If you have a product to sell, you may ponder the best approach to bring it to market. Should you opt for wholesale or retail? The best choice for your business depends on various factors, from pricing and profit margins to customer relationships and market reach.
Deciding on the best business model is no light decision. In this post, we’ll cover the key distinctions between wholesale vs. retail to help you determine the most effective strategy for your business.
What is wholesale?
Wholesale is a business model that involves selling products at large quantities to businesses or other outlets that are not the end-user. Instead of selling small quantities of goods directly to customers, wholesalers act as the supplier or distributor, selling their products in bulk to businesses at a lower price. And then those businesses sell directly to customers. This typically involves purchasing products in large quantities from manufacturers at a discounted price and reselling them to retailers or businesses at a markup.
Below are the main pros and cons of wholesaling:
What is retail?
Retail is a business model that involves selling products directly to customers. Retailers act as the bridge between the manufacturers or wholesalers and the customers purchasing the product. The retailer purchases products in bulk from suppliers, directly or through distributors, and sells them in small quantities directly to customers and at a marked up price.
Not all retailers buy and sell products from distributors. Some retailers may create and manufacture their own product to sell directly to customers. Below are some of the pros and cons of retailing:
Wholesale vs. retail: Key differences
Understanding the key distinctions between wholesale vs. retail can help you make the most informed decision about your business model and sales strategy. Below, we’ll cover how each differs in terms of target audiences, pricing structures, profit margins, inventory management, and operational considerations.
Who you’re selling to
One of the main differences between wholesalers and retailers is who you’re selling to. In a wholesale model, you sell products to other businesses, retailers, or resellers rather than individual customers. In a retail model, you sell directly to the consumer.
The focus of a wholesaler is supplying large quantities of goods to other businesses, who will sell that product to their customers. Their primary concern is meeting the needs of the businesses or retailers purchasing the products, not the final customers. Alternatively, retailers focus on the end customer who will purchase the goods for personal use. If you’re selling products only to distribute “final products,” then you can consider yourself a retailer.
Pricing and profit margin
Wholesalers and retailers also differ when it comes to product pricing structure. In a wholesale model, small business owners typically sell their products at a lower price per unit than the retail price. This allows retailers to mark up their prices and make a profit when their end consumer makes a purchase.
While wholesalers generally charge a lower price per unit for their products than retailers, they make up for it in a higher volume of sales since retailers purchase wholesale products in bulk.
And while retailers command higher prices for their products, part of their marked-up price is intended to cover additional expenses like overhead costs, marketing, and in-store customer experience.
Inventory management
Inventory management is another key difference between a wholesaler and a retailer. Since wholesalers tend to sell products in bulk to retailers or businesses, they have to manage large quantities of inventory. This makes warehouse space a key consideration for wholesalers to ensure they have enough room for bulk inventory. It also requires careful planning to ensure their product stock levels can meet the demand of their buyers.
As for retailers, inventory management prioritizes consumer demand. This requires having the right products available at the right time according to customer preferences. Retailers must strike a balance between having sufficient inventory to meet customer demand without buying too much or too little overall. Purchasing too much inventory can result in excess inventory costs, and purchasing too little can result in lost sales opportunities. Overall, strategic inventory management is crucial for both wholesalers and retailers.
How to determine whether wholesale vs. retail is right for your business
Whether you become a wholesaler or retailer will depend on a few different factors, including your product, inventory management capacity, and business goals.
Considerations for wholesalers
A wholesale business model can allow you to reach a broader market and more readily scale your business. As well, buying and selling products in bulk can allow for a more streamlined distribution process that can lead to cost efficiencies and a more optimized supply chain.
To determine if wholesaling may be best for your business, consider the following factors:
- Product offering and scalability: Evaluate whether your product is suitable for wholesale distribution. Is your product one that can be produced and distributed in large quantities? Some products, like unique handmade items or niche products, may be more difficult to scale.
- Inventory management and logistics: Consider your capacity for efficiently managing large-scale inventories and fulfilling bulk orders. Sufficient warehouse space, order fulfillment systems, and distribution processes are required to meet wholesale order demands.
- B2B relationships and customer service: Building relationships with retailers or businesses are crucial for wholesale success. Reliable order fulfillment and effective communication are critical to meeting your buyers’ needs and nurturing long-term partnerships.
As a wholesaler, you may not need a point-of-sale system, but you’ll need to deal with invoicing. You’ll need to create easy-to-pay invoices that include:
- Customer purchase order (PO) numbers or billing codes
- Itemized lists of goods and pricing
- Lengthier payment terms
As a wholesaler, a large portion of your time will be spent on supply chain management and logistics—getting products to a particular location, overseeing the manufacturing process, and maintaining and tracking inventory. While wholesaling can be an excellent path to rapidly scaling your business, be sure to consider all parts of the process carefully.
