Wholesale vs. Retail: Understanding the Differences
When starting a business, the debate of wholesale vs. retail is one of the most significant features of developing your strategy. After all, your decision will influence your approach to branding, selling, and order fulfillment. The overall impact on your bottom line can be huge.
There are thousands of success and failure stories in both retail and wholesale. This guide will underline the benefits of either option while also looking at wholesale vs. retail examples in the process. By the end of this article, you should have a much clearer picture of the advantages and disadvantages of both systems.
Wholesale vs. Retail: The Definitions
There are over 32.5 million businesses in the U.S. right now. While not all of them are in the business of commerce and selling goods, millions of them are. And they all face the same dilemma: go wholesale, retail, or a combination of both.
Before deciding which sales approach is right for you, it’s essential to know what they are. The retail definition states that this method of selling revolves around providing goods directly to the consumer or end-user. In most cases, this means selling individual items or products in small quantities.
Conversely, wholesale vendors focus on selling products in bulk quantities. While they can also sell products in smaller quantities, it is often done in large volumes.
The wholesale trade explanation also states that it involves selling items to outlets and retailers and is rarely focused on selling to the end customer directly.
Both the wholesale and retail business models can be used by manufacturers that produce products in-house. Similarly, both models can support brands that focus on acquiring goods from other companies.
While not entirely accurate in all cases, wholesale is often used for B2B, while retail focuses more on selling products to customers.
Wholesale selling focuses on lower costs because the large volumes mean sellers can afford a lower profit margin per item. Moreover, handling costs and other related expenses are far smaller. Retail companies usually charge more because they are focused on selling smaller quantities per transaction.
In many cases, retailers procure their products from wholesalers and subsequently need to add a markup before selling the products on.
Wholesale vs. Retail Examples & Statistics
Market research is vital in all aspects of business management, especially when looking at the pros and cons of wholesale or retail. Some of the key industry facts you should know include the following:
- U.S. merchant wholesalers generate $8 trillion of total goods sales per year.
- U.S. retail sales are over $5 trillion per year and steadily climbing.
- Around 5.9 million people are employed in the wholesale sector.
- Small retail business owners in the U.S. can expect to earn around $60-70k per year.
Both wholesalers and retailers can make big money if they are supported by a strong business plan and promote the right products to the target audience. When determining the best option for your business, it will be necessary to consider the products you are hoping to sell and whether you are more likely to achieve a large sales volume from retailers or lots of individual sales from end-users.
It also makes sense to look at the differences between retail and wholesale methods by analyzing some practical examples.
How Retail Works
Retailers can range from huge online outlets like Amazon to small local brick-and-mortar businesses. Meanwhile, many large companies like Walmart operate in both digital and physical spaces.
In addition to store retailing, companies may look to non-store retailing, covering direct marketing and sales, distance selling, and online sales.
Retailing can take many forms, from online fashion stores to department stores or traditional brick-and-mortar stores. However, the fundamentals of business will remain largely the same:
- The retailer procures products through wholesale purchases, in-house manufacturing, or other methods.
- It promotes the products to a defined client base of end-users who may be interested in them.
- Once the products are sold, the retailer fulfills the order. This could mean selling the product in-store, completing an online delivery, or using dropshipping.
While running a retail business is complex and involves hundreds of tasks, from hiring sales staff to printing shipping labels, the basic buying and selling model is that you purchase large quantities of a product before selling individual items at a higher price.
How Wholesale Works
Wholesale involves buying much larger quantities (or manufacturing them yourself) before selling them to retailers. So if you think about the supply chain, wholesalers generally come one step before retailers.
There are well over 400,000 wholesale distributors in the U.S. This includes many types, such as those who work exclusively online, some that focus exclusively on dropshipping, numerous discount wholesalers, and more. In general, we can split them into three groups:
- Merchant wholesalers buy goods and their titles before reselling with a markup to businesses, retailers, and other wholesalers.
- Agents, brokers, and commission merchants are wholesalers who do not take on the title of the goods. Instead, they serve as a middleman service to negotiate the buying and selling on behalf of their clients. Their payments primarily come through commissions.
- Manufacturers’ sales offices and branches are wholesale operations that a manufacturer may run to sell bulk orders of their products to other companies and retailers at a discounted price.
Whichever route is taken, wholesalers usually serve to bridge the gap between the manufacturer and the retailers who will sell those goods to the end-users.
The Pros and Cons of Retail or Wholesale
Now that we've given a retail trade explanation and a wholesale definition let’s look at the pros and cons of retail and wholesale distribution. Understanding these should help you determine which arrangement is best for your company.
The Pros and Cons of Retail
- Higher profit margins. Arguably the biggest benefits of retail revolve around pricing. Wholesalers sell large volumes but only make small profit margins per item. The markups when selling directly to the consumer are far higher. Whether you have manufactured the goods yourself or purchased them from a wholesaler, a 100%+ markup is common.
- You can utilize multiple sales channels, including online and in-store sales. This means you will see a regular sales flow and serve a much larger customer base than the handful of retailers that typical wholesalers use. Simply put - it creates a more stable business model.
