When you consider starting a business, you will have to make a wide range of decisions. What should you sell? Should you sell online, in a physical storefront, or both? How will you acquire inventory?
All of these questions are important, but another one you should definitely consider is whether or not you want to sell products as a wholesaler, a retailer, or a hybrid that does both. In fact, this is one of the first decisions you should make.
If you’re not familiar with the differences between wholesale and retail, we’ll break down how both methods of selling work, the pros and cons of each, and whether or not a hybrid approach is viable in today’s blog post.
How Does Wholesale Work?
Let’s begin at the beginning and talk about how wholesale and retail work.
If you choose to be a wholesaler, your business model will essentially involve buying large quantities of products from distributors, storing them in warehouses, and then reselling them to retailers.
Wholesalers are basically the “middle man” between suppliers or manufacturers and retail stores.
As a wholesaler, you’ll buy large quantities of items at a significant discount because you’re purchasing such a large volume of products.
You’ll then resell these items in smaller quantities to retailers with a mark-up that allows you to make a profit on each item sold while also allowing retailers to resell them at a profit.
That’s a very simple overview of how wholesale selling works, but if you understand the basics of wholesaling, it’s easier to decide if it’s the right approach for your business.
To sum up, wholesalers:
- Buy items in large quantities at a discount
- Resell the items in smaller quantities at a higher price to retailers
How Does Retail Work?
Now that we know how wholesale works, let’s take a moment to examine retail.
Retail is a business wherein you sell products directly to end-users. The customers who buy your items want to own the item and aren’t looking to resell it to another company or individual.
Retailers purchase their inventory from wholesalers or distributors (or their materials if they manufacture their products). They may buy in bulk, but the quantities are almost always less than what a wholesaler purchases.
As such, they pay the wholesaler more for the items than the wholesaler paid to acquire them. It’s a symbiotic relationship, though. The wholesaler has to resell items at a price low enough for the retailer to make a profit too.
The key differentiator between wholesale and retail is basically the end buyer. If you’re selling products to someone who’s going to use the product and not sell it to someone else, it is essentially a retail sale.
The main takeaway here is:
- Retailers buy items that they intend to sell to an end buyer. The purchaser, even if it’s a company, isn’t generally buying the product to resell it
- Retailers buy smaller amounts than wholesalers and will generally pay a markup on items, but will still be able to make a profit when selling to the end buyer
- Retailers often sell products individually, not in bulk.
What are the Key Differences Between Wholesale and Retail?
We’ve discussed some of the key factors of wholesale and retail in the previous sections, but let’s dive deeper into how the two approaches differ.
When it comes to pricing, both retailers and wholesalers are concerned with getting the lowest price possible when buying inventory, but pricing tends to have a bigger impact on wholesalers.
Because wholesalers buy such large quantities, getting the lowest unit price possible has a major impact on their ability to turn a profit. The lower the amount they pay for products, the more potential profit they can make when selling to retailers.
Or, if there’s a lot of competition in a product category, they can be more competitive if they can offer lower prices to retailers. Paying less for products upfront gives them more wiggle room to undercut competitors and still make a profit.
Price is important for retailers too. However, since retailers aren’t required to buy huge quantities, they have more flexibility when it comes to ordering.
They’ll still need to purchase stock at a price that allows them to make a profit after purchase, warehousing, and the other costs associated with running a business.
This is why we often describe the relationship between wholesalers and retailers as symbiotic. They must work together to ensure both make a profit. If the wholesaler prices things high, retailers will not be able to make a profit and will not buy the items.
Retailers, meanwhile, need to build in realistic profit margins and manage their inventory levels effectively so they can make a profit while still paying a wholesale price that allows the wholesaler to profit as well.
Like pricing, competition is another factor to consider whether you choose to go with a retail or wholesale business.
There’s no major appreciable benefit to one or the other when it comes to competition. What we mean by that is you will have competitors at retail and wholesale and the level of competition is more determined by what products you’re selling than what method of selling you choose.
Wholesale does have a slight advantage in that wholesalers can choose from a huge range of products and markets to target. As long as there are businesses interested in reselling the products at retail, and the wholesaler can procure the goods at a fair price, there’s nothing stopping wholesalers from offering widely varied product lines.
Retailers, on the other hand, tend to have less flexibility in this regard. If you sell apparel, you probably won’t find much success offering electronics if the apparel market gets too competitive.
The main point here is that you should be doing research on the amount of competition you’ll be up against before deciding what to retail or wholesale. This is especially true if you’re a retailer tied to brick-and-mortar locations.
