Khaja Hussain - Grozeo
Every retailer, at one time or another, has wrestled with the intricate challenge of product pricing, particularly those who serve both the wholesale and retail markets. You’re not alone if you’ve been grappling with this issue lately.
When it comes to pricing products, there are a multitude of mathematical formulas to consider, including margin, markup, markdown, profitability, and sales history. However, I’m here to tell you that you only need a handful of key concepts to create successful pricing strategies, whether you sell wholesale, retail, or both.
Wholesale Price vs. Retail Price
Wholesale and retail represent two fundamentally distinct processes in the world of commerce. Wholesale moves goods from manufacturers to distributors, whereas retail involves acquiring those goods and selling them to the end consumer.
Producers or distributors charge wholesale prices to retailers, who, in turn, set the retail prices for consumers.
What is Wholesale Price?
Wholesale pricing is what you charge retailers who buy products in bulk. The primary objective of wholesale pricing is to profit by selling goods at a price higher than the cost of production. For instance, if it costs you $5 in labour and materials to manufacture a product, you may set a wholesale price of $10, yielding a $5 per unit gross profit.
What is the Retail Price?
Retail pricing, on the other hand, revolves around the customer. It’s about determining what the customer will pay for your product. Retailersmarkup wholesale goods to earn a profit, but it should always be, at most, what the customer perceives as fair.
This aspect of retail pricing can be somewhat elusive, as the answer to what customers are willing to pay is often fluid and influenced by various factors.
How to Calculate Wholesale Price
Let’s delve into the steps you can take to calculate the wholesale price for your products.
1. Research Your Market
Before setting any product prices, it’s essential to understand your market segment and where your brand fits in. Whether you position yourself as a discount, contemporary, or high-end brand will significantly affect how your target audience perceives your pricing.
If offering lower prices is your competitive advantage, factor this into your pricing strategy. Moreover, you need to know your break-even point and use the break-even point formula to calculate this number.
2. Calculate Your Cost of Goods Manufactured
Cost of Goods Manufactured (COGM) represents the total cost of producing or purchasing a product, encompassing materials, labour, and any additional costs associated with getting the product ready for sale, such as shipping and handling. The formula for COGM is:
Total Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods Manufactured
3. Set Your Wholesale Price
When determining your wholesale price, start by doubling your cost of goods. This ensures that your wholesale profit margin is at least 50%. The profit margin is the retailer’s gross profit when an item is sold.
Apparel retail brands typically aim for a 30% to 50% wholesale profit margin, while direct-to-consumer retailers aim for a 55% to 65% margin.
The retail margin percentage can be calculated using the formula:
(Retail Price – Cost) / Retail Price = Retail Margin Percentage
For instance, if you buy swimsuits for $25 each and sell them for $50 each, your retail margin per suit is 50%.
Pricing Methods for Wholesale
Now, let’s explore two straightforward and effective methods for pricing wholesale products: Absorption Pricing and Differentiated Pricing.
Absorption Pricing
When determining your price, absorption pricing involves factoring in all costs, including fixed costs and profit margins. The formula is:
Wholesale price = Cost Price + Profit Margin
While this method is easy to use and guarantees profits when all expenses are considered, it may lead to pricing gaps and needs to assess competitors’ pricing or value perception.
Differentiated Pricing
On the other hand, differentiated pricing is used to optimise the return on investment by considering the demand for a product. It allows you to set different prices for the same product in various scenarios. This approach finds factors like buyer acceptance and market conditions.
For instance, you can charge a higher price during peak seasons or in areas with less competition. Differentiated pricing allows you to capitalise on market conditions and buyer willingness to pay a premium.
Setting a Suggested Retail Price
A Suggested Retail Price (SRP) is the price manufacturers or wholesalers recommend to retailers. It’s crucial to ensure that retailers follow or exceed the SRP to maintain pricing consistency and avoid undercutting.
The retail price can be calculated using the formula:
Retail Price = Wholesale Price / (1 – Markup Percentage)
Research your market to determine how comparable brands or retailers set their prices and work backwards to calculate your target retail price based on your production costs.
Creating a Dual Pricing Strategy
A dual pricing strategy is an intelligent approach for businesses serving wholesale and retail markets. It involves setting an external retail price for your online store website or retail customers and a separate wholesale price for wholesale accounts.
You can use the provided formulas to calculate your margins and determine wholesale and suggested retail prices. This approach allows you to maintain profitability, whether selling wholesale or retail.
In conclusion, understanding these pricing strategies and formulas can help you make informed decisions and develop pricing strategies catering to wholesale and retail customers. By researching your market, calculating your costs, and setting competitive prices, you can succeed in commerce. Remember, the key to effective pricing is balancing profitability with the perception of value in the eyes of your customers.
