Whether you’re a business owner who’s buying or selling goods, it’s essential to understand the various components of the supply chain. One of the critical decisions you must make involves choosing between wholesale and retail.
Unfortunately, if you’re a small business owner just getting started, weighing the wholesale vs. retail decision can be overwhelming. A wide array of criteria go into determining which is the best choice for your small business.
Today, we’re here to answer questions like, “What is retail?” and “What is wholesale?” After reading this guide, you should have a sound understanding of the two so that you can quickly determine which is the best structure for your business.
What is retail?
Retail involves the sale of goods or services directly to the end-user. Retail sales can involve a variety of products and can occur through numerous distribution channels. Types of retail stores include, but are not limited to:
- Department stores
- Online stores
- Discount stores
- Brick-and-mortar stores
What distinguishes a retail transaction from a wholesale one is the fact that the sale involves the end buyer. The definition of retail doesn’t so much concern the type of distribution channel as it does the parties involved. Retailers act as a middleman between wholesale companies and consumers.
If you’re selling products and do so only with the intent of distributing “final products,” then you can consider yourself a retailer.
Similarly, if you’re buying goods for your own use, the transaction will be a retail-based one. For instance, if you need a printer for your new business and purchase one at your local office supply store, like a Staples or an Office Depot, you’ve participated in a retail-based transaction.
Typically, retailers sell small quantities of goods. Sure, you could technically purchase 100 printers from a Staples if your business grew to that size. But this is not considered a standard order, and it would probably take some time to fill. Retailers, especially when compared to wholesalers, sell products at much smaller quantities.
What is wholesale?
Wholesalers are those who sell products to businesses or other outlets who are not the end-user. Wholesalers don’t sell small quantities of goods like retailers. Instead, they sell products in bulk at a low price. The more you buy from a wholesaler, the less per-product you’ll end up having to pay.
So imagine you’re a manufacturer, and you need raw materials — let’s say lumber. You could walk into your local hardware store and purchase lumber — you likely did this when you set up prototypes and initial products.
But as your company grows and demand increases, you’ll need large quantities of lumber. Perhaps you open a couple different factories who each go through hundreds of pieces of lumber per day. A wholesaler would allow you to purchase lumber in bulk to meet your needs.
But wholesalers don’t have to stick to wholesale. Wholesalers can also be retailers and manufacturers. For example, General Mills produces various foods, including cereal. They then distribute cereal to grocery stores that sell goods to the end-user. In this case, General Mills is both the manufacturer and the wholesaler.
Another example of this is Apple. You can purchase Apple products in stores like WalMart or Best Buy, or through your cell phone carrier. However, you can also buy products directly from an Apple store or off the Apple website.
In this scenario, Apple operates as a manufacturer, wholesaler, and retailer. They receive parts from various wholesalers and then assemble those parts into products like iPhones. They then sell products in bulk to retailers. But by selling products on their website and in stores, they also act as a direct-to-consumer (DTC) retailer.
What are the key differences between retail and wholesale?
To summarize the key differences, retailers sell goods directly to the end-user, typically in small quantities. Wholesalers, on the other hand, sell goods to other store owners and others in the retail industry who then turn around and sell the goods to the end user. Wholesalers sell a large number of products at a time.
If you’ve ever heard of the terms B2B and B2C, they are especially relevant when discussing wholesalers and retailers. B2B stands for “business to business.” B2C stands for “business to consumer.”
Retailers participate in B2C transactions. They receive a product from another business, a wholesaler, and sell it to consumers. Wholesalers engage in B2B sales. They receive a product from a manufacturer (or manufacture products themselves) and sell them to other companies.
There are a few other differences between wholesalers and retailers. For one, there is much higher competition between retailers, and retailers care significantly about the customer experience.
For instance, if you’re shopping for a product, you would likely shop around to determine where you can get the best price. You may choose to shop at a particular store for other reasons, such as their location or their customer service.
