Ecommerce businesses typically follow one of two business models: wholesale or retail—or they may offer a hybrid of both formats.
In this article, we’ll explore the key differences between these two ecommerce business models in more detail, so that you can decide which one best fits your goals, or decide whether you want to pursue both models at once.
How does a wholesale business model work?
A wholesale business leverages business-to-business sales channels, enabling business customers to purchase your products in bulk orders for lower prices than standard retail pricing. It’s an important part of the supply chain for many ecommerce businesses that lack the resources to manage marketing and fulfillment of their products on an individual basis, or simply prefer a streamlined operating model.
Wholesale buyers are distributors who serve as middlemen in between the manufacturer or distributor and the end customer. Because your brand is selling products to them in bulk, you can eliminate a lot of the complications around dealing with individual order fulfillment and customer support, and streamline your sales channels.
When offering wholesale pricing to business customers, you can request a minimum purchase order, which will help your business ensure that the lower pricing is worth the tradeoff for the volume of product you’re selling at one time. You can also consider offering wholesale contract terms, which will commit the wholesale business to buy a set amount of product over the course of the upcoming year or time period of your choice. Some wholesale sellers do not set a minimum order quality, but will offer progressively lower prices based on the volume of the order.
Wholesale businesses often sell to other retailers, who then sell to end consumers. Occasionally, wholesale businesses may sell directly to the end-user: Stores such as Costco and Sam’s Club charge their customers an annual membership fee to take advantage of wholesale prices.
In a wholesale business model, it’s important to clearly lay out all of your product specifications so that buyers can make informed decisions. Keep in mind that your marketing channels will be different than when targeting end consumers: Rather than focusing on social media or digital advertising, you might prioritize trade shows or industry publications that reach your target market.
It’s also important to make sure that you have a secure online portal for managing your wholesale orders. When selling via ecommerce, Shopify Plus streamlines B2B sales with a variety of features customized for wholesale businesses.
When selling products wholesale, keep in mind that wholesale buyers expect deep discounts compared to retail pricing: retail goods are often priced anywhere from 30 to 50 percent higher than their wholesale counterparts, with some products, such as certain brands of apparel, costing as much as five times the wholesale cost in retail sales. However, wholesale businesses often offer slower shipping and fewer concessions to buyers around returning products, with more limited returns windows and reasons.
How does a retail business model work?
A retail business, in contrast, sells its products directly to the end user. In this case, products are sold at a higher markup to ensure a profit margin over the wholesale price or manufacturing costs.
In retail sales, products are sold in a business-to-consumer model, either from an ecommerce store or from a physical retail business. In this case, products are typically sold in small quantities, including individual items.
Because pricing is higher than in a wholesale model, retailers need to convince customers of the products’ value by using a variety of marketing channels, and prioritizing the customer experience.
Retail stores often promote their products with high-quality photography and video content, both on their own website and app and across a range of social media platforms. They might offer customized product recommendations based on what customers have previously browsed or purchased. And they’re likely to offer limited-time, discounted promotions to attract higher sales volume, such as during the Black Friday-Cyber Monday shopping window.
For retail businesses, whether ecommerce or brick-and-mortar, delivering a high-quality customer experience is crucial. In order to ensure that customers will pay higher prices for products, it’s important to focus on building your brand reputation through high-quality design and branding for your shopfront, marketing campaigns, and other initiatives; and by securing customer reviews and testimonials that speak to the quality of your products and service.
While wholesale businesses may offer slower shipping times, retail businesses typically prioritize fast shipping and fast returns, with transparent order tracking and a flexible returns policy to ensure that the customer is happy with their purchase. When offering direct-to-consumer sales, leveraging a returns management platform like Loop makes it easy to automate and save time and money on the returns process, delivering a better customer experience that will help you improve customer retention.
Offering a hybrid model: Wholesale plus retail
Many brands offer a hybrid model that allows for both business-to-business and business-to-consumer sales.
By creating separate divisions that allow you to sell to both business customers and end users, you can improve your cash flow by generating predictable, high-volume bulk sales at discounted prices, while also prioritizing selling to individual customers at retail prices with higher profit margins.
To run both models effectively, it’s important to automate as many of your tasks as possible, using a robust ecommerce platform that integrates with tools for inventory management, fulfillment, logistics, and other functionality. Make sure that you have sufficient warehouse space and the right processes in place to handle both models, whether that means running your own warehouse operations or partnering with a 3PL for outsourced warehouse space and order fulfillment.
The bottom line
As an ecommerce business, you can be successful in a wholesale or retail model, or a combination of the two. No matter which you choose, it’s important to be conscious of your target audience and their needs, and customize your offerings, customer experience, and marketing strategies to meet their demands. And by streamlining ecommerce returns, you’ll make it easier to ensure that your customers are satisfied with their purchases, whether they’re buying a single product or a shipment of 1,000, while reducing overhead costs on customer support.
Want to see how Loop can help you streamline returns for your wholesale or retail business? Get in touch for a demo.