Retail vs wholesale: Which model is right for your business?
Retail vs wholesale: What’s the difference?
The main difference between retail and wholesale is who you’re selling to. Retailers sell products directly to consumers, while wholesalers sell products in bulk to other businesses and retailers. Wholesalers are at the top of the distribution chain, supplying their products to retailers who then sell to consumers.
If your distribution model is wholesale, you sell in bulk to retailers and other businesses. You sell at a competitive rate to encourage retailers to stock your product, while setting a price that maintains your own profit margin.
For example, a wholesaler might buy 1,000 pillows from a manufacturer at $1 a pillow, costing them $1,000. They may then sell the pillows to 50 retailers at $4 each (four times the original price), earning a nice profit.
Retail is the sale of products directly to consumers. Retailers may manufacture their own products and sell directly to their customers. Alternatively, they may buy stock in bulk from wholesalers or directly from the manufacturer and then sell them at a higher rate to their customers.
For example, a retailer might buy 200 pillows for $4 a pillow from the wholesaler and sell them for $15 each to the end customer. After subtracting expenses, they can make an excellent profit per pillow.
Pros and cons of wholesale
Longer buying cycle
Wholesalers tend to sell large shipments, so customers don’t need to reorder often. This cadence provides income security and increases average order value. Wholesalers can predict their profit margin and maintain a high inventory turnover because they regularly ship large quantities of goods.
Expanded brand awareness
Wholesalers sell to various retailers simultaneously, meaning their products appear on numerous shelves. More exposure to products helps build consumer awareness.
A wholesaler can expand into global markets without understanding local rules, regulations, language barriers or payment preferences. You'll automatically reach shoppers in international markets if your retailers also sell to them. Wholesalers also ship goods in bulk instead of hundreds of small retail packages, which reduces costs significantly.
Less control of products
After selling a product to a retailer, a wholesaler can't control its price or marketing. It may be a good option if you aren’t concerned about what happens to the product. It may, however, mean that retailers market or price the products in ways that don't reflect the quality of your product.
Little customer interaction
Wholesalers have very little — if any — contact with the end customer. After the retailer receives the products, they handle the sales process. Little interaction is ideal if you want to focus on product development, but not so good if you enjoy building customer relationships.
High startup costs and overheads
Wholesalers may need to invest a substantial amount of capital to get started. Buying large quantities of products from manufacturers to sell adds up, and storing a lot of inventory requires a large warehouse.
Smooth inventory management is an integral part of running a thriving wholesale business. Inventory control is essential in warehouses that handle large volumes of stock. Effective inventory management can be a challenge for many businesses without specialist inventory management software.
Pros and cons of retail
Higher profit margins
As retailers sell in smaller quantities to their customers and seek to deliver a brand experience, they can mark up the price of each item they sell. This means that their profit margin per sale is higher than that of a wholesale business.
If you’re manufacturing the products yourself, the direct feedback that you get from your customers will be very beneficial in developing your range. Likewise, you have the flexibility to change your order with your supplier if the product isn't selling well.
More control of products
Retailers have the final say on how they market, price and sell their products. This means you maintain control over your brand and the customer experience you deliver. Your marketing channels, campaigns and how you present your products online are entirely up to you.
Today’s retail landscape is highly competitive. Brands often sell similar products, so it can be hard to stand out with the right product range. It’s important that retailers understand their target market and can invest in marketing to drive ongoing sales.
In addition to purchasing stock, retailers also have other expenses they need to pay for, like advertising, marketing, rent and employee wages. These things require time and money, putting pressure on your bottom line.
Consumers expect affordable, fast delivery — if not, they can choose from many other shopping options. Retailers must meet these expectations to succeed, including low-cost delivery and efficient shipping to different locations. Inventory management can be challenging — particularly if selling online as well as through a brick-and-mortar store.
Wholesale and retail: things to keep in mind
If you’re considering whether selling wholesale or retail is the right path for you, consider that you might be able to do both. Selling products to retailers and consumers is possible, but there are a few things to keep in mind:
You’re competing with yourself
Selling your own products in a retail store puts you directly in competition with all the retailers you've sold wholesale to.
While it may be tempting to undercut these competitors to win out on price, this can affect your reputation as a wholesaler and cause you to lose future bulk sales. It’s important to maintain a competitive price for your retail customers while still being an attractive wholesale option.
As a solution, you could offer different product ranges in your retail store and via your wholesale business so you’re not competing with your business-to-business customers.
Inventory management and fulfilment can get complicated
You essentially run two separate businesses when you sell wholesale and retail. It’s essential to have a strategic approach to inventory management and fulfilment to ensure sufficient stock is available.
Consider whether you’ll keep the inventory for both businesses in the same warehouse or occupy several smaller fulfilment centres. Secondly, determine how to manage each business' stock and differentiate them. The warehouse side of your business will function separately from the retail side, so you’ll need to find a way to manage both avenues seamlessly.
You may need to restructure your website
Your website will need to reflect the two different parts of your business. You can either choose to have two separate websites — one for your wholesale business and one for your retail business — or restructure your existing site to accommodate both. You can set up a portal so that retailers can make bulk purchases from you, or each business model may have its own page.
Inventory management made easy
Whether you decide to sell wholesale or retail, MYOB has you covered. With MYOB’s inventory management software you can:
Understand what’s selling and what’s not
Automate re-ordering to increase efficiency
Oversee warehouse performance
Have visibility of upcoming sales orders
Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.