In a retail business model, usually, the company has direct access to final customers, which will consume a final version of the product/service, sold in units, and at higher margins. Where in a wholesale business model, instead, a company usually sells raw products in bulk to retailers and middlemen who sell directly to customers. In a hybrid model (like Costco) the wholesaler also sells to final customers.
| Scenario | Retail | Wholesale |
|---|---|---|
| Customer Interface | Sells products directly to individual consumers through physical stores, online platforms, or other channels. | Sells products in bulk quantities to businesses, retailers, or other wholesalers rather than individual consumers. |
| Product Packaging | Typically focuses on attractive, consumer-friendly packaging to appeal to individual buyers. | Packaging is often designed for ease of handling and shipping, with less emphasis on individual appeal. |
| Pricing Strategy | Often employs competitive pricing and promotions to attract individual consumers. | Offers lower per-unit prices to businesses, allowing them to resell products at a profit. |
| Order Quantities | Sells products in smaller quantities suitable for individual consumption or use. | Sells products in larger quantities, often requiring minimum order quantities for customers. |
| Customer Relationships | Builds individual relationships with consumers, providing customer support and addressing specific needs. | Focuses on building long-term relationships with business customers, often through negotiated contracts and terms. |
| Marketing and Advertising | Engages in consumer-oriented marketing and advertising campaigns to create brand awareness. | Primarily targets businesses and retailers through B2B marketing and networking. |
| Inventory Management | Manages inventory based on consumer demand and fluctuations in consumer preferences. | Typically maintains larger inventory volumes to meet the needs of business customers. |
| Sales Channels | Utilizes various sales channels, including physical stores, e-commerce websites, and direct marketing. | Primarily sells through dedicated B2B channels, trade shows, or through sales representatives. |
| Payment Terms | Offers flexible payment terms for individual customers, including credit cards, installment plans, etc. | Extends credit terms to business customers, often requiring credit checks and negotiations. |
| Location Selection | Focuses on retail store locations in areas with high foot traffic and proximity to consumers. | Chooses warehouse and distribution center locations strategically to optimize logistics for bulk shipments. |
| Return Policy | Typically offers consumer-friendly return policies to accommodate individual buyer needs. | Often has stricter return policies due to the wholesale nature of transactions. |
| Inventory Turnover | May have faster inventory turnover due to smaller, more frequent consumer purchases. | Inventory turnover rates may be slower due to larger order quantities and less frequent transactions. |
| Marketing Research | Conducts market research to understand consumer preferences and trends. | Focuses on industry and market trends that affect the needs and demands of business customers. |
| Packaging Customization | May customize product packaging for holidays, events, or special occasions to attract consumers. | Customization often caters to business requirements, such as private labeling or bulk packaging. |
| Pricing Negotiation | Typically involves straightforward pricing for consumers with limited negotiation. | Involves negotiation and price agreements tailored to the specific needs of business customers. |
| Sales Volume | Sells products to a large number of individual consumers, resulting in higher sales volume per transaction. | Sells larger quantities to fewer customers, often resulting in higher overall sales volume. |
| Market Competition | Competes with other retailers for individual consumers’ attention and loyalty. | Competes with other wholesalers for business customers and contracts. |
| Seasonal Demand | Experiences seasonal fluctuations in demand driven by consumer trends and holidays. | May experience fluctuations in demand influenced by business cycles and industry needs. |
| Sales Tactics | Employs various sales tactics, including advertising, discounts, and loyalty programs, to attract individual buyers. | Focuses on building strong relationships with business customers, providing tailored solutions. |
Understanding the Retail Business Model
The retail business model is straightforward. The company buys raw products in bulk, it either process, repackages, or sells them directly to final customers at a much higher margin than the bulk purchase. In addition, since the retailer goes direct to consumer, it doesn’t have to split the revenues with middlemen.
This gives the retailer high gross margins on its sales. In this way, the retailer can finance its operations, which are usually much more expensive.
In fact, the retailer has distribution risks associated with the fact that in order for the business to survive it must have a continuous flow of consumers. Since the retailer business usually sells lower-priced products and services to more people, rather than taking much larger orders, like the wholesaler.
