Finding the right pricing strategy and prices for your products are key to your business success. Pricing impacts not only your sales volume, but also your profitability.
Set the price too low and you might damage your product perception value. Worse, you might not cover your costs and, therefore, risk actually losing money in running your venture. Set your price too high and your products won't be attractive enough for retailers to carry your products.
With so many influencing factors, no wonder pricing is often seen as a difficult challenge for small businesses. Retailers must be able to sell their products with a decent margin, in order to run a profitable business.
We’ll show you the step-by-step process to find the right price for your products. This guide was built with the collaboration of successful wholesalers and distributors and extensive research.
The formula highlights six major factors:
The good news is that our pricing guide is here to help you with this recurring and complex pricing exercise. We'll run you through a step-by-step process to help you decide what the right price is for your products and business.
Topics Covered in This Article:
Let us show you how to price your products for wholesale vs. retail.
To confirm the best methods, we analyzed pricing on thousands of items with the help of some of our clients willing to participate in the survey.
First, we noticed three distinct types of distributors:
#1: Brand distributors
#2: Manufacturers & Creators
#3: Bulk purchase wholesalers
Identify which distributor profile best describes you. We'll return to these profiles and what they imply, further into the process.
While these three types of distributors might not have to do the same extensive research about the market, competition and positioning, they all have one thing in common that is key to their successful pricing decision: COST analysis.
Our guide will walk you through the markup strategy. Note that whatever your pricing strategy is, you should always start with your COST first. You can read more about compatible pricing strategies here.
Now, we’re guessing what your next questions are: How do I find my cost? And how do I use this cost to define my product pricing? Let's jump into the next section that details how to calculate your cost.
2. Calculating your cost of sales
You’ve got it by now: You must calculate your costs to be on the right path for success.
You must calculate your cost of sales and operational cost separately. We’ll show you how to.
From our study, many successful wholesalers reported that cost calculation allowed them to reduce risk and make better decisions. Some wholesalers changed their product lines and stopped selling a product to make sure their margin would cover their costs.
Cost of sales or COGS (cost of goods sold) represents how much you spend to acquire the products that you'll resell. It is a direct cost that should include:
Let's take a fictitious example: Sam is a wholesaler of women’s apparel. Let's help Sam with the cost calculation for the red dress:
Note, if you are profile #2, a manufacturer or entrepreneur making your own products, the cost of sales is a bit more complex.
You must calculate your cost of goods sold, which includes all costs of making your products:
Make sure to calculate for all items in your product line.
Obviously, there are more costs to run a business than the cost of your products. These additional costs are the overhead expenses, also called indirect costs. They include operational cost and exist regardless of the volume of product sold.
It includes fixed or variable expenses, such as:
This list is not exhaustive, so make sure you think of any other expenses your business might incur. Based on our survey, two interesting views were prominent and worth sharing to other wholesale distributors:
Note 1: As a wholesaler, you should also probably assess the cost of damaged products or shrinkage products because of human errors when preparing orders, or thefts. These get easier and easier to assess as you gain experience.
Note 2: Small businesses mentioned they always get unexpected costs at some point that must be covered. It might be something you want to add in the equation if you want to be extra cautious or if your margin is tight and more at risk.
In other words, keep in mind that any ‘forgotten’ costs will reduce your margin directly and negatively impact on the profitability of your endeavour. Small businesses can suffer most from these errors.
Let's go back to Sam, our entrepreneur, selling apparel for women. Sam is working remotely from home.
Cost per month:
Here you go: you now have your cost of sales and overhead expenses.
Now, let's calculate your total estimated cost:
Tips: you can create simple excel spreadsheets to calculate multiple lines quickly.
Sam's business would have the following total cost estimation over a period of six months:
1. Sam will sell 500 dresses during a six-month period. Red dresses cost of sales: 17 * 500 = 8,500.
2. Obviously, Sam also sells other clothing. Total cost of sales: 8,500 + cost of sales for the entire product lines = 120,000.
3. The total cost for a six-month period = (7,700 * 6 months) + 120,000 = $165,600.
Keep this total cost amount handy; it will be useful to verify your business profitability further along in the process.
Tips: Compare forecast with results
At the end of a period, it’s instructive to compare your planned cost of sales with your actual COGS. It might help you plan better for the future and to be more accurate in your pricing. Your inventory and order management should provide you with your COGS.
It will be a good time to analyse and review your pricing strategy and make the necessary update.
What’s next? It’s now time to actually define your product pricing.
When it comes to pricing between retailers and wholesalers, markup pricing is the preferred industry method. Markup is the amount that is added to the cost of a product to determine the product resell pricing.
A product is marked up at each stage of the distribution.
For example: Sam, our women apparel distributor, sells the red dresses at $40 each to retailers. Retailers sell the dress at the recommended retail price of $90 to the end customer. It is a 120% markup over cost. Retailers and wholesalers might also say it is a 2.2 markup ratio (90 / 2.2 = 40).
Be careful not to confuse markup with margin. They are different. Margin or gross margin is always expressed as a percentage. It’s the difference between selling price and cost. The monetary amount between selling price and cost is the gross profit.
