For small businesses just getting started, retail versus wholesale can feel like a make it or break it decision. Worse, complicated formulas and a host of acronyms cloud the already murky waters.
The truth is determining which model is right for you doesn’t mean you have to understand electronic data interchanges (EDI)—the system most wholesalers use to place and receive orders.
Nor do you have to calculate your COGS (cost of goods sold), CAC (customer acquisition cost), and CLTV (customer lifetime value) from the jump—all terms associated with retail.
Instead of weighing you down with unnecessary jargon: Let’s briefly examine the what, why, and why not of retail and wholesale.
Once the big picture comes into clear focus, then you can tackle the rest.
What’s the difference between retail and wholesale?
By way of definition, retail is selling merchandise directly to end consumers normally in one-off purchases. Wholesale, in contrast, is selling products through bulk orders to other businesses who then resell to the end consumer.
Because of this divide, retail relationships are categorised as business to consumer (B2C) or direct to consumer (DTC), while wholesale is known as business to business (B2B).
The retail business model
In general, when selling retail, you sell the product for a higher price per unit than wholesale. 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 (profit)
You also have the ability to interact with your customers one-on-one and receive their feedback in real time.
Because you’re face-to-face with customers—and other members of the public—helping people understand the work involved in what you do is a great way to generate word-of-mouth marketing.
Lastly, as a small-scale manufacturer of over-the-counter goods, you can be quicker at incorporating new designs and feedback into your products.
Why not retail?
Running a retail store is all about interacting with people. This includes both e-commerce websites and brick-and-mortar locations. If your sales and accounting aren’t coordinated through an integrated POS system, that can spell disaster.
If you find social situations awkward or have a hard time finding the energy to talk to people, this can be a major obstacle to your success.
Being face-to-face is also an occasion to introduce criticisms of all sorts, from pricing decisions to product craftsmanship. If you’re unable or uncomfortable with being in that situation, then retail may not be the best model for your business.
Your success will rest solely on your ability to sell your product and continuing to do so as you create new ones. If building a consumer brand sounds more like a bad dream than a fulfilling experience, then retailing may not be right for you.
You’ll be the marketer, salesperson, and fulfilment specialist for your business.
That’s a lot of hats for one person to wear, especially when you’re also the product creator.
The wholesale business model
As a wholesaler, you have the ability to sell large quantities of your product at once, and have them sold to consumers via multiple channels.
Selling your products wholesale can open up new revenue streams that might be too cumbersome for just one person to handle. That gives you more stability because the responsibility for selling your product 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 normal retail overhead.
Why not wholesale?
If you’re a creative type, then wholesale can get rather boring.
A large portion of your time will be spent managing logistics: getting products to a certain location, managing the manufacturing process as well as maintaining and tracking inventory.
You will have to spend time vetting potential clients, including their creditworthiness to ensure you aren’t transacting business with shady characters.
Not conducting this research can lead to lost funds and lost inventory.
Typically, these functions increase overhead. That requires a clear picture of job costing and profitability tracking as you hire more employees. B2B also requires the creation of easy-to-pay invoices that include:
- Customer purchase order (PO) numbers or billing codes
- Itemised lists of goods and custom pricing
- Lengthier payment terms
If your product lends itself to mass production, this might be a non-issue. But if you toil away on every piece, then selling wholesale might deplete your resources quickly.
Wholesale or retail? Maybe both?
Wholesale is great for people who can mass produce a product and get it to market efficiently. It’s also a more professional environment, as you will be interacting with other business people, and not necessarily the public.
If you feel you function better in a more formal work environment or consider yourself business savvy, wholesale might be the business model for you.
Also remember, you don’t have to choose one versus the other. In many cases, growing businesses do both.
Being able to sell your own creations and manage your own business can provide you the level of freedom you may be yearning for; whether as a retailer or a wholesaler, you can achieve this financial freedom and create a successful enterprise for yourself.
Just make sure to choose the right business model for you to avoid unnecessary stress later.