Wholesale vs Retail: The Ultimate Guide for Retailers

Sourcing inventory is an important part of running a retail or ecommerce business. You need to strike a balance between products that customers want, and that are unique enough to make your business stand out. The price that you pay for inventory affects the prices you set for customers, and therefore your profit margins. By achieving healthy margins, you can have a prosperous business for years to come.

If you’re getting started with your business and are sourcing your initial inventory, you may not know the differences between purchasing inventory from a wholesaler versus sourcing inventory from a retailer. 

In this guide to buying inventory wholesale vs. retail, we’re answering your most frequently asked questions, including:

• What’s the difference between wholesale and retail?
• Is it better to buy wholesale or retail?
• How much can you save by buying wholesale?
• Who can buy wholesale products?
• Who makes more of a profit: a wholesaler or a retailer?
• Wholesale vs. retail prices: Why are wholesale prices lower than retail prices?

We hope our answers will guide you toward the best decision for your business.

Wholesale vs. retail: What’s the difference when it comes to sourcing inventory?

Before we dive into the differences between wholesale and retail, we’re filling you in on what buying wholesale means and what buying retail means when it comes to sourcing inventory.

What is buying wholesale?

Buying wholesale means purchasing products from wholesalers. Wholesalers sell products in bulk, exclusively to other businesses, at lower-than-retail prices. Wholesale businesses can offer these lower prices because of the high volume of sales they receive from their customers.

The businesses that purchase inventory from wholesalers do one of two things with this inventory. 

One option is reselling these products at a markup to make a profit. Let’s say you run a quilting supply boutique and purchase 500 spools of white thread from a wholesaler for $250 total. Each spool cost you 50 cents. You markup the spool of thread, factoring in things like your desired profit margin, how much competitors are charging for similar products, and the wholesaler’s suggested retail price. You decide to sell each spool of thread for $3 and make a $2.50 profit on each spool, or an 83% profit margin.

The other thing businesses do with wholesale products is use them to create other products. For example, let’s say that instead of running a quilting supply boutique, you make and sell homemade quilts. You purchase the inventory you need to make quilts (thread, fabric, batting, etc.) from wholesalers in bulk, then use that inventory to make quilts and sell them at a profit. The materials to make one quilt might cost you $25 wholesale. After factoring in labor costs (let’s say this comes out to $150 per quilt) and competitive pricing, you sell this quilt for $350. You make a $125 profit, or a 50% profit margin.

What is buying retail?

Buying retail means buying products from other retail businesses—like yours—that typically sell goods to the public in small quantities and source their inventory from wholesalers. Retailers markup the wholesale price they paid to purchase their inventory to make a profit, so they can run financially viable businesses.

When you purchase inventory from a retailer, you’re spending more on that item than you would have if you had bought it directly from a wholesaler. In order to price your product competitively, you’ll have a smaller profit margin if you buy retail. 

For example, let’s say your quilting supply store sources spools of thread from a big box fabric supply retail store rather than a wholesaler. You purchase one spool of thread for $3 (compared to 50 cents per spool wholesale). Because your competitors sell thread for between $3 and $5, you can’t price your thread higher than that or no one will buy thread from you. So you price your thread at $5 per spool. You earn a $2 profit on each spool, or a 40% profit margin.

Difference between wholesale and retail

The differences between purchasing wholesale inventory and retail inventory come down to price, quantity and access.

Wholesale vs. retail price

Wholesale: Inventory bought through a wholesaler is cheaper than inventory bought through a retailer. 

Retail: A retailer’s prices include a markup from the wholesale price, and are therefore higher than wholesalers’ prices.

Wholesale vs. retail quantity

Wholesale: Wholesale businesses typically sell in bulk and are able to offer lower pricing that way. You can typically get a cheaper price per unit as you buy more. Depending on the wholesaler and product, you may need to purchase as few as 10 of each item, or as many as 1,000 to access lower pricing.

Retail: Retailers sell at the same price per item, no matter what quantity you’re buying. They also don’t typically have minimums on how many of their products you need to buy.

Wholesale vs. retail access 

Wholesale: You need to prove you’re a business, or work in a specific industry, to be able to buy inventory from a wholesaler.

Retail: Anyone is able to shop retail.

Is it better to buy wholesale or retail?

Typically it’s better to source inventory wholesale because you’ll pay less per item. However, there are cases in which you may need to shop retail, such as when you only need a low quantity of a product or need to restock quickly. 

For example, it pays off for restaurants to order produce, meats and other ingredients from a wholesale food supplier rather than shopping at the grocery store. Because restaurants go through large quantities of food, wholesalers can offer them large quantities at lower prices than retail. 

However, restaurants usually need to place inventory orders in advance, so there’s some waiting involved when ordering wholesale inventory. If a restaurant runs out of an ingredient one day, it’s okay for the team to run to the grocery store to replenish stock until the next bulk shipment arrives. 

But, if your business consistently orders less inventory than it needs and you regularly supplement wholesale orders with retail top-ups, this miscalculation will cut into your profit margins. An inventory management solution can help you forecast your inventory needs more accurately and save money.

Wholesalers vs. retailers: How much cheaper is wholesale than retail?

Retail markups vary from industry to industry, so there is no general rule for how much cheaper wholesale is than retail. Look to these industry benchmarks to understand how much you could save by buying wholesale. 

Source: Chron

Can a regular person buy wholesale?

Wholesalers typically don’t sell to the public. To purchase wholesale, you usually have to prove you own a business by providing an EIN (employer identification number). 

Some wholesalers work only with professionals in certain industries, so you may have to prove that you work in a specific trade to get access to bulk pricing for specialty wholesalers. Construction and interior design, for example, are fields that usually offer wholesale access exclusively to professionals in those fields. 

Sometimes a wholesaler will let “a regular person” buy from them if they agree to purchase a large quantity.

Who makes more of a profit: wholesalers vs. retailers?

There is no simple answer to the question of who makes more of a profit: wholesalers or retailers. The answer depends on the business’s costs of goods sold (COGS), sales prices and business model.

Wholesalers have to pay for the raw materials to make their products, manufacturing and employees, but then they set their prices and have some control over the market. 

Retailers purchase their products for a higher COGS than wholesalers, but retailers can also get away with charging high markups. While retailers don’t have to manufacture products, they still have to pay for staff, commercial space, marketing and more.

Generally speaking, both wholesalers and retailers can make healthy profits when they’re able to keep their cost of goods sold down and prices high. Retailers that have little overhead operating expenses (such as a dropshipping business) are typically successful at achieving high profit margins.

Wholesale vs. retail prices: Why are wholesale prices lower than retail prices?

Wholesale prices are lower than retail prices because retail prices come with a markup. Retailers purchase inventory in bulk from wholesalers, then inflate the price per unit to make a profit on each item they sell. 

Wrapping up: Wholesale vs. retail

Where you source your inventory is a decision you should make with your business’s needs in mind. While wholesale pricing is more attractive than retail pricing, you may end up stocking products that every other competitor also carries. And while retail sourcing can let you A/B test inventory by purchasing in smaller quantities, you’ll end up with lower profit margins due to the higher cost of goods sold.

No matter how you decide to purchase inventory, inventory management software can help you keep an eye on what you have left in stock, when it’s time to reorder, and your profit margins. Lightspeed POS and eCommerce are equipped with all of the inventory management tools you need to run a successful business. Start your free trial today.