How to calculate your margin:
If we take Sam’s red dress example:
- margin = (40 - 17) / 40 *100 = 57.5%
- profit = 40-17 = $23
This simple calculator helps you find your markup and gross margin quickly:
The keystone markup is a common markup ratio that is often recommended to new small businesses. It is a 100% markup that translates into doubling the price: cost * 2 = selling price.
New businesses often use this formula by default when they don't really know where to start.
We now understand, however, that pricing can be much more complex than this. To ensure the right price, distributors and wholesalers should check competition, the industry's standard, and what the customer is willing to pay.
We highly recommend joining industry groups or online forums, for example, by doing a quick search on LinkedIn or Facebook. You can also search for associations or other professional networks to learn more about the best practices and habits of your chosen industry. For example, if you are selling beauty products, you could join a group called Cosmetics Distributors to learn from others and ask your questions.
Here are some benchmarks in top industries:
Apply markup for your product cost and then round up to next price point.
But wait—let's pause, here, for a second.
Remember, we discussed the different types of distributors at the beginning of this article?
Well, if you are profile #1, a distributor reselling existing brands, then it’s time to tweak your markup and adjust the pricing.
Pricing flexibility is reduced and so you must be vigilant with your markup, margin and cost. On one side, you have a set RRP that cannot be changed, and retailers will likely negotiate and buy only at a markup ratio similar to your competitors. On the other side, you have your cost and must make a margin out of this without much flexibility on the selling price.
Knowing your cost well will help you know what profit you can make, based on the 'required' retail markup. It is usually at that point you must find which items from the product line might not be worth selling.
Now you can apply your markup pricing and do the following calculation for each product:
Let's quickly go back to Sam’s red dress example:
- wholesale price = 17 + (17 * 135%) = 40 - Sam's markup is 135%. Profit is $23 and a margin of 57.5% as calculated above.
- retail price = 40 + (40 *120%) = 88 - Sam decides to set the RRP at $89.95. Retailers will make a margin of $49.95 or 60% on this item, with a markup of 120% for the retailers.
Now that you've defined your pricing, thanks to your markup, and you know your total cost (remember we asked you to keep it handy in the previous section), it’s time to check your business profitability.
Simply calculate the following for a given period:
How is Sam’s business doing? Remember, Sam's total estimated cost during the six-month period was $165,600.
As mentioned in the cost estimation, Sam expects to sell 500 red dresses at $40 wholesale price during the six-month period. Net sales for the red dresses is = 40 * 500 = 20,000.
Net sales for the entire product line = 180,000.
So, sam's profit is = 180,000 - 165,600 = $14,400.
This profit doesn't leave much room for error. We’re assuming that Sam sells as forecasted and doesn't carry any inventory at the end of the period.
In our survey, wholesalers mentioned that they usually create a mock-up of best- and worst-case scenarios to see how the profit is impacted. Their simulation helps them to foresee difficulties and potentially change some parts of the business to reduce risks.
Cost might be the most important factor to understand in your pricing strategy. Other features, however, can also help you set the right price—and they might even help you make a larger profit.
Here is what to look for and how you can benefit from setting an advanced pricing.
Our survey identified this useful tip: competition price analysis. You must know where your price sits next to your competitors. If your products are more expensive, the value (or perceived value) of your products or services must be higher. For example: the product could be higher quality, include a new technology, be hot on the market, due to trends or strong marketing, or maybe, as a distributor, you offer longer term payments; otherwise, it’s very unlikely that you’ll manage to sell your products—and the last thing you want is to be overstocked with products that don’t interest your market and at a price that cannot be reduced, due to your cost.
It’s also interesting to understand whether or not your product is scarce. The market can bear higher cost for scarce or unique product; however, demands must be high enough to be able to justify your price and allow you to go higher.
In conclusion, evaluate what the market will bear and be more or less within the price range of the market, depending on your product value.
Our survey highlighted another common pattern among successful wholesalers. They customize their pricing for different types of retailers. For example, they used a markup ratio of 100% for independent retailers, while they offered 110% to department stores.
Why the difference? To be more competitive and attractive for larger retailers, while increasing sales volume.
Deciding to sell your product wholesale in another market means new local dimensions.
Let’s check if you also need an advanced pricing for foreign resellers. You should follow these steps:
You can keep the same markup than your home country, or you might have to change it based on your competition analysis.
To penetrate another market can be costly, so it’s best to make sure you evaluate it properly before making any investment. It could also create new opportunities. For example, you could find markets in which retailers are requesting a markup lower than your home country, allowing you to make higher margins.
Once again, we highly recommend finding associations or groups, such as LinkedIn.
Costs always evolve and markets change, so pricing, likewise, should be regularly updated. Keep in mind that reducing prices are always easier than increasing them. Setting the price too low might help you to penetrate a market, but the risk of this practice is that customers will come to expect the wrong value, thus making it harder for you to sell to them again when you need to raise the price.
Pricing is definitely a ‘thought’ exercise that requires time and research. Its many variables include costs, competition, customers, industry benchmark, and product value. Price must cover your cost and