Understanding the Wholesale Business Model
In the wholesale business model, generally, the company sells in bulk, to fewer customers (usually retailers or middlemen) who deal with final customers. Therefore, the wholesaler has less marketing and distribution costs associated with having to attract a continuous stream of customers, and instead, most of the effort is skewed toward inventory, transportation, and distribution (intended as the deals with retailers).
Main differences between Retail and Wholesale
Let’s see the main differences between retailers and wholesalers:
Local and direct access to customers vs wider distribution capacity
The retailer distribution is mostly local (unless of course, you set up an online retail shop). The wholesaler instead can cover larger territories by dealing with other retailers, locally, nationally, and internationally. Therefore, in general, the retailer is localized and operates within central locations in cities and towns, while the wholesaler is delocalized and usually operates outside central areas.
That’s because to the wholesaler what matters is the ability to stack more raw product per square foot. Where to the retailer matters more than the local market it can access, and the premium prices it can charge.
Thus, the wholesaler might opt for locations where there is more space and less expensive in terms of rental per square foot. The retailer might do the opposite choice. It might pick smaller locations, which gives it an advantage in terms of access to more consumers and the ability to charge a premium based on the location.
Higher gross margins vs higher net margins
The retailer usually enjoys higher margins, given the fact it can sell directly to customers. Therefore, transform a simple product (perhaps a bag of coffee) into a product served to customers and therefore with a very high gross markup. However, the retailer might also have much higher operational costs per unit given it has to focus more on location, and customer service to successfully operate the business (think of a restaurant in a city center with the incredible rent expenses it will run).
On the opposite side, the wholesaler might focus less on location and more on its ability to be closer to retailers/middlemen or the customers to whom it can sell the product in bulk. And on its ability to stack the inventory efficiently and organize transportation around it. Therefore, the wholesaler might enjoy lower gross margins (the product is sold in bulk and at a lower price per unit) but relatively lower operational costs and distribution risks (which are carried by the retailer).
Distribution risks vs logistical risks
The retailer does take on its shoulders the distribution risks, associated with the costs of running the overall business and making sure that a continuous stream of customers and repeat customers feed the business.
While the wholesaler also needs to worry about customers, it will also have much lower marketing costs associated with its business, and most costs skewed toward logistics. In short, the distribution risks for the wholesaler translate into its ability to efficiently structure its operations and logistics, rather than how to find customers, which is instead the main worry for the retailer.
Local competition vs national competition
In most cases, the retailer will need to understand as much as possible the local market, as this will be the lifeblood of the business. The wholesaler instead will need to worry about access to infrastructure, and to larger urban areas where many other retailers are available. From there, make sure to be competitive at the national and international level to quickly distribute the raw product.
Wholesale prices fluctuations vs logistics impact
Since the retailer usually does not control the supply chain it might also be exposed to price fluctuations which it can’t control. On the other hand, the wholesaler might have more control over the supply chain, and ascertain more purchasing power, given its larger size compared to retailers.
Thus, it might be more subject to logistic impact overall.
Costco and the Hybrid model (a Wholesaler selling directly to consumers)
There is a way in between wholesale and retail, and Costco’s business model represents it extremely well. While Costco is. wholesaler, which sells things in bulk, it does that directly to consumers. Therefore, Costco follows what we can define as a hybrid model (in between wholesale and retail) where it also enjoys a strong brand toward consumers.
Costco attracts consumers with things like good gas prices, and simple products, like the food court deal, with the iconic Costco hot dog and soda combo for just $1.50, to attract consumers to its wholesale stores and sell them things in bulk. Those are used as hooks and a marketing strategy.
This strategy is well known as the “loss leader strategy” where a product is not profitable, as long as ancillary, complementary products are sold at profit.
This might sound trivial, and yet by creating a moment for the family to share a food experience (something that you usually see in a retail shop), Costco creates the opportunity for a shopping experience for the whole family. This strategy has worked well since 1985.
Retail and the fashion industry
The fashion industry is also a very interesting example of how retail business models adapted over time and it offers a window into the future.
In fact, on the one side, we have slow fashion players who focus on selecting manufacturers and sell their products in flagship stores, usually located in very central locations within large urban areas, by focusing on their sustainable branding.
And on the other spectrum, you have fast-fashion players, who focus less on manufacturers’ selection and more on logistic optimization to speed up production and lower down the costs of the items sold. While still using retail spaces in central locations in large urban areas to distribute the product.
