merchant vs retailer

Saturday, January 03, 2015

Is there a difference between the two?

When it comes to doing business, there’s plenty of different ways to structure your company. As you look to structure your business in a way that makes sense, it’s important to understand the nuances between merchants and retailers. This article will cover them both, including the different types of merchants and if a retailer is actually significantly different than a merchant. To start, let’s define a merchant.

What’s a merchant?

Put simply, a merchant is an individual or a business that sells goods or services. You may hear the term ecommerce merchant, which is a business or individual that exclusively sells their goods or services over the internet. When it comes to merchant transactions, there are two types – business to business (B2B) or business to consumer (B2C). In a business to business transaction, one business is selling goods or services to another business. An example of this is a telecommunications company who sells smartphone plans and services to a construction company. Because this is a transaction from one business to another, it’s a B2B transaction. But, in a business to consumer transaction, a business is selling goods or services directly to an individual consumer.

It’s important to also know that the term “merchant” is a very broad term (and intentionally so). It’s a catchall term for anyone who sells anything, with a slight caveat that the determining factor is that the product or service for sale must be sold for a profit.

Is a retailer a merchant?

Because merchant is such a broad term, you may wonder how the word “retailer” fits in. The short answer is that a retail business is a type of merchant. Retailers or retail merchants sell products directly to consumers. By doing this, they allow customers access to manufactured goods and can make money by reselling these goods to an end user. Retailers rely on the supply chain to acquire the goods that they sell to the end user.

There are many different types of retailers – from ecommerce retailers to brick and mortar stores like grocery stores, specialty stores, department stores or even discount retailers. Retail industry storefronts each operate and look different than one another based on their goods. For instance, the customer experience at a grocery store is likely to be much different than their experience at a department store.

Now, let’s look at the four different types of merchants, and how retailers fit into the merchant equation.

The four types of merchants

As we’ve established, merchants are a broad category, but at their core each type sells a product. Let’s look at each of the four types of merchants.

Wholesale merchants – A wholesale merchant buys goods in large quantities from one supplier and then sells them to a variety of smaller retailers for a profit. For example, they might buy a product from a manufacturer. In their order, they purchase 10,000 units of that one kind of product. Then, they’d work with small businesses who can’t take on 10,000 products in their inventory to supply them with the number of units they can take on. A wholesaler works with multiple retailers to provide the smaller quantities that each retailer needs at wholesale prices. They also usually have a warehouse or storage facility where they take possession of the large amounts of units before selling them to specific retailers.

Retail merchants – These are the middlemen between suppliers and the end consumers. They’ll buy a product from a wholesaler, distributor or even directly from a manufacturer, and then sell it to the end consumers for a retail price. Retail sales takes the products and markets, advertises, and finds the right consumer for them. They take on smaller quantities, but also take the risk that the products won’t sell, and take a loss if a customer returns a product. In this way, retailers are doing the legwork to make sure the right product gets to the right consumer.

Retailers make their money by marking up the cost of the products they sell. The difference in what they pay for the goods and what they sell them for is their profit, minus any costs they have selling the product. Retailers are seen as resellers since they are buying the product from a wholesaler or a manufacturer and then reselling the product to the consumer for a higher price. Reselling could even include packaging the product differently with a private label or proprietary packaging. As you can see, retailers are a very large part of the merchant ecosystem.

Ecommerce merchants – Ecommerce businesses are growing at a rapid pace, and an ecommerce business is solely based online. These merchants only sell their products or services on the internet, although there are a variety of channels available to use. The sale of goods might happen on marketplaces such as eBay or Amazon, or they may use their own website. Ecommerce merchants are responsible for building their brand, marketing their products, and taking care of things like bookkeeping and payment processing. In addition, online retailers may need to develop their own website or use software to design and implement their online store.

While ecommerce merchants have the advantage of reaching a global audience, they aren’t immune to challenges. One of the biggest challenges that ecommerce merchants face is accepting payments online. From the background checks a business needs to set up a payment gateway to dealing with payment processing and fraudulent purchases, operating an ecommerce business can be high-risk.

Affiliate merchants – The last type of merchant is an affiliate merchant. This merchant is any online business that makes its money from referring people to other merchants (usually ecommerce merchants). In this way, an affiliate merchant drives traffic and helps a company generate leads for a product. Some businesses run their own affiliate program or hire affiliate merchants to help them sell more products at their business. Affiliate marketing is all about getting people down the purchasing funnel, and affiliate merchants use their knowledge to help do that. Now let’s take a look at a common thread between all these types of merchants – the merchant account.

What’s a merchant account and why do you need one?

For all types of merchants, including retailers, a merchant account is key to accepting payments at your business – from credit and debit card payments to Automated Clearing House (ACH) transactions, mobile payments, online payments and more. When it comes to getting a merchant account, businesses can work with a merchant account provider (usually a bank or other financial institution) to set up their own merchant account, or they can work with a payment processor to utilize the processor’s merchant account.

Generally speaking, a new business will lean toward a third party payment processor because of the strict underwriting requirements banks have. Either way, your business needs a merchant account to accept payments at your business – including credit card processing. Without a merchant account, businesses like yours can’t accept payments besides cash.

During a transaction, the acquiring bank or the payment processor receives funds for the transaction from the issuing bank and then moves them to your merchant account. Once funds from a transaction are placed into a merchant account, the transaction is complete. After the transaction completes, the funds are then transferred into your business bank account. Merchant accounts essentially serve as a holding account to protect banks and payment processors so they don’t get burned by fraud or chargebacks.

If you’re an ecommerce merchant, you’ll also need to get a payment gateway. The best way to think about a payment gateway is as an online point of sale (POS) system for your business. Not only does it help to authenticate an online credit card transaction, but it also securely transmits data from online payments or sales to the payment processor. Enhanced security is vital to protect your customers’ payment data, and a payment gateway does this through the use of tokenization and encryption, helping to limit instances of fraud and chargebacks at your online business. A payment gateway will also typically have website integration capability to make electronic payments on your website seamless for customers.

Whether you choose to use a payment service provider or a payment gateway, you’ll want to make sure to check the processing fees for each of these services. Some providers may include a base monthly fee and then a per-transaction fee, while others may have a flat-rate pricing structure or even an interchange plus pricing model, which relies on a markup of a card network (such as Visa, Mastercard, Discover, or American Express) interchange fees. You’ll also want to investigate the necessary equipment you’ll need to accept payments (if applicable). From a POS system to card readers, it’s important to know what a merchant services provider can help you acquire for your business. Finally, you should keep an eye on any extra fees a credit card processor may have, including statement fees, service fees, bank routing fees, and more.

Merchant service providers can also help ensure your business follows PCI compliance guidelines. PCI stands for Payment Card Industry, and PCI compliance includes a specific set of procedures to help protect consumer cardholder data. These rules were set forth by the card issuers to help curb fraudulent transactions.

As you can see, knowing the difference between the types of merchants and retailers can be a great way to figure out what you want your business model to be. Retailers and other merchants all have different positives and negatives, so it’s important to weigh these against each other when deciding on the path forward for your business. You’ll also need to ensure you’re thorough when selecting a merchant services provider, so that whether you’re a retailer or other merchant, you’ll be ready to take on whatever the business throws at you.

Ready to work with a payment processor who can help you run your business?

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