can go a long way in enabling you to seamlessly manage both wholesale and retail without causing confusion.
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