There is much less competition when it comes to wholesalers. You may only find a handful of wholesalers compared to hundreds, if not thousands, of retailers.
Use General Mills as an example again. General Mills produces cereals and distributes them to grocery stores. Sure, there are other cereal manufacturers. But according to Food Industry, there are nearly 40,000 grocery stores in the United States.
Furthermore, retailers typically need to worry about advertising costs, while this is not the case with wholesalers. Wholesalers typically only deal with limited products as well, where retailers tend to handle many different products at one time.
The retail business model
In general, when selling retail, you sell the product for a higher price per unit than a wholesaler. Since wholesalers sell products in bulk amounts, they purchase the product at a discount and then use their own formulas to mark up the retail price.
As a retailer, you have control over your product: when it’s sold, where it’s sold, and how much it’s sold for (which directly affects your profit). You can also interact with your customers one-on-one and receive their feedback in real-time.
As a retailer, you need to worry about advertising costs and focus on getting consumers into your store to buy your products.
Another component of retail management is a point of sale (POS) system. Retailers need a suitable POS system that allows them to complete B2C transactions. This includes the ability to accept credit card purchases. If you don’t coordinate sales and accounting through an integrated POS system, that can spell disaster for your business.
Retailers also deal with customers on a regular basis. This could involve talking with customers face-to-face in a brick and mortar store or answering customer questions on an e-commerce site. If you’re uncomfortable with that situation, then retail may not be the best model for your business.
If you choose to operate as a retailer, your success will rest solely on your ability to sell your product and continue to do so as you create new ones.
If building a consumer brand, building a marketing program, and dealing with consumers sounds like an awful experience, then retailing may not be right for you. As a retailer, you are the marketer, salesperson, and fulfillment specialist for your business.
The wholesale business model
As a wholesaler, you can sell large quantities of your product at once. Selling your products wholesale could open up new revenue streams and get you in contact with thousands of different consumers. Wholesale can provide you with more stability because the responsibility for selling your product to consumers by-and-large falls to the wholesale buyer.
Wholesaling also comes with fewer expenses, at least when compared to the money spent year-round on in-store marketing and standard retail overhead. You don’t have to worry about marketing costs if you don’t want to. And you’re moving products in bulk, which cuts down on your overhead. It also cuts down on shipping costs.
As a wholesaler, a large portion of your time will be spent on supply chain management and logistics — getting products to a particular location, overseeing the manufacturing process, and maintaining and tracking inventory.
You will have to spend time vetting potential clients to ensure their legitimacy. This could involve running credit checks. If you don’t do this research, it could lead to lost funds and lost inventory.
You may not need a point of sale system as a wholesaler, but you’ll need to deal with invoicing. You’ll need to create easy-to-pay invoices that include:
- Customer purchase order (PO) numbers or billing codes
- Itemized lists of goods and pricing
- Lengthier payment terms
Because you’re not receiving up-front payment, there’s always a chance that the buyer won’t end up paying their invoice. That’s why it’s crucial to only work with credible buyers when you’re operating as a wholesaler.
Wholesale or retail: Which is right for your business?
If you’re just starting your small business, you may want to begin as a retailer. You likely don’t have the current ability to meet wholesale demands. Take time to establish your product and build a following. You can sell online and ship products to the consumer directly.
As your brand grows and you expand your business and are more prepared to manufacturer large quantities of goods, you can consider using wholesale suppliers to put yourself into brick-and-mortar stores. Or you could choose to open brick-and-mortar stores of your own.
Remember, you don’t have to choose one or the other. In many cases, growing businesses do both. In fact, we’ve created a detailed guide on how to wholesale to retailers as a retailer.
Being able to sell your own creations and manage your own business can give you the level of freedom you desire. Whether as a retailer or a wholesaler, you can achieve this financial freedom and create a successful enterprise for yourself.
This article was produced by the Quickbooks Resource Center and syndicated by MediaFeed.org.
Featured Image Credit: Milkos / iStock.