Wholesalers and retailers are vital components of the consumer chain. They’re dependent on each other but have different ways of operating and management. If you want to start a retail business, eCommerce, or brick-and-mortar, one of the most important considerations is inventory. It’s always important to find a balance between the products that customers are looking for and those that are unique enough to make your business stand out.
Additionally, the price you pay for inventory affects the prices you set for customers and therefore your profit margins. As a retailer, the wholesaler is your product provider. And for the wholesaler, the retailer is the customer. In this guide, we discuss the differences between wholesale and retail and then compare the benefits of each model. In case you’re still unsure which of these business models to establish for your business, this guide will help you be better informed. Plus, hopefully it’s helpful for retailers trying to navigate their relationship with wholesale partners.
Table of Contents
- Wholesale vs. retail: What’s the main difference?
- What is wholesale?
- What is retail?
- Other differences between wholesale and retail
- Wholesale or retail: Which one is more appropriate for you?
- Is wholesale or retail more profitable?
- How to handle inventory management in wholesale and retail
- Can a regular person buy wholesale?
- Wrapping up: Wholesale or retail
The most significant difference between wholesale and retail lies in the type of buyer that these two types of trade target. Retail involves selling products directly to the end consumer. On the other hand, wholesaling involves selling products in bulk to other businesses, such as retail stores.
Wholesale can therefore be referred to as business-to-business (B2B) and retail as business-to-consumer (B2C). Wholesalers buy goods in bulk from manufacturers or distributors and store them. They then sell them to retailers in smaller volumes. Retailers buy smaller quantities of bulk goods from wholesalers or distributors and then sell them directly to the end-users of their products.
Buying wholesale involves purchasing large quantities of products from manufacturers or distributors and then reselling them in bulk at a reduced price to other businesses. Wholesale businesses can offer these lower prices because of the high volume of sales they receive from their customers.
In other words, even though the selling price of the goods is lower, the companies still make a profit from their transactions because their selling price is higher than their original purchase price. For example, a wholesaler may buy 1,000 pairs of sandals at $4 per pair for a total of $4,000. The wholesaler can then sell 100 pairs of shoes to 10 different retailers for twice the initial rate, or $8 per pair of sandals.
What Is Retail?
Retail is the sale of goods directly to consumers. A retailer buys goods in bulk, either from a wholesaler or distributor or directly from the manufacturer, at a reduced price. They then sell them separately at a higher price, allowing them to make a profit on the transaction.
When you buy stock from a retailer, you spend more on that item than if you had bought it directly from a wholesaler. In order to price your product competitively, your profit margin will be lower if you buy from a retailer. In short, a retail store serves as the final point of contact in the supply chain, selling products directly to consumers.
Given the context of the above example, a retailer may buy 100 pairs of sandals for $8 and then resell them for $12. Of course, the retailer’s price will be set after necessary deductions for shipping and storage costs. This is why one of the priorities for any retail business owner is to have good suppliers who can offer products at reduced prices. Lower wholesale prices mean a healthier profit margin for the retailer.
In addition to this main difference between retail and wholesale described above, there are differences in price, concern for the customer experience, level of competition, product control, etc.
Wholesale vs. retail customer experience
Wholesale: Wholesalers are generally not customer-facing entities, which means they do not interact directly with customers. For this reason, wholesalers are much less concerned with the customer experience or brand marketing.
Retail: Many retail companies sell goods in a store, online, or both. These retail stores need to ensure that their retail presence attracts customers and encourages them to make a purchase from the company. The company’s physical presence, customer service, and marketing efforts all play a role in the customer experience, and retailers spend a great deal of time and money making sure these factors are effective.
Wholesale vs. retail: price of goods sold
Wholesale: Wholesalers generally offer their products at a much lower price so that retailers can buy these products in large quantities.
Retail: Retailers sell a product at a higher price than they purchased it from the wholesaler.
Wholesale vs. retail: operation costs
Wholesale: Wholesalers generally have lower operational costs because the only customer they deal with is the retailer. In addition, since products are shipped in bulk by wholesalers, their overhead and shipping costs are generally lower.
Retail: Retailers usually have several more expenses than wholesalers. The space usually costs more to design and decorate, and will likely come at a higher price for a location premium. Retailers must also consider advertising, marketing, and other ways to attract customers, which cost money and take time. They may also consider retail overhead costs, such as rent and employee salaries.
Wholesale vs. retail: location
Location is one of the key points of difference between wholesale and retail. Retailers must choose a location where customers and shoppers reside, such as main streets, malls, or shopping centers. In other words, the retailer’s location must have high foot traffic potential.
For example, a convenience store may be part of a gas station, so customers can purchase goods while filling up their cars. It may be located along a busy road, in an urban area, near a train station, or another transportation hub.
The type of goods you plan to sell will determine the best location to sell your goods. For example, grocery stores are best located in open areas where large trucks can deliver without creating traffic and where parking can be provided to allow customers to enter and exit the store easily.