Building on the previous bullet, marketing is another important area for both retail and wholesale businesses. It’s arguably more important for retail, but that doesn’t mean wholesalers won’t have to market as well.
Marketing is less important for wholesale because wholesalers have a potentially smaller customer base. They’re not looking for individual buyers, they’re looking for buyers from retail companies who will buy in bulk.
The customers who come to a wholesaler are already informed about what they want, who they can get it from, and what it will likely cost. Because of that, wholesale can spend significantly less on marketing than a retail business.
Retail sellers, on the other hand, will need to spend significantly more on marketing because they’re trying to reach multitudes of individuals who may buy one or two items. The targeted customer pool is bigger, and even if you do get them to consider your products, they may not be informed or ready to buy.
Reaching them through marketing is vital to make them aware you exist, what you offer, and when there’s a deal that might actually entice them to make a purchase.
Fulfillment and Expenses
For retailers, fulfillment is crucial. Whether you realize it or not, you’re competing against Amazon, who can deliver items in a day. Customers have come to expect fast shipping and fulfillment. This is a legitimate issue for retailers because faster shipping means more expenses in most instances.
Wholesalers, meanwhile, don’t face these issues in the same way. Wholesalers sell huge amounts of products in bulk. Customers order ahead of time, so there’s rarely a need for an item to get there the next day (or even the next week in a lot of cases).
Because they ship in bulk, wholesalers can negotiate better shipping rates for freight. Retailers, who are shipping priority and single packages to customers, don’t have this luxury unless they’re a giant like Amazon.
All in all, this is another area where wholesalers have an advantage over their retail counterparts.
When it comes to location, there are a lot of variables that come into play.
If you’re a retail business with physical stores, location is everything. Pick the wrong spot for your business and you might be out of business before you get started.
However, location matters even if your business is an eCommerce shop. The more centrally located you are in relation to your customers, the better shipping times will be. If you’re dropshipping, location matters too. The closer a shipping location is to the customer, the faster they’ll get their products.
You’ll also need to factor in the cost of locations if you have a physical storefront. Retailers will pay more because they need commercially desirable locations to lure in customers. Those locations are often more expensive than running a warehouse in an industrial park.
Wholesalers don’t have these issues. They can get away with the industrial park warehouse space because many of them aren’t open to the public. Orders are placed online or over the phone. Plus, since they often need huge amounts of space, it’s not feasible to have a location in an area of prime real estate.
Location is important for any business, but when it comes to retail versus wholesale, it’s definitely more important for a retail business.
Finally, we wrap up this section talking about relationships. The connection between retailers, wholesalers, and customers is important. Without customers, it’s challenging to stay in business.
However, this is another area where retailers have to put forth more time and effort to be successful. Retailers will need more customers than wholesalers. It’s simple math. If each retail customer only buys one item, you’ll need significantly more customers to be successful.
Wholesalers, on the other hand, could theoretically get by with a handful of really big customers placing huge bulk orders regularly.
Retailers will have to constantly search for new customers and lure previous buyers back to purchase more. Wholesalers’ customer relationships are generally less complex and often far more stable. Once a company chooses to do business with a wholesaler, they will continue to do so unless they find a better deal or the wholesaler fails to deliver the products required.
As you can see, retail and wholesale are similar business types in some ways, and radically different in others. Each comes with its own unique set of challenges. All of these issues can be overcome, but it’s good to understand what you’re up against before deciding to go down either of these paths.
Pros of Being a Wholesaler
As with pretty much anything in life, there are pros and cons to being both a retailer and a wholesaler. In the next sections, we’ll break down all the challenges and benefits to help you make a more informed decision.
The pros for wholesalers include:
One of the biggest pros of wholesaling is that it allows you to build brand awareness with less effort than a traditional business.
If you wholesale your products, that means you potentially have access to a wide range of retailers. A single retailer, on the other hand, can generally only sell their products in their stores or through their eCommerce platforms.
It’s easier to develop brand awareness when you can get your products into Walmart, Amazon, and a variety of other stores. Wholesalers have the ability to get their products into many different locations and reach more customers.
Another pro to selling products wholesale is that you can take advantage of dropshipping to move your products.
If you’re not familiar with dropshipping, it’s a selling method wherein retailers or eCommerce sellers sell your products. They market and promote the product, and when an order comes in, the wholesaler fulfills it by sending the product directly to the customer.
Dropshipping allows sellers to move products without the cost of storing inventory. Wholesalers, meanwhile, can benefit from additional sales without having to actually market or promote their products.
