Walmart is an absolute giant in the retail sector, but what is their business model, and how does Walmart make money? When you consider their size, reach, expenses, and pricing, one has to ask. In fact, it almost seems unfathomable that this significant player can make such substantial profits.
When we look closely at the Walmart business model, we’re immediately struck by two things. The first is that Walmart stores seemingly stock everything. And second, their prices are super low. Therefore, we can determine that Walmart makes money by selling a high volume of products for a low-profit margin. In other words, they rely on sales volume to remain profitable.
The business model of any company determines how they go about purchasing, pricing, and selling their products or services. And this is clearly something that the people behind Walmart have considered thoroughly.
In fact, the chosen Walmart business model was initiated by the vision of its founder, Sam Walton.
The Idea Behind the Walmart Business Model
When Sam Walton purchased his first store in Arkansas in 1945, he hoped to offer customers essential products at the lowest prices. His hope was to attract legions of customers this way and sell at volume. And this business model proved successful.
Sam Walton opened his first official Walmart store in 1962, and it didn’t take long for the store to grow exponentially. Within 5 years, Walton expanded to multiple locations and saw massive profits.
What’s more, he diversified his business by initiating a subsidiary known as Sam’s Club. Through this arm of the company, Walton offered further discounts to other retailers.
Now boasting upward of $400 billion in revenue per year, the Walmart business model stands firm as a profitable strategy. And it’s understandable because this approach fulfills the client’s needs and differentiates Walmart from other retailers.
But a great deal goes into achieving and maintaining this business model. So, let’s dig in, analyze the model, and find out exactly how Walmart makes its money.
Analyzing the Walmart Business Model
First, you should know that the Walmart business model is based on the Everyday Low Prices/Everyday Low Costs (EDLP/EDLC) pricing strategy. One of the reasons it’s successful is because customers know they can expect low prices every day. And this has proven to be an excellent foundation for building customer trust and loyalty.
You should also know that the Walmart umbrella doesn’t only include Sam’s Club stores. Walmart itself is divided into a US division and an international division. And then there’s Walmart Health in addition to Sam’s Club.
That said, let’s take a closer look at the Walmart business model. We’ll do so by examining the four key elements that make their strategy successful.
Walmart functions as a one-stop shop. Each store houses multiple departments, providing everything from daily essentials to clothing, appliances, sporting goods, and more.
This way, Walmart attracts customers of all ages and covers various needs. With so much on offer, Walmart attracts many customers for different reasons.
That’s right. Walmart not only offers customers a variety of products, but they also provide a range of services. And these services are cleverly designed to serve as an extension of their product offering.
Walmart provides clients with financial services making it easier to purchase from the store. These services include payment and reward cards, facilities to pay bills and transfer money, cashing of checks, and more.
Another type of service offered by Walmart relates directly to their products. The company provides various warranties on their products and includes installation, assembly, and support services on goods purchased.
Then there’s their automobile section where customers can purchase vehicles and have them serviced and repaired. And the Walmart Health division offers optometry, clinic, and medication dispensary services.
In addition to this, Walmart provides customers with house cleaning services, the option to trade-in certain items, and even custom-made cakes. And there’s a section dedicated to registries and gifts, including gift cards.
They also have a range of services aimed at businesses, such as producing promotional goods. And there’s a division called Walmart for Business focused on providing office supplies and equipment to companies.
Walmart’s business model dictates that its profit margin on product sales is meager. That said, the retail giant still makes a profit through sales, however minimal. The success of this approach lies in two key factors, namely their customers and their suppliers.
Customer Purchasing Behaviour
The Walmart business model includes intelligent pricing and product placement strategy. And this begins with them reducing the prices of some of their critical essential items. Prices on these are reduced to the point that Walmart no longer makes a profit on them.
With prices below cost, customers swarm to Walmart for their essential goods. But when at the store, they are tempted to purchase other impulse buy items through clever product placement. Walmart makes a profit on these items, which is how they generate their overall revenue.
Because Walmart buys in bulk and often, suppliers are happy to give them the best possible prices on their goods. As a result, Walmart can consistently offer its customers incredibly low prices on good-quality products.
This makes Walmart a formidable competitor in the retail space. New and smaller stores can’t purchase from suppliers at the same volume and rate. Therefore, suppliers won’t give them the same low rates awarded to Walmart.
Walmart is looking to the future and is preparing to make waves in eCommerce. Recently, they’ve acquired large eCommerce platforms such as Bare Necessities, Flipkart, Eloquii Design, and Art.com. In doing this, Walmart aims to enter the space through established channels, giving it a leg up on much of the competition.
The Walmart business model is simple but effective. They’re undercutting the competition with an Everyday Low Prices/Everyday Low Costs pricing strategy. And with their wide range of product and service offerings, they’re attracting multiple customers from all walks of life.
Granted, they don’t make much profit from the products they sell. And when it comes to some essential goods, they sometimes sell those at a loss. But, due to their product placement strategy, customers usually purchase more than they intended to. And this is how Walmart makes money.