I know I have written blogs about wholesale and direct-to-customer, but I wanted to dig into this topic a little more and share with you some of the main differences between them. A lot of people ask which one is better and, even though it's up to you to know what suits your business plan, there is no right answer here. So, let’s look at both of these sales strategies and the pros & cons of each one of them.
Wholesale can give you better stability in terms of ROI, no wonder some of the biggest brands all do wholesale, while direct-to-customer gives you the option of smaller production quantities along with a bigger profit margin. But, as I say, it depends on your business plan, the size of your investment, and your marketing plan.
To make an easier comparison between these two methods that rule the fashion industry, let’s look at a few topics that distinguish them the most.
1. MOQs
In previous blog posts I have explained what MOQs mean but if you are new around here, allow me to do a quick recap: when you are ready for production, any manufacturer that you are working with will require a MOQ (Minimum Order Quantity). Even when you are producing with your local manufacturer, you have to order a certain amount of units, otherwise, it doesn’t make any sense for the manufacturer who is not going to make any money, or for you who will pay an expensive amount for cut & sew.
When you are ordering production units, higher volume equals a lower cost per unit. Lower production quantity equals a higher cost per unit. This is industry standard but, regardless of producing locally (which usually is more expensive) or offshore (which usually requires high MOQs), you need to make sure that your production quantities are coherent with your marketing plan.
It is necessary to understand that the investment in marketing walks side by side with the investment in production. Nobody wants to produce a million units, but don’t create a strong marketing plan that will sell those units. Remember, you started a business to do what you love and make money, not to sit in inventory.
For more about MOQs and establishing production numbers, here are some blog posts that will explain everything you need to know:
Now, let’s dig into what matters in this blog post. There is a difference between production and wholesale MOQs. Even though they mean the same thing (minimum order quantity) the difference is that, instead of meeting the minimum quantity required by the manufacturer, you are the one telling your buyers the MOQs they need to meet.
This might seem great, but you have to be realistic. Don’t think you can go out there requiring five thousand units per order when you are a new clothing line. You need to make a name for yourself and your wholesale orders need to be determined according to your production budget.
Regardless, a great point of doing wholesale is that you develop your collection, you set up a showroom, schedule appointments with buyers and you have the chance of ordering production quantities according to how many orders you received. Different to direct-to-customer, where you order a certain production quantity, but you don’t know how many units you will sell until production is done and your collection has launched.
What a lot of new brands do is combine wholesale and direct-to-customer. It is a good way of making sure you will be selling a certain amount of units (from wholesale pre-orders) and have stock to sell directly to your customers (via e-commerce, retail store, and pop-up shops…).
Like I said, your marketing investment needs to be coherent with your production investment. With that in mind, you have to make sure that you have the budget to meet your sales orders. Remember, nobody wants to be sitting in inventory and, at the same time, you cannot start a brand that cannot fulfill orders.
2. Cost-effective
I, personally, like to say that wholesale is more cost-effective than direct-to-customers, but it depends on your business/marketing plan.
When doing wholesale you know exactly how many units you need to produce to meet buyers' orders, which makes it easier when negotiating prices and MOQs with your manufacturer. Differently from direct-to-customer, when you have a sales strategy but until you launch your collection you are never 100% sure of how much inventory you need to meet projected sales. This makes it a little more complicated to determine production quantities and negotiate prices with your manufacturer.
Choosing one or the other, you have to look back to your budget and business plan. As I said, nobody wants to be sitting in inventory and, at the same time, you cannot start a business that is not able to fulfill customer orders, so you need to make sure that your budget is coherent with the size of your production & sales strategy.
3. Profit margins & ROI
On the blog INSIDE THE FASHION INDUSTRY - Costing & Profit Margins: High Fashion VS Fast Fashion, I explained wholesale profit margins in a detailed way, but if we are to compare wholesale VS direct-to-customer in a simple way, the main difference is that wholesale has a lower profit margin.
The industry standard for wholesale is usually 25% and direct-to-customer double, but it depends on the type of garment you are producing and the quantities you are producing. This is not a bad thing nor does it means that you are making less money - remember, when doing wholesale, you are the one telling your buyers the MOQs. So you can determine a certain quantity that will allow you to generate profits.
This happens because when selling to retail/e-commerce stores, they need to add their profit margins. If you are selling your product for double the price, retailers will have to add more margins to each product, which will lead to a high price point. So, if buying products directly from you is cheaper than buying from retailers, why would customers go to retail stores? It is a business strategy that works well and makes it fair for everybody since you and your retailers will be selling your garments for a competitive price.
But why do wholesale then? The advantage of this sales strategy is that you are the one dictating the MOQs and you know the exact amount of units you need to produce. Once buyers place an order, you produce what is needed and ship it to your customer. Whatever quantity your buyers bought it will be their responsibility to figure out a way to sell those units. While direct-to-customer you can have a small inventory, but it is your problem to figure out how to sell the products.
So far it might seem clear that wholesale gives you more stability in terms of return on investment, but, as I said, everything depends on your budget.
I keep repeating that the investment in marketing walks side by side with the investment in production. Especially when combining these two sales methods, where you need to meet factory quantities, be able to fulfill buyers' orders, and have inventory enough to sell directly to your customers. This investment goes beyond focusing on good materials and quality, it also involves a strong sales plan and branding.
4. Get your name out there
This is one of my favorite parts. If you start a brand and you manage to have stores like Macy’s, Saks, Bloomingdale’s, or Flying Solo placing an order with you, do it! Don’t have the budget to do so? Figure something out or, at least, keep your mind open for future partnerships.
When you have your brand selling in well-known stores like these it might seem like nobody will find your products in the middle of the jungle of brands offered by them, but you have the chance of being in a store that carries the most famous brands worldwide. It is a great opportunity to have your name out there and grow traffic to your business.
I love the fact that, when starting an interesting blog like this, I always promise myself that I will keep it simple and try to keep it as short as I can, but here I am four pages later… This is a very popular topic and a lot of my readers, especially the ones who are looking into starting a clothing line, ask me about it. It was time to dig into this subject and tell you the main differences between them. I hope you all enjoyed and found this helpful.
Don’t forget, for anyone who wants to learn more and is interested in the Fashion Coaching Program, you can schedule a free 30 min consultation with me to ask all your questions. Use the link below to schedule your call.
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