It’s a win-win in most instances.
Wholesalers can go global without incurring the costs of actually building locations or expanding into new markets. They simply have to find retailers to work within the regions they want to target.
This is much simpler than having to expand a retail storefront’s reach. If you want to create a business that has a global reach, wholesaling is one of the easier ways to achieve that goal.
Wholesale Allows You to Reach a Much Bigger Audience
One of the benefits of increased brand awareness and being in a variety of different stores is that it gives wholesalers the ability to reach a much larger number of customers.
If you’re only in one company’s stores, you only have access to their customer base. People who don’t shop in those stores might benefit from your product, but they’ll never see it because they’re not customers of that particular retailer.
With wholesale, you can take a much broader approach and get your products into a multitude of locations. More exposure means you’ll have more opportunities to reach customers.
A positive side effect of having your wholesale products in more locations and markets is that you’ll invariably gain credibility with customers.
When people see your products in a number of different retail locations, they’ll often assume that your product is desirable and worthy of a purchase.
Cons of Wholesale
Retaining Brand Identity
The potential downside of having your products in so many different retail locations is that it can be challenging to maintain a brand identity. Your products will often either get lost in the shuffle of other products or will get less preferential treatment when compared to the retailer’s own brands.
In a wholesale situation, it’s easier for your products to feel like just another product on the shelf. Building the brand identity is harder.
The rewards are often worth it, as being in more markets and locations is almost always a good thing, but do keep in mind that you’ll have to focus more on your brand identity than a traditional retailer would.
Marketing Your Product
While your product will be in more locations and markets and retailers will sell it for you, you’ll still need to focus on your own marketing.
There are two reasons why this is important:
- You can’t depend on your retail partners to properly market your product for you and retain your brand identity.
- You need to market to make sure potential retail partners can find your products.
If you operate under the belief that your retail partners will take care of all the marketing for you, you will eventually have issues.
Finally, being a wholesaler means you’ll be filling lots of large orders. Large orders mean you’ll need lots of product, and lots of product requires storage space.
If you go the wholesale route, factor in the cost of storing all the products. From the warehouse space to carrying costs, maintaining high stock levels comes with a cost.
Pros of Retailer Selling
Retailing comes with its own pros and cons. Here are some of the most common:
Targeted Consumer Base
One of the biggest benefits of being a retailer is that you can focus on a specific product or set of products, which means you can target a very specific consumer base.
If you sell feminine apparel, you will have an easier time identifying and targeting your perfect customers and creating avatars for your branding and marketing initiatives than a wholesaler who offers a wide range of different products that turn up in places like Amazon, Walmart, and beyond.
There’s something to be said for the wide net you can cast as a wholesaler, but don’t discount the value of connecting with a targeted audience looking specifically for the products you offer.
Building on the previous point, it’s much easier to build a personal connection with customers as a retailer.
Wholesale sellers have retailers as a “middleman” between their business and customers. Retailers have the advantage of dealing with customers directly.
Beyond that, monitoring your direct sales will give you insights into customer behaviors that wholesalers don’t often get.
Direct access and increased insights can give retailers a much more personal connection with their customers.
Control Over Brand Identity
We talked earlier about how being a wholesaler means managing your brand identity can be a challenge. The opposite is true for retailers.
Retailers have complete control over their brand identity because they handle their own marketing and deal directly with their customer base.
This is a definite advantage compared to wholesale. You can manage your brand identity as a wholesaler, but it will require more work.
Price and Profit Margin
Finally, another benefit to running a retail business is that you have control over your prices and profit margins.
To clarify that, we mean the retailer gets to determine their own retail price and profit margin. You will have to factor in the costs of buying from a wholesaler (if you use one), but when a wholesaler allows a retailer to re-sell their products, they have no control over the retail price or profit margin (in most instances, they charge the retailer a wholesale rate and that’s their price and margin).
Both groups get to determine their pricing and margins, but the retailer often has more control over this because they’re not selling in bulk and offering discounts to make larger sales.
There’s more to this one, but it’s a bit beyond the scope of this article. Just realize that as a retailer you will have the ability to set prices and margins that work for your business.
Cons of Retailer Selling
Harder to Reach New Markets
Being a retailer means you’ll often occupy your market niche, but reaching new markets will be challenging because you don’t have the broad reach of a wholesaler.
Expanding into new markets carries more costs and risks for retailers. Wholesalers can hedge their bets by going with multiple partners. Retailers basically go it alone.