- Retail offers an opportunity to connect directly with consumers, and stats show that even digitally native firms are now opening more brick-and-mortar stores than ever before. Any entrepreneur that loves the general function of commerce will prefer this route. Aside from deeper connections, modern data analytics will help guide your marketing and customer care efforts. When handled correctly, this may also help you generate more sales and conversions.
- There is potentially less financial exposure. You won’t need massive warehouse spaces or to purchase large volumes of stock before selling. In fact, dropshipping means that you won’t even need to handle stock or order fulfillments. With internet-based sales, you can even operate from home. There is also more room to offer discounts while still seeing profit margins.
- You’ll have full control of the brand identity and how products are shown. When relying on department stores and other retailers to sell the goods you’ve produced, their actions could potentially cause a negative impact. Of course, they can have a positive influence too. Still, if you want to enjoy complete control over your sales, retail has an advantage over wholesale.
- There is pressure to build a much larger audience base because the average spend of individual customers will be far smaller. This means conducting market research and completing campaigns to reach the right people and find a niche that will bring significant gains. Moreover, retailers will have to continually keep outperforming other online and offline retailers to see sustainably good results.
- Retailers often face challenges that wholesalers don’t: in-store theft, for example, can contribute to massive losses and happens far more often than large-scale thefts on company warehouses. End-users are also more likely to seek returns, while the operational and staffing costs of brick-and-mortar stores are usually more expensive than what many wholesalers face.
- Reaching new demographics can be challenging. When your brand identity is focused on a niche, it can be difficult to expand beyond it. Likewise, it will limit which products may be suitable for your retail outlet. If you were to hit a downturn in sales, it might prove tough to find upselling opportunities or new client demographics to rejuvenate your brand.
The Pros and Cons of Wholesale
- Manufacturers looking to sell their products can significantly improve brand awareness through wholesale distribution agreements. This is because the products will be promoted by a wide range of retailers. As consumers and end-users see your brand more frequently, the likelihood of conversions and an increased company presence on the market will improve.
- Wholesale opens the door for for entrepreneurs to dropshipping. Retailers will handle the front-end sales and interactions while you deal with the order fulfillment elements following a sale. It allows you to enjoy some of the best features of retail selling without directly reaching out to consumers yourself. Wholesalers can continue to sell bulk quantities to some retailers while dropshipping for others.
- You can sell internationally with greater ease. The costs of transporting single items to end-users can often make this difficult for retailers, especially when the company is new. Shipping large quantities in one go promotes smoother (though riskier) logistics. This can open the door to working in new territories, especially since the chosen retailer will handle the local sales, and you only have to worry about getting the goods to them.
- Reduced marketing costs. One of the benefits of wholesale is that you work with retailers who simply want the best product at the best price. They do not need to be sold on a product the same way a consumer would.
- Less competition in the wholesale sector. Most wholesalers work with just a small number of products and manufacturers. Selling in large quantities also offers an opportunity to earn more per client, which is one of the key benefits of wholesale over retail.
- Wholesalers often require a significant level of capital and a strong cash flow. If they aren’t the manufacturers, they need to buy massive bulk orders before subsequently selling the smaller packages to retailers. The fact that you need to buy large quantities of stock before making sales while also having to buy and maintain a suite of trucks and delivery vehicles means that you’ll have substantial upfront expenses.
- The retail vs. wholesale price formula shows that wholesalers often see a markup of around 20% on products. Of course, working with massive quantities means that you can still see large profits overall. Nonetheless, the workload for what is often a small profit margin is one of the significant drawbacks. Meanwhile, damage to a single shipment could seriously harm your ROI, even if the goods are insured.
- You are still required to complete some marketing aspects, especially if you manufacture the products you are selling. After all, there needs to be consistency across all retailers. This can produce an extra workload without increasing your direct profits. That said, if it helps retailers, you are likely to get larger and more frequent orders.
As shown above, both retail and wholesale have advantages and disadvantages. In today’s climate, many business owners can combine elements of both selling methods to maximize profits. Setting up two sister websites or brands - one aimed at wholesale and one at retail is a relatively simple task and allows you to enjoy the best of both worlds.
Whether choosing one of the methods or a combination of the two, the most important thing is that you understand how each distribution method will benefit your company and what potential problems each can bring. When you do, success will be far more likely to follow.
Wholesale is a business practice in which companies sell products in bulk rather than individually. This most commonly means selling to various types of retailers at low prices, who will subsequently sell them to the end customer at a higher price. In some cases, wholesale suppliers will also provide smaller quantities to the end-users through specialized stores, but this is not a common practice.
Both share many similarities, but the difference between wholesale and retail in terms of quantities and buyers means wholesale is not considered retail. Instead, they are different distribution arrangements that work together within the supply chain.
Wholesalers can fall into three categories. Merchant wholesalers are the most common type and buy products in large quantities before selling them to retailers. Brokers tend to serve as middlemen who act between manufacturers and retailers. Finally, manufacturers often have sales branches for both retail and wholesale sales.
As an industry, global wholesale suppliers generate over $8 trillion per year, while retail is worth around $5.2 trillion. However, individual businesses can thrive in either sector. When comparing wholesale vs. retail, the right option will depend on numerous factors. These include stock availability, the demand from end-users versus retailers, the industry you’re operating in, and where you’ll sell your items.
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