Considerations for retailers
A retail business model might appeal to business owners interested in building their brand and creating a unique identity in the marketplace. Retail businesses can also enjoy more control over their pricing structure, adapting product prices based on factors like market demand, competition, and overhead costs.
To determine if retailing may be best for your business, consider the following factors:
- Target market and consumer demand: Success in retail begins with a strong understanding of your target audience and their buying preferences. The ability to cater to a potentially wide range of consumer needs and goals while considering market trends and competition is crucial to retail success.
- Sales channels and marketing: Consider your ability to choose strategic sales channels that align with your target market. Whether through a physical brick-and-mortar store, an e-commerce platform, or both, assess how you’ll create effective marketing strategies to reach your target customers.
- Customer experience and branding: Consider how you’ll differentiate your retail business and create a positive customer experience. As a retailer, you’re responsible for not only your product prices but also how you represent your product and the customer experience you provide.
Another component of retail management is a point-of-sale (POS) system. Retailers need a suitable POS system to complete B2C transactions. This includes the ability to accept credit card purchases. Evaluate how you’ll coordinate sales and manage bills in addition to the other factors discussed above to streamline your business.
Run your business with confidence
If your business doesn’t yet have the ability to meet wholesale demands, consider starting as a retailer to establish your product and build a following. As your brand grows, you can consider using wholesale suppliers to put yourself into brick-and-mortar stores.
Selling your own creations and managing your own business with the help of the right accounting software can give you the level of freedom you desire. Whether as a retailer or a wholesaler, you can achieve this financial freedom and create a successful enterprise.
This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.
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Home businesses tax deductions to take as a small business owner
Small business owners take on a considerable amount of responsibility. Beyond serving clients, they must also take care of all the minutiae of running a business, including keeping track of expenses they can deduct as a small business owner.
Fortunately, small business owners and entrepreneurs who use their home for work can benefit from various home business tax deductions that help them reduce their taxable business income. Common deductions include office supplies, software and internet access, but deductions can vary widely depending on the type of home business you run.
- Who qualifies for home business tax deductions?
- 25 home business tax deductions for your small business
- How to write off home business expenses
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If you run your business out of your home, you may be able to deduct expenses for the use of your residence on your taxes for your small business. The home office deduction can be utilized by homeowners and renters, and any type of residence can qualify (single-family home, condominium, manufactured housing, etc.).
To qualify for the home office deduction, your home business activities must meet the following criteria:
- Regular and exclusive use. According to the IRS, you must “regularly use part of your home exclusively for conducting business.” In other words, you must have a space in your home that you use only for business purposes, such as a home office or extra room that is used only for business and never for personal use.
- Principal place of business. To qualify for the home office deduction, your home also must be the principal place your business operates from, although there are exceptions. The IRS reported that you may qualify for the home office deduction if you also have a business location outside of your home, provided you use your home for a substantial component of your business. For instance, if you conduct business in another location but have meetings with clients or patients in your home, the IRS allows you to deduct expenses for the part of your home that you use “exclusively and regularly” for business purposes.
There are some exceptions to these rules, including for those who run a home daycare. If your small business involves watching children in your home, then it would be impossible to meet the “exclusive use” criteria if you’re watching children in your own living area. To qualify for this exception to the exclusive use rule, you must provide daycare for children, persons age 65 or older or persons who are unable to care for themselves. Additionally, you must have “applied for, been granted or be exempt from having a license, certification, registration or approval as a daycare center or as a family or group daycare home under state law,” noted the IRS.
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If you’re eager to reduce your taxable income this year, figuring out which home business tax deductions you can take is a smart first step. Here are 25 common deductions you may be able to qualify for.
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Business supplies and office expenses, such as office furniture, printer paper, pens, calculators and business cards, are deductible provided they are for business use. According to the IRS, business expenses must be both ordinary and necessary, meaning they are “common and accepted in your trade” and “helpful and appropriate,” though not necessarily indispensable.
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Small business computers and software you need to purchase for your business, including small business accounting software, should be tax-deductible business expenses provided these purchases are ordinary and necessary for your business to remain in operation.
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You may also be able to deduct home repairs and maintenance performed on your place of residence, but only for the part of your residence that is used exclusively for business purposes. According to the IRS, an example could include “painting or repairs only in the area used for business,” like a new coat of paint or replacement flooring in your home office.
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You can deduct the business portion of your rent as an expense if the property you rent is for use in your trade or business. However, you cannot deduct rent as a business expense if you have or will receive equity in or a title to said property. Per the IRS, rent is defined as “any amount you pay for the use of property you do not own.”
In terms of depreciation, the IRS said that you can typically deduct depreciation on the business use portion of your home as well, in an amount up to the gross income limitation over a 39-year period.