If a wholesale company plans to sell goods, it should choose a central location with easy access to highways and major roads so that delivery trucks can travel throughout the area. Similarly, a wholesale business that plans to sell goods worldwide should preferably have its location near an airport or port. The purpose of this is to reduce costs related to logistics and shipping.
Wholesale or Retail: Which One Is More Appropriate For You?
Before you get into wholesale or retail, you need to understand the ins and outs of each business. So let’s take a closer look at the benefits you can enjoy and the challenges you must overcome for each type of business model. This will help guide your decision.
Why wholesaling might be good for you
Pros of wholesale
By accessing wholesale prices, wholesale distributors can purchase goods at a noticeably lower rate than retail businesses. Having the ability to ship products in bulk also allows them to benefit from lower fulfillment costs. Consequently, their overall expenses are lower, giving them a better opportunity to make significant profits.
In addition, wholesalers typically enter into long-term agreements to supply bulk products to retailers. Not only does this provide them with a long-term stream of income, but it also offers them a higher average order value. This makes it easier to predict their profit margin, allowing them to plan their budget and expenses in advance.
In addition, they have a good chance of maintaining a high inventory turnover rate since they ship large quantities of orders at one time. The business model allows for lower unit costs and higher revenue, which can promote scalability.
Wholesalers can also take advantage of a sales method known as drop-shipping. A retailer or merchant sells the product but does not own the inventory. Instead, the order is sent directly to you, and you ship the product directly to the customer. This allows you to build a brand and product base but cut out some of the complicated and expensive steps in the middle.
Cons of wholesale
One of the biggest challenges of running a wholesale business is competition. The industry is dominated by giants such as Alibaba, Salehoo, Worldwide brands, Tradekey, etc. New companies entering the market have to work hard to build their credibility to get reliable customers.
Also, although wholesale companies have access to wholesale prices, they have to invest in huge quantities of goods at a time. The cost of procurement can easily add up when you have to buy thousands of units to take advantage of wholesale prices. You are therefore required to have a large capital base to get started.
Relatedly, another significant constraint is order fulfillment. While wholesale businesses may benefit from lower fulfillment costs, the process of filling large quantities of orders comes with its own set of challenges. For starters, storing large volumes of inventory requires significant warehouse space. In addition, there are transportation risks and capacity restrictions that can be associated with shipping bulk orders.
Why retailing might be good for you
Pros of retailing
Retail is ideal for you if you want to build a brand and a personal connection with consumers. In addition, you have the choice of using various marketing channels to reach your target customers. You can also choose the type of store that best suits your needs: a brick-and-mortar store, an online store, or both.
One of the advantages of being a retailer is that you can have a wealth of data that tells you about your customer’s behavior and preferences. You can only access this data through a retail POS system that is tailored to your business. Choosing the right retail POS software is one of the most significant decisions you can make to better manage your business.
Based on such data, you can better inform your marketing and procurement strategies. For example, it becomes much easier to provide personalized product recommendations based on each customer’s purchase history. Retail inventory management software can provide you with more advanced data, including notifications when you are out of a specific product.
Retailers have more control over their brand identity. This allows them to build a strong and consistent brand image that is not affected by the flaws and mistakes of trading partners.
This increased control also extends to pricing strategy, giving them the freedom to decide on their pricing based on their target profit margin. It also means that they can easily adjust their prices if their current rates are not producing the kind of profit margins they expect.
Cons of retail
There are some challenges associated with this business model, too. Order fulfillment can be a real headache, as consumers expect fast and affordable shipping. With retail companies having to deliver orders to customers in different locations, it is difficult to distribute inventory strategically to ensure efficient and inexpensive delivery to all of their customers. This difficulty is especially felt if you run an eCommerce store. This is especially the case during the holiday season when customers expect free and fast shipping.
A retailer also needs to watch their margins across all their sales channels, as each platform has different costs, such as eBay or Amazon fees. Also, further overhead costs add up fast and eat into profit margins. Costs like insurance, shipping, licensing, and taxes all must be factored into finding a way to have a positive bottom line.
Another inconvenience is that retailers do not always have control over market trends. A retailer may purchase products from a wholesaler and then find that these products are not in high demand among their customers, which can result in surplus inventory or dead stock.
There is not a definitive answer to the question of who makes more profit, wholesalers or retailers. As a wholesaler, you can purchase large quantities of goods at lower cost rates, which increases profit margins while selling the product to retail customers. However, wholesalers generally have a lower profit margin than retailers. The percentage range varies by product, but wholesalers typically earn between 15% and 30% profit, while retailers typically earn between 20% and 50% profit on the wholesale price when selling products to consumers.
In general, both wholesalers and retailers can make significant profits when they are able to keep the cost of goods sold low and prices high. Those retailers that have low operating overhead (such as a dropshipping business) are generally able to achieve high-profit margins.
In many retail and wholesale operations, the most important asset is inventory. Inventory management in retail and wholesale does not present the same challenges.
