2020-12-06 01:59:50Business OperationsEnglishhttps://quickbooks.intuit.com/global/resources/business-operations/retail-versus-wholesale-business/Retail Versus Wholesale Business Models: What’s Best For My Business?

Retail Versus Wholesale Business Models: What’s Best For My Business?

11 min read

In this article, you will learn:

Wholesalers and retailers are the key links in the supply chain. And the supply chains today are evolving with the changing trends.

These trends include innovation in business such as the Internet of Things, Cloud Technology, Shorter and Tough Business Cycles, Expanding and Demanding customer base, etc.

Accordingly, Retail and Wholesale too have seen dynamic changes and are the two types of business models for a product-based business.

A business model is nothing but the way you plan to sell products to your customers.

Thus, before starting a product-based business, you first need to:

  • Have a clear understanding of Retail and Wholesale business models and
  • Understand which business model appropriate for your business

So, in this article, you will learn what is a retail and wholesale business, the difference between retail and wholesale, and which business model is right for you.

What is Retail?

Retailing is a business model in which the seller sells goods directly to the final consumers as per their needs. That is, it is a Business-to-Consumer model.

In this, you either produce your own products or procure products from the distributors. Such products are then sold directly to the final consumers in the retail stores. Thus, products are sold to consumers without any third-party intervention.

Furthermore, the products are sold in smaller quantities and with high frequency in retail stores as well as outside the stores.

Accordingly, retailing done outside the retail stores is known as non-store retailing. Non-store retailing includes selling via the internet.

Therefore, the retailers either:

  • Sell their own branded products,
  • Products from third-party brands, or
  • A combination of their own as well as third-party products.

Now, some of the popular international retailers include Walmart, Toys Our Us, etc. So, as a retailer, you add value to the final consumers by performing channel functions like:

  • Product assortment and services decision
  • Determining the pricing and promotion policy like everyday low pricing, high-low pricing, etc.
  • Promotion decisions like promoting via advertising, personal selling, etc. to reach more customers
  • Deciding a suitable location for the retail store

What is Wholesale?

A Wholesaler is an individual or a company selling products in bulk to retailers, industrial consumers, and other wholesalers.

Thus, wholesale is a Business-To-Business model where wholesalers buy products from producers or distributors and sell the same to third-party businesses in bulk.

Since as a wholesaler, you sell in bulk, you are thereby able to sell goods at a low price per unit. This further leads to reduced costs in terms of handling time, etc.

Therefore, as a wholesaler, you add value to your customers by performing channel functions like:

  • Helping manufacturers reach customers at a low cost
  • Providing financing facility like giving credit
  • Buying and building assortments
  • Breaking bulk into smaller quantities
  • Providing warehousing and transportation facility
  • Bearing risks such as damage, cost of theft, etc.
  • Providing market information like new products, price developments, etc.

Difference Between Retail and Wholesale

We have already discussed in detail retail and wholesale business models. As evident, these models differ in their function. The following are the differences between retail and wholesale business models.

S.No.ParticularsWholesalerRetailer
1.Purchase of GoodsWholesaler purchases of goods are in bulkRetailer purchases goods in smaller quantities
2.Goods Purchased FromThe goods are bought directly from manufacturersGoods are bought either from distributors or wholesalers. At times, retailers are themselves producers who produce their branded goods and sell them in their retail stores.
3.Variety of GoodsWholesalers have a limited variety of goodsRetailers deal in a wide variety of goods
4.Capital NeededNeeds relatively more capital to start and run wholesale businessIt needs relatively less capital to start and run a retail business
5.Purpose of SaleGoods are sold for onward sale, that is, further resellingThe goods are sold directly to consumers for final consumption
6.Direct Contact With ConsumersNo direct contact with consumersHave direct contact with consumers

Types of Wholesalers

The Wholesalers are categorized into three major groups:

  • Merchandise Wholesaler

The Merchandise Wholesalers are businesses owned independently. These wholesalers take the title to merchandise that it manages.

Thus, the Merchant Wholesalers account for the largest share in the group of wholesalers. These can further be categorized into Full-Service and Limited-Service Wholesalers.

  • Agents and Broker

    • Broker

A Broker is a type of wholesaler who does not take title to the merchandise. Instead, a Broker serves the function of bringing the buyers and sellers together providing them assistance in negotiation.

    • Agents

Agents are wholesalers who do not take title to the merchandise. Instead, they represent buyers and sellers on a relatively permanent basis and undertake only a few functions.

Thus, Brokers and Agents differ from Merchandise Wholesalers. Further, they do not take title to the goods and perform only a few functions.

  • Manufacturer’s Sales Branches and Offices

This is a type of wholesaling model where independent wholesalers are not involved. That is, buyers or sellers themselves undertake the wholesaling business.

Types of Retailers

Retail Stores can be categorized based on a number of characteristics. These include:

  • Amount of services offered
  • Prices they charge
  • Product lines they offer and
  • The manner in which they are organized

Accordingly, some of the types of retailers are as follows:

  • Specialty Stores

This is a type of retail store offering a limited product-line with a deep assortment within such product-lines.

  • Department Stores

A Department Store is a retail outlet that has a wide variety of product-lines. That is, each product-line functions as a separate department handled by specialized merchandisers.

  • Supermarket

Supermarkets are the type of retail stores that have a wide variety of grocery and other household items. These are self-service outlets and function on a low-cost, low-margin, high-volume model.

  • Convenience Stores

As the name suggests, a Convenience Store is a small retail outlet located near a residential area offering fast-selling convenience goods.

  • Chain Stores

Chain Stores are two or more retail stores that are commonly owned and controlled.

