retail-vs-wholesale

Retail vs. Wholesale: Business Models Comparison

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.

Understanding the Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

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

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

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)

costco-business-model
With a substantial part of its business focused on selling merchandise at the low profit-margin, Costco also has about fifty million members that each year guarantee to the company over $2.8 billion in steady income at high-profit margins. Costco uses a single-step distribution strategy to sell its inventory.

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.

slow-fashion
Slow fashion is a movement in contraposition with fast fashion. Where in fast fashion it’s all about speed from design to manufacturing and distribution, in slow fashion instead quality and sustainability of the supply chain are the key elements.

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.

fast-fashion
Fash fashion has been a phenomenon that became popular in the late 1990s, early 2000s, as players like Zara and H&M took over the fashion industry by leveraging on shorter and shorter design-manufacturing-distribution cycles. Reducing these cycles from months to a few weeks. With just-in-time logistics, flagship stores in iconic places in the largest cities in the world, these brands offered cheap, fashionable clothes and a wide variety of designs.

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.

ultra-fast-fashion
The Ultra Fashion business model is an evolution of fast fashion with a strong online twist. Indeed, where the fast-fashion retailer invests massively in logistics, warehousing, its costs are still skewed toward operating physical retail stores. While the ultra-fast fashion retailer mainly moves its operations online, thus focusing its cost centers toward logistics, warehousing, and a mobile-based digital presence.

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.

shein-business-model
SHEIN is an international B2C fast fashion eCommerce platform founded in 2008 by Chris Xu. The company improved on the ultra-fast fashion model by leveraging real-time retail, which quickly turned fashion trends in clothes’ collections through its strong digital presence and successful branding campaigns.
real-time-retail
Real-time retail involves the instantaneous collection, analysis, and distribution of data to give consumers an integrated and personalized shopping experience. This represents a strong new trend, as a further evolution of fast fashion first (who turned the design into manufacturing in a few weeks), ultra-fast fashion later (which further shortened the cycle of design-manufacturing). Real-time retail turns fashion trends into clothes collection in a few days cycle or a maximum of one week.

Whether these retail models will be sustainable in the long run it’s hard to say.

Connected Business Model Types And Frameworks

What’s A Business Model

fourweekmba-business-model-framework
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.

Business Model Innovation

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Level of Digitalization

stages-of-digital-transformation
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.

Digital Business Model

digital-business-models
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.

Tech Business Model

business-model-template
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

AI Business Model

ai-business-models

Blockchain Business Model

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source Business Model

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

B2B vs B2C Business Model

b2b-vs-b2c
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.

B2B2C Business Model

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

D2C Business Model

direct-to-consumer
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

C2C Business Model

C2C-business-model
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

Brokerage Business Model

brokerage-business
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.

Dropshipping Business Model

dropshipping-business-model
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

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