When you open a business that sells products, one of the critical decisions you need to make is how you will sell. Do you plan to sell your products directly to your customers? Or, will you use vendors who distribute your products to their customers? The way you sell determines if your business is retail vs. wholesale.
Keep reading to learn the answers to questions like:
- What is retail?
- What is wholesale?
- Is there a difference between wholesale vs. retail price?
- What’s the difference between wholesaler and retailer?
Retail vs. wholesale for businesses
To fully understand the differences between wholesale vs. retail, you need to know what each type of selling is. There is some potential overlap between the two.
What is retail?
A retail business sells products to its customers for a profit. Retail businesses sell directly to consumers. These companies may manufacture the goods they sell. Or, they purchase the products from a distributor, manufacturer, or wholesaler to then sell to their customers.
Examples of retail businesses include:
- Stores (e.g., grocery or department)
- Mail order shops
- Internet businesses selling direct-to-consumer
The consumer in retail businesses is also the end-user.
What is wholesale?
A wholesaler is a business that buys large amounts of goods directly from distributors or manufacturers to resell to other businesses. Wholesale businesses may also manufacture the goods they sell to retailers.
This type of business structure sells its products in bulk to retailers, not end-users.
Is there a difference between wholesale vs. retail price?
There is a difference between the prices set by retailers and wholesalers. The wholesale price is lower than the retail price for a few reasons:
- Bulk purchases: Wholesalers sell bulk items to retailers for a lower cost to create a profit for their business. By ensuring a bulk order (often with a minimum purchase), wholesalers can reduce shipping and handling times and the overall cost. Wholesale businesses can also reduce costs by buying in bulk from the manufacturer.
- Retail markups: Retailers can mark up the costs of the goods they sell after purchasing from wholesalers. The end-user purchases the goods for a higher price because retail businesses must profit from the items they purchase to resell. And, retailers may make changes to the wholesale items they purchase to resell at a higher cost (e.g., branding a plain T-shirt from a wholesaler).
- Advertising costs: Generally, wholesale businesses do not need to advertise their goods as extensively as retailers. Wholesalers sell products regardless of how they look at the warehouse, reducing advertising costs through visual displays. And, retailers may advertise that they have the products available at their locations.
Additionally, wholesalers cannot tell retailers how much to sell their products for. However, wholesalers may recommend a minimum advertised price (MAP) to retailers. A MAP is the lowest suggested price for the products. Wholesalers may ask retailers not to advertise their products for a price lower than the agreed-upon MAP.
While there is a difference between wholesale and retail prices, both types of businesses should still review their margin vs. markup. Both want to turn a profit for their business. Retailers may have a greater markup and profit margins because of the price they sell to the end-user.
What’s the difference between wholesaler and retailer?
To understand the biggest differences between wholesalers and retailers, use this chart:
|Pricing||Provides lower costs to purchasers||Provides higher costs to purchasers|
|Sales Volume||Sells in bulk||Sells in small quantities|
|Customers||Sells to retailers||Sells to end-users|
|Control||Has little control of the price of goods when sold||Has greater control of the price of goods when sold|
Again, both types do have some minor overlap. Both wholesalers and retailers may produce or manufacture the goods they sell.
Determining wholesale price vs. retail price
Again, the prices wholesalers give to retailers are generally much lower than the prices the end-users see. But, both wholesale and retail business owners must factor in profit margins and markup costs when determining their prices.
Before deciding on the price of the products, factor in these costs:
- General expenses
And, consider the products being sold. Ask questions like:
- What is the demand for the product?
- Is there an average market price for similar products?
- How do prices differ between locations (e.g., cost differences between states)?
- Do products come with branding materials?
- What is the quality of the product?
- How do customers view the specific product (e.g., favorably)?
- Is the product a fad or novelty item?
Both wholesalers and retailers must consider the minimum profit margin they will accept for the products. They should also calculate the markup for the goods.
Pros and cons of wholesale vs. retail
Retail and wholesale business structures have some benefits and drawbacks. Carefully weigh the pros and cons before deciding which type of business you will operate.
Retail pros and cons
The pros of operating a retail business include:
- Dealing in a wide variety of goods
- Lower investment costs
- Creating a targeted customer base through marketing
- Personal connections with customers
- Control over prices for end-users
Cons of running a retail business include:
- Higher competition in the market
- Prices to the end-consumer are higher
- Increased costs for advertising, both in and out of store
- Selling smaller quantities
Keep in mind that retailers may have access to multiple wholesalers. With access to a variety of options, retailers can shop around to find the most suitable wholesaler for their needs. And, retailers can use multiple wholesalers for various products to stock their stores.
Wholesale pros and cons
Before deciding to become a wholesaler, check out some of the pros and cons.
Pros of being a wholesaler include:
- Dealing in large quantities
- Selling at lower prices
- Not having to decorate a store
- Less market competition
- Lower costs for advertising
Cons of being a wholesaler include:
- Dealing in a limited variety of products
- Higher initial investment costs
- Lower control of the price end-users see
Wholesalers may also need to have a much larger space to store their products (e.g., warehouse), which can increase costs.
If a wholesaler decides to manufacture the goods they sell, they must also be capable of producing in large quantities. And, they must have a manufacturing space large enough to create and store the goods.This is not intended as legal advice; for more information, please click here.