Over the years, new players like ASOS, have learned to further speed up the manufacturing process, and to reduce the retail space, to decrease prices, and yet have wider margins, as instead of selling in retail they distribute the product directly from sholesales to customers, in what is called ultra-fast fashion.
And the most recent evolution of that, with players like SHEIN, which have brought the fast-fashion concept to the next level, by tapping on digital tends quickly developing on social media like TikTok, further reducing manufacturing time, and by tapping into a global distribution by using online retail.-
Thus, on the one hand, SHEIN fast-follows, surfs, and creates digital trends. And on the other hand, it reduces physical retail spaces, in favor of online retail spaces, further decreasing prices and still keeping margins and profitability. This is known as real-time retail.
Whether these retail models will be sustainable in the long run it’s hard to say.
Examples of Retail vs. Wholesale Scenarios:
- Books:
- Retail: A customer buys a single copy of a best-selling novel from a local bookstore.
- Wholesale: A local bookstore orders 200 copies of a best-selling novel from a distributor or publisher.
- Clothing:
- Retail: A person purchases a dress from a brand’s flagship store.
- Wholesale: A clothing store owner buys 500 dresses of different sizes from a clothing manufacturer to sell in their shop.
- Electronics:
- Retail: An individual buys a smartphone from an electronics store.
- Wholesale: An electronics retailer orders 1,000 smartphones from a manufacturer for resale.
- Groceries:
- Retail: A family buys groceries for the week from a local supermarket.
- Wholesale: A supermarket chain places an order for 10,000 cartons of milk from a dairy supplier.
- Cars:
- Retail: A customer purchases a car from a dealership for personal use.
- Wholesale: A car dealership orders 50 cars of a new model from the manufacturer to sell to individual customers.
- Furniture:
- Retail: A couple buys a dining table set from a furniture showroom.
- Wholesale: A furniture store orders 100 dining table sets from a furniture maker to display and sell in their store.
- Cosmetics:
- Retail: Someone buys a lipstick from a cosmetic store.
- Wholesale: A cosmetic store chain orders 5,000 lipsticks of various shades from a cosmetic manufacturer.
- Jewelry:
- Retail: A man buys a diamond ring from a jewelry store to propose to his partner.
- Wholesale: The jewelry store orders 200 diamond rings of various designs from a jewelry wholesaler.
- Toys:
- Retail: Parents buy a toy for their child’s birthday from a toy store.
- Wholesale: A toy store chain orders 10,000 units of a popular toy from a toy manufacturer for the holiday season.
- Sports Equipment:
- Retail: An individual buys a tennis racket from a sports equipment store.
- Wholesale: The sports equipment store orders 500 tennis rackets from a supplier to sell in their outlets.
Key Highlights:
Retail Business Model:
- Direct-to-consumer approach (B2C) where the company sells processed/finished products directly to final customers.
- Higher margins but also higher costs and distribution risks.
- Retailers do not have to split revenues with middlemen, leading to higher gross margins on sales.
- Retailers need a continuous flow of consumers as they typically sell lower-priced products to more people.
Wholesale Business Model:
- Wholesalers sell products in bulk to retailers at discounted prices.
- Retailers then sell the products to consumers at a higher price.
- Wholesalers focus on fewer customers (retailers) and more on inventory, transportation, and distribution.
- Wholesalers have less marketing costs but more logistical risks.
Main Differences between Retail and Wholesale:
- Local and direct access to customers (Retail) vs wider distribution capacity (Wholesale).
- Higher gross margins (Retail) vs higher net margins (Wholesale).
- Distribution risks (Retail) vs logistical risks (Wholesale).
- Local competition (Retail) vs national competition (Wholesale).
- Wholesale price fluctuations (Retail) vs logistics impact (Wholesale).
Costco and the Hybrid Model:
- Costco follows a hybrid model between wholesale and retail, selling in bulk to consumers directly.
- Uses a “loss leader strategy” by offering low-profit-margin products to attract consumers and sell other items at profit.
Retail and Fashion Industry:
- Fashion industry examples of slow fashion (focus on sustainable branding) and fast fashion (speed and low-cost).
- Ultra-fast fashion reduces retail space, focuses on logistics, and sells directly to customers.
- SHEIN is an example of real-time retail, turning fashion trends into collections quickly through digital presence and branding.
Connected Business Model Types And Frameworks
Attention Merchant Business Model
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