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If you have a home office, your house utilities will also be required for your business. As a result, you can deduct a portion of your utility bills, such as gas and electric bills. However, you can only deduct a portion of these expenses since, obviously, part of your utility bills are for personal use.
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If you use your car for business purposes, you can deduct auto-related expenses for the business use of a car. The IRS also reported that, if you use your car for both personal and business use, you must divide your car expenses based on the mileage you drive for personal and business purposes.
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You can also deduct mileage for all travel related to business. The IRS offers a table of standard mileage rates and mileage deduction rules you can refer to for the last several years, including mileage expenses for 2020.
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You can also write off employees’ pay as a small business owner. This is true even if you operate your business out of a home office.
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You can also deduct contributions to retirement plans, including tax-advantaged retirement plans for the self-employed or small business owners, such as an SEP IRA or a solo 401(k).
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If your business is paying interest on a credit card or loan that you borrowed for business activities, you should also be able to deduct this interest as a business expense.
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According to the IRS, you may be able to deduct various federal, state, local or foreign taxes that are directly related to your trade or business.
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You can typically deduct the cost of business-related insurance products you pay for, provided they are applicable to your trade or profession.
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If your business creates products or purchases them for resale, you can typically deduct the cost of these products or the costs involved in manufacturing them. This can include the cost of raw materials, freight, shipping, storage, direct labor and more.
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Thanks to the Tax Cuts and Jobs Act of 2017, you may be able to deduct up to 20% of your qualified business income on your taxes. This deduction does have limitations based on your trade or business as well as how much you earn, however. Specifically, joint tax filers with incomes below $315,000 and other filers with incomes below $157,000 can claim this deduction in full provided they work in a qualifying industry. For 2018, joint tax filers with incomes between $315,000 and $415,000 and individuals with incomes between $157,000 and $207,500 were subject to phase-outs.
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If you use your home for business purposes, you can generally deduct cleaning services and supplies that you purchase for the business-related portion of your home.
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If you own your home and have a home mortgage, you can deduct a portion of your mortgage interest on your business taxes. Deductions are based on the percentage of your home that you use for your business. If your lender requires mortgage insurance, part of that can be deducted as well.
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Business-related travel expenses can also be taken as a business expense. This could include travel to meet with clients or to professional education or training events.
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If you pay for professional services, such as legal advice or tax preparation, these expenses can be deducted as business expenses.
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If you pay for marketing help or a business coach, these expenses can be deductible from your business income.
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If you ship items for business purposes, shipping costs can be deductible on your taxes. The same is true for postage when used for business purposes.
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A security system that protects the doors and windows in your home from intruders can also be partially deductible as a business expense, provided part of your home is used for business purposes.
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Professional memberships you pay for and subscriptions to business-related publications can also be tax-deductible.
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The IRS said that while the first local telephone landline in your home is not a deductible business expense, “charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses.”
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Health insurance for yourself and your family is deductible as a business expense when you’re self-employed, although you do not have to have a home office to qualify for this deduction.
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If you pay for or reimburse education expenses for an employee, you can deduct the expenses if they are part of a qualified educational assistance program, per IRS rules.
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If you’re feeling overwhelmed by all of the home office business expenses you might have to keep track of, you should know that the IRS also offers a standardized home office deduction that requires less legwork upfront. Here are the two options you have when it comes to how to write off home office business expenses this year:
- Simplified home office deduction: Since the 2013 tax year, taxpayers have been able to access a simplified option for computing the home office deduction. This option lets you determine a standard deduction based on the square footage of your home office space, thus letting you avoid tracking and reporting all of your individual home office expenses. Of course, the simplified method isn’t perfect since you can’t take some deductions like depreciation. You also cannot carry over a loss from a previous year, which is a departure from the regular method.
- Regular method: If you keep excellent records and prefer to deduct business expenses the old-fashioned way, you are still able to do so. With this method, you would need to keep detailed records of all your actual expenses for your home office including mortgage interest, utilities, depreciation and more. From there, your deduction will still be determined based on the percentage of your home used for business purposes.
If you’re using the regular method, you should plan on using IRS Form 8829 for certain business-related tax deductions when you file your taxes. But be aware that some business expenses don’t fall under the home office deduction, so they would be deductible within other areas of your taxes, such as Schedule C or F. Examples include telephone expenses, dues and salaries.
Also note that if you use the simplified method and itemize deductions, you can deduct some expenses for your home that are otherwise deductible, including mortgage interest and property taxes, as itemized deductions using Form 1040 or 1040-SR, Schedule A.
When choosing which method to use for your home office deduction, keep in mind that both options have pros and cons. The regular method requires a lot more work, but you have the potential for a larger deduction if you have a lot of qualified expenses within a year. The simplified method is easier, but not necessarily ideal if you want to recapture depreciation when you sell your home, or if you want to be able to carry over losses. Make sure you understand each method and its limitations so you can make an informed decision.
This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.
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