Best wholesale inventory management practices
Optimize storage space
The total cost of storage real estate increased an average of 8.4% in the 12 months leading up to June 2022. This figure doesn’t even consider the expenses associated with a disorganized warehouse, which inevitably leads to errors, inefficiencies, workplace accidents, and returns. The goal of warehouse or storage room optimization is to create more space by reducing your inventory and maintaining control and safety for your workers and your inventory.
Improve inventory forecasting
Accurate inventory forecasting is the cornerstone of wholesale inventory management. As a wholesaler, you are not just selling to end consumers who can tolerate minor delays in their personal orders. You sell to companies that have direct contact with customers. Therefore, you are required to meet their demand. Using a tool focused on inventory forecasting, you can interpret historical sales data, current events, and a host of other variables to analyze future demand.
You can opt for demand forecasting software that allows for intelligent forecast adjustments for best results. There are several wholesale inventory management software programs available. So do some research to choose the one that is right for you.
Training and equipment for warehouse workers
By training your warehouse staff, you strengthen your wholesale inventory management. You can only empower your employees if they are properly trained and equipped to handle their responsibilities. How can you minimize product damage by training your team? Is there a team of highly experienced people who can facilitate inventory training for their colleagues? While your employees may perform well, they can still benefit from additional knowledge and skills.
Best practices in retail inventory management
Invest in an inventory management system
While it’s possible to manage your inventory manually, it’s tedious, time-consuming, and can be fraught with error. Use a unique, high-quality inventory management software and point of sale (POS) system. You’ll be able to automate many of your processes, understand how your inventory’s performance, and more easily scale your business.
With advanced inventory management software, retailers can view real-time balances to avoid shortages and overages. The tool can also handle repetitive and labor-intensive tasks, such as manually updating inventory levels for thousands of SKUs. However, not all inventory management software is designed to produce the same results. Nor are they all suited to the retail business. Decide on a budget and find a service provider that can perform the key functions you need to manage your inventory better.
Develop a strategy for recording stock receipts
Suppose you don’t have a proven process for verifying and recording products received and detecting errors and damage. You’ll likely run into problems, such as unrecorded inventory, unexpected stock-outs, and payments for items you never ordered. To ensure the accuracy of your inventory receipts, count products against purchase orders, follow up with suppliers for errors, shortages, or damages, completely unpack shipments and update inventory counts in your inventory management system.
Build strong relationships with wholesalers
Without the supplier or wholesaler, it’s difficult to produce or sell products and make money. One way to help them improve their offering is to let them know what happens to their items after you unpack them. By building solid relationships with them, you may be able to lock in discounts, reduce the risk of delays and quality issues, and simplify your inventory management. Don’t be afraid to drop non-performing or problematic suppliers and find new ones.
Leverage ABC analysis
ABC analysis is a method of ranking your inventory in order of most essential items to least important items. While A items are considered the highest priority inventory and require frequent replenishment, B items have value but are medium priority and are ordered more infrequently. C items are low-priority inventory items that do not need to be reordered very often because they are typically carried in large quantities.
By using ABC analysis to organize your inventory, you can optimize your storage space and streamline order processing. If your business has a large inventory catalog, make sure your point of sale software has this feature.
An ordinary person cannot buy wholesale unless there is an exceptional situation. Wholesalers generally do not sell to the public. To buy wholesale, you must generally prove that you are a business owner by providing an EIN (employer identification number).
Some wholesalers will require you to present a wholesale license. Additionally, some wholesalers only work with professionals in certain industries. You may need to prove that you work in a specific trade to access wholesale prices from specialized wholesalers.
Choosing where to source your inventory is a decision you must make based on your business needs. While wholesale prices are more attractive than retail prices, you risk stocking products that all other competitors also offer.
One thing is for sure, whether you are a retailer or a wholesaler, inventory management software can help you keep track of what you have left in stock, when it’s the best time to place a new order, and your profit margins. So it comes down to choosing the right software for your needs and budget. KORONA POS is the benchmark tool for better management of your inventory and store operations for retail businesses. Click on the bottom to learn more about KORONA retail POS software.
FAQs: Wholesale vs. Retail
Wholesale means setting a price that allows producers or distributors to profit on the cost of producing the goods. Retail pricing involves adding a markup to the cost of acquiring inventory so that retail businesses can make a profit.
The most important benefit of wholesaling is the ability to generate more revenue from large orders. In addition, higher inventory turns, and lower fulfillment costs are other major benefits.
Wholesale price is the price charged for a product sold wholesale to large trade groups or distributors instead of the price charged to consumers. The wholesale price is the sum of the cost price of a given product and the manufacturer’s profit margin.
Yes, a business can operate as both a wholesaler and a retailer. This dual distribution strategy allows the business to sell products in bulk to other businesses while selling smaller quantities directly to end consumers. It provides opportunities for diversification, increased market reach, and margin optimization.