  • Franchise

A franchise is a contractual agreement between a manufacturer, wholesaler, or a franchiser and independent individuals known as franchisees.
Under such an agreement, franchisees buy the right to own and operate one or more units in the Franchise model.

Distributor Vs Wholesaler And Distributor Vs Retailer

There is a need to build relationships with a number of parties involved in the network to produce products and make them available to buyers.

Thus, you need to build relationships not only with customers but also with the key partners of the supply chain if you want to create customer value. These supply chain partners include distributors, wholesalers, and retailers.

Accordingly, you may not require these middlemen if you are a retailer who operates on a small scale. However, you would need an excellent value delivery network for efficient distribution if you are a large business.

In other words, you would not be able to provide goods to the end consumer at a favorable price without key supply chain partners.

So, here are some of the key partners in the supply chain.

  • Distributors

Distributors are the partners who work directly with manufacturers and are the dealers in niche products. They act as a point of contact between manufacturers and wholesalers.

That is, the manufacturers would not be able to reach out to relevant wholesalers if distributors are absent in the supply chain.

Thus, the wholesalers stock large quantities of inventory and supply products to suppliers for further resale.

  • Wholesalers

The wholesalers are the partners who purchase products in large quantities from distributors or suppliers.

Further, the wholesalers are able to resell products to retailers at competitive prices since they buy in bulk.

Thus, the wholesalers are key partners in the supply chain as the retailer’s demand would be left unmet if the wholesalers are absent. Also, there would not be sufficient distributors to meet the needs of the retailers.

  • Retailers

Retailers are the other key partners in the supply chain who buy products in small quantities from the wholesalers. They purchase products in smaller quantities because such products are sold to the final consumers quite frequently.

Furthermore, retailers charge the highest markup from consumers in the supply chain. This is because running a retail store is costlier than any other business model.

Also, the retailers always look for opportunities to charge higher prices for better margins since there is a higher risk attached to retailing.

Wholesale Vs Retail: Which Business Model Is Right For You?

It is important to consider certain factors in order to decide which business model is appropriate for your business. This includes:

  • Knowing who you are as a business owner in terms of your strengths, weaknesses, personality, etc.
  • Ways in which you can reach your target customers
  • The amount of control you want to exercise
  • Nature of your products
  • The extent to which you need to maintain direct contact with customers etc.

Thus, you determine why wholesale or retail is the right business model for you based on the above-mentioned factors.

Why Retail Might Suit You?

As mentioned above, retailing would be an appropriate business model if you want:

  • Face to face contact with customers
  • To have a higher degree of control over your products

Therefore, the following are the benefits of owning a retail business.

  • Reach Out To Target Consumers

The retail business allows you to target a custom consumer base. Likewise, you have the flexibility to choose the retail channels through which you would reach out to such consumers.

So, the various retail channels could include online stores, physical retail stores, etc Furthermore, you can make the necessary changes within no time since you have control over retail channels.

For instance, you are a men’s shoe retailer and may find that the men’s accessories sell well on amazon over your online store.

Thus, you can use such information to your benefit since you have the data of how your products perform on various retail channels. That is, be present where your customers are.

  • Direct Contact Brings Personalized Connection

You get consistent feedback from your customers for your offerings since you are directly dealing with them. Thus, this helps you to understand what customers need.

This means you can quickly adapt to the tastes and preferences of your customers once you know them.

Similarly, you are able to identify best-selling items easily. This is because you have separate customer sales reports available for various product lines.

In addition to this, you can also know your premium as well as non-buying customers. This helps you to tailor your offerings and target them in a better way.

  • Decide Price and Margins

As a retailer, you have the flexibility to decide the price and the profit margin you would demand from your customers.

Furthermore, the entire share of profit belongs to you as you are the sole owner of your business.

Similarly, you get a clear understanding of the profit margins being earned from each of the products as proper reports are available for such products.

This helps you to make necessary alterations so that you earn favorable profit margins across products.

Furthermore, watch out for the profit margins across retail channels where your products are available to ensure better profitability.

This is important as channels like Amazon have different fees. Moreover, you incur various costs like shipping, insurance, etc. that vary across retail channels.

Thus, tracking profit margins across retail channels would ensure that you are earning profits as a retailer.

  • Control Over Your Brand’s Identity

As a retailer, you have control over the branding of your business offerings. Besides this, you also have control over other factors like how the products would be showcased, on what channels they would be made available, etc.

Thus, this flexibility ensures brand consistency for products would be displayed the way you want them to be viewed.

Why Wholesale Might Suit You?

If you are seeking to reach out to a large number of customers, wholesale would be the right business model for you. Thus, here are some of the advantages of undertaking a wholesale business:

  • Reaching Large Customer Base

As mentioned above, the wholesale business model gives you wider customer access. This is because you are not limited to selling your products through specific shops or your own retail stores.

Furthermore, your products can reach large potential customers since you sell through multiple stores. This means you can even reach those customers who would not be able to locate you otherwise.

  • Expanding to Global Markets

The wholesale business model opens up opportunities to venture into international markets easily and quickly. This is possible because of the sound relationship that you have with your retailers.

Furthermore, you get an opportunity to sell your products in the international markets if some of the retailers sell internationally.

Thus, to sell internationally, you will have to make sure that you have an accounting system like QuickBooks that allows you to undertake multi-currency transactions.

Similarly, another important thing would be sending goods in bulk as a large container instead of individual supplies. This would further give you the benefit of reduced cost.

  • Benefit of Dropshipping

Another benefit that you can avail in the wholesale business is that of Dropshipping.

Dropshipping is nothing but an order fulfillment system. It allows you to send products to customers not from your own inventory but by placing an order to a vendor or a manufacturer.

These vendors then send items to customers on your behalf with your branding.

 

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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