Profit Margins Can be Narrow
As a retailer, you can set your own prices and margins, but if you’re reselling items and you’re not getting a great wholesale deal, those margins can be slim as you have to turn a profit on items you’ve purchased but also be in line with market prices from your competitors.
This is why it’s imperative you get the best wholesale deals possible and find wholesale partners who understand your business’s challenges.
Customer Acquisition and Churn
Retailers need more customers than wholesalers on average, which means you will constantly have to spend time finding new untapped markets, new customer bases, and replacing customers who “churn” out of your system.
Because of this, marketing is incredibly important for retailers. You need to not only focus on sales but also constantly seek out new ways to reach your target buyers.
Types of Wholesalers
With all of the pros and cons discussed, let’s take a quick look at the different kinds of wholesalers and retailers out there. One of these types of businesses could be perfect for you.
1. Merchant Wholesalers
Merchant wholesalers are wholesalers who will buy large quantities of products and then resell them in smaller quantities. The catch is that they sell these smaller quantities at a fair markup, which is how they generate their profit.
2.Sales and Distribution for Manufacturers
Sales and Distribution wholesalers are one of those crafty trick question wholesalers. You call them wholesalers, even though they’re not technically wholesalers.
Think of a company that makes a product and has its own distribution division. They sell the items to other wholesalers and retailers. Companies that make computer chips are a good example of this kind of business.
Discount Wholesalers buy large quantities of cheap or discontinued stock and resell it at a low price.
We discussed dropshipping earlier, but it’s a viable wholesale business, especially for people just starting out. You sell the items to customers, but the wholesaler fulfills the order directly, paying you a commission on each sale.
Brokers are the deal-makers in the wholesale world. They don’t buy or sell products, but they do hook up buyers and sellers. As such, they make money from fees and commissions for their service.
These are wholesalers who sell their products almost exclusively through the internet (or at least have a program for those kinds of sales) as opposed to a physical location.
Types of Retailers
Specialty stores are simply retailers who have found and operate in a very specific niche. Yankee Candle would be a good example of a specialty store. They focus on a very narrow product range.
As you can probably guess, these are your online eCommerce stores. Amazon is an obvious example.
Department stores feel like they’re on the verge of extinction, but they’re still out there. Macy’s is one of the last great examples. They sell a wide range of products built around specific “departments” like clothes, housewares, and so on.
I’m guessing we’re all pretty familiar with supermarkets. They’re one of the most ubiquitous retail stores around.
Convenience stores are another familiar category of retail. They carry food, drinks, gasoline, and other commonly needed items.
These are the Dollar Generals and Big Lots of the world. They have a regularly rotating stock of discounted products available. Because the stock is often dictated on what kind of wholesale deals the stores can get, you will find a wide range of products available, but the selection changes regularly.
Technically, Walmart also fits in this category.
7.Other Media Retailers
This covers your companies selling through catalogs, TV, and other media that isn’t the internet.
Can You Do Both?
At this point, you may be thinking the best bet is to be a retailer and a wholesaler.
The good news is, you can indeed do both things at once. Here are a few of the challenges:
1.Competing Against Yourself
The biggest hurdle is self-competition. As a wholesaler and retailer, you will often find yourself competing against yourself.
Think of it this way: if you sell your products in your retail store, but also offer the products wholesale to competing retailers, you’ll be trying to sell your products both in your stores and your competitors’ stores.
That can be challenging. It’s not impossible, but many businesses will struggle here.
2.Different Ranges of Products
One way to potentially get around this problem is to rebrand your products. Wholesale items that you offer to competitors can be branded differently so they don’t feel like direct competition with your own retail offerings.
This could be more work than it’s worth, but you’ll have to determine that for your business through analytics and forecasting.
Finally, you’ll need to consider your wholesale costs and profit margins if you really want to make the hybrid approach work. Taxes, carrying costs, storage, and a multitude of other factors have to be considered so you can set retail and wholesale prices that actually provide enough margin to make the business viable.
The nuts and bolts of that are way beyond the scope of this post, but be aware that this is something you need to think about.
All in all, a hybrid retail/wholesale business is viable, but it does present more challenges than just going with one or the other. Consider that before heading down this path.
Whether you decide to start a retail business or a wholesale business, it’s good to understand how each work and the pros and cons of both.
Each path is viable and there are countless success stories to model your business after. Ultimately, it comes down to choosing an approach that appeals to you.
Hopefully, this article has made the decision easier and given you things to think about. Retail and wholesale offer huge opportunities for entrepreneurs and we are happy to help you get started down the road to success.
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