As consumers, we have been contributing to the wholesale and retail business model most of our lives.
As a commerce business, it’s important to know the difference between the wholesale and retail business models in order to be successful.
Many businesses wonder what sets wholesale companies and retail stores apart from one another, which actually works, and what business model is right for them. Let’s explore this.
Wholesale vs Retail
How does wholesale actually work?
Wholesaling is the process of buying goods in bulk from distributors or manufacturers, storing them in large quantities in warehouses, and then selling the goods to individual retailers for a profit.
Wholesale requires business connections to gather goods from many different brands.
How do wholesalers make a profit?
Wholesalers can sell their goods to retailers for a higher price than they bought them for. They do this by buying the goods in a massive quantity for a low price, then sell smaller portions of their inventory to retailers for a higher price, resulting in a profit.
Here is an example:
A wholesaler buys 10,000 packs of instant noodles from a manufacturer in Asia for 10 cents per pack, costing them $1000 dollars for the entire 10,000 unit inventory.
The wholesaler then sells 5000 packs to 2 different retailers in Asia for 3x the original price at 30 cents per pack. Totaling $3000 of instant noodle¹ sales.
The wholesaler then deducts the original $1000 investment from the $3000 return, resulting in a profit of $2000 dollars. Shipping costs and warehouse expenses are then deducted from this profit and the money is usually reinvested into another inventory.
How does retail actually work?
Retailing involves buying goods from a wholesaler and selling them at slightly higher prices to consumers and end-users.
Retailers are the last part of the supply chain to the consumer or end-user.
As a consumer, you will buy goods from retailers almost every day, this can be both in-person or online such as supermarkets, clothing stores, or online stores² like Amazon.
How do retailers make a profit?
Retailers will sell goods individually. They will charge a higher price for each item that they bought from a wholesaler.
Here is an example:
A retailer buys 5000 packs of instant noodles at 30 cents per pack for a total of $1500.
They then sell the packs of noodles for $1 each for consumers to buy in their retail store.
After selling all 5000 packs, the retailer will have hauled in $5000, that’s $3500 of profit.