If you are a new entrepreneur or even planning to enter the path of entrepreneurship, then it is essential to understand the main difference between wholesale and retail business models. A business model is how an organization intends to make a profit. To keep it even simpler, it’s how you sell your products. As a business owner, you should carefully choose a business model based on the type of products sold, your target audience, and the anticipated margins.
Picking the right business model is critical for both new players and established players. You may wonder how it impacts an established player.
Simple, the market is ever-evolving; unless you keep pace with its dynamism through altering business models, you will end up getting obsolete in the long run. A model that works today for a particular product in a particular area might not work after a few years due to changing consumer needs.
Now before we deep dive into the topic of business models, it is essential to understand the key players in a typical supply chain. They are –
- Manufacturers – Businesses who create the end products.
- Distributors – They have direct relationships with the manufacturers and distribute the products to wholesalers and retailers.
- Wholesalers – Wholesalers buy the products in large quantities either from the distributor or the manufacturer at attractive prices and sell them to retailers.
- Retailers – Retailers stock products in smaller quantities and directly sell them to consumers.
- Consumers – The last level on the supply chain for whom the products are made.
From these players, you get two major business models- Wholesale and Retail. In this post, we will understand these two models better, including how they are different and what you should pick.
Retail Business Model
What is a retail business model?
A retail business model involves buying goods from distributors/wholesalers and selling them directly to consumers. A typical retail business could be the quintessential department store that you can see right across your street. Such stores are called retail outlets. Many retailers have also set up an online store to sell their products. They are popularly called e-tailers.
If you are planning to set up a retail store and are short of ideas, here is a handy guide for you.
How does a retail business model work?
To understand the working of a retail business model, you need to understand its two essential components – Value Proposition and Operating Model.
A value proposition is the ‘appealing experience’ that a retail business offers to its customers through the following activities –
- Providing a seamless shopping experience to the customers.
- Offering attractive pricing for products via discounts, coupons, and timely offers that excites and attracts the tribe.
- Creating value-added services such as free delivery to further enhance the brand in the eyes of consumers.
On the other hand, the operating model is how a business operates by considering its costs for sourcing manufactured goods and in-store operations. It also revolves around how close you are integrated with wholesalers/distributors and logistics partners to ensure the availability of stocks at all times.
Most retailers believe that tinkering with the product value proposition is all that takes it to stand out from the competition. Although a value proposition is necessary, the operating model of the retail business should also be taken care of.
Both of them ensure that your retail business model is aligned with the shifts in the market. Value proposition and operating models are distinct yet intertwined elements of a typical retail business.
Why should you pick a retail business model?
The retail business model has a separate fan base among business owners. In 2019, the global retail market generated sales of 25 trillion dollars. This is forecasted to reach a staggering 27 trillion dollars by 2022! The response is quite overwhelming in India as well.
When you pick a retail business model, you get to enjoy a plethora of advantages like –
Higher liquidity: This is probably the biggest advantage of picking a retail business model. A retail model is a cash-only business, unlike wholesale, where you end up giving credit to the retailers. As a result, you will have more disposable money in hand and enjoy higher liquidity.
Less initial capital: Retail business model is not capital intensive. Since you are buying a smaller quantity of products, your total expenses come out way lower than a wholesaler. Apart from the lower costs of purchasing the products, you can also save on storage space.
Limited liability: This is a given. As a retailer, you are only an agent selling the product of the manufacturer. In case of any defect in the product, the manufacturer is liable for it. It is the manufacturer’s responsibility to replace or face any consequences of supplying defective products.
Why should you not pick the retail business model?
Here are some negatives of picking the retail business model –
Requires good location: Since retailers predominantly deal with end consumers, it is essential that they set up their store where the consumers visit regularly. Unfortunately, these are prime commercial areas where the rent often hits the roof. If you are the owner of the premises, then it is good; otherwise, get ready to allocate a sizable budget for the rent.
High competition: The business is such that the same type of products will be sold by multiple retailers in the same area. This creates a highly competitive ecosystem where it gets very daunting to sell the products.
Higher marketing costs: Since the competition is very high, you have no other option apart from attracting consumers to your store. And for that, you need to spend on marketing activities like ads, which can add to your expenses.
Wholesale Business Model
What is a wholesale business model?
In a wholesale model, the business buys goods from a manufacturer or a distributor and sells them to a retailer at a negotiated price. It is also important to note that wholesalers can sell their products directly to the consumers as well. Many people wrongly assume that wholesale is an outdated business model as it is getting replaced by the newer and disruptive direct-to-consumer business models.
This is far from the truth. The wholesale business is as relevant today as it was a couple of decades ago. In recent years, the wholesale model has experienced a revolution of its own due to online marketplaces such as Amazon, eBay, and Zellers.
Looking for business ideas in the wholesale market, here are some options for you.
How does the wholesale business model work?
Wholesale businesses usually build trusted, meaningful relationships with their suppliers. This ensures timely delivery of bulk products at a fair price, keeping quality at the foremost priority.
As wholesale businesses deal with both suppliers and retailers(in some cases even consumers), it is necessary for them to have a good grasp on the market trends and latest fads among their target audience. This will make it easier to sell new products or upsell products.
Contrary to popular beliefs, wholesale business can also be taken online. Popular businesses like Alibaba and eBay are classic examples of businesses offering omnichannel experiences. These are typically B2B(Business to Business) marketplaces that provide diverse products to individuals and businesses at wholesale prices. Such B2B marketplaces are becoming increasingly popular among small businesses and act as a single platform for small buyers and sellers.
Accelerated by the pandemic, wholesalers are now pushed to play in a new field and be more competitive. To meet the demands of the new normal and post-pandemic scenario, wholesale businesses are transforming their business models into a one-stop shop for all stakeholders in the supply chain.
Why should you pick the wholesale business model?
Here are some advantages and reasons for you to pick the wholesale business model over the retail model –
Less competition: Unlike retail business models, which have significant levels of competition, there is not much competition in the wholesale business primarily because each wholesaler deals with a specific line of product from a particular manufacturer in an area. In some areas and product lines, you can even enjoy the perks of monopoly.
Lower spending on marketing: As a wholesaler, you do not have to spend significant money on building your brand image through marketing activities. This is because most of the retailers who need the products will directly approach you.
Get bigger discounts: Since wholesalers buy the products in bulk and that too directly from the manufacturers, they enjoy large discounts. They can also participate in several schemes that offer great discounts over and above the existing ones they get for buying in bulk.
Location can be anywhere: Your wholesale business can be set up at any location (even outside the city) as you do not have to meet consumers. The retailers will visit you or get them delivered at their stores via delivery trucks. The best part – you do not have to pay an exorbitant amount of rent for a small room in a prime area.
Why should you not pick the wholesale business model?
Here are some challenges you might face after adopting a wholesale business model –
Requirement of huge capital: Wholesale business is all about bulk buying. And for that, you need significant capital to buy the products. You might also have to pay for the logistics to transport goods to the retailers.
Needs more space: Even though your wholesale store need not be in a prime area, you will still need a huge space to store the huge volume of products that you purchase. Though you might not pay huge rent per square foot, you will still end up paying a sizable amount due to the size and to maintain such a huge space.
Possibility of goods getting damaged: Since you are buying goods in huge volumes, there are high chances of some products getting damaged either during transit or during storage. Even worse, some products might expire because they remain unsold for a long period.
Difference between Wholesale and Retail Business Models: A Summary
1. Price – Goods in bulk are purchased at cheaper rates by wholesalers. But in retail models, goods are sold at higher rates in limited quantities.
2. Reach – Wholesale business models cover across states and have a higher reach. Retail business models are usually confined to smaller areas.
3. Art of Selling – Wholesalers need not master the art of selling because they do not deal with end consumers. However, in retail models, you need to hire people with sales skills as it is B2C(Business to Consumers).
4. Competition – Competition is high among retail business models.
5. Location – Location of the outlet plays a significant role in retail business models as the stores in prime areas have an upper advantage compared to those where not many come for shopping.
6. Type of interactions – Retailers usually interact only with end consumers, while wholesalers interact with both businesses and consumers.
Closing Thoughts: Choosing the Right Channel for your Business
As you have seen in the previous sections, the wholesale and retail business models have their own pros and cons. When choosing the business model, keep in mind the following aspects –
- Your personality and strengths as a business owner.
- The brand identity of your business.
- Your target customers.
If you plan to become a wholesaler, then you need to know how to prioritize selling products to other businesses by building meaningful relationships with them. This ensures that they keep visiting you for repeat purchases.
On the other hand, if you plan to adopt the retail model, then you need to master sales and marketing as retail is all about brand visibility.
Some smart business owners manage both retail and wholesale businesses side by side, thus enjoying the benefits of both these models. But whatever business models you are adopting, it is necessary to constantly adopt fresh strategies and alter the business model to your business needs. This will ensure that you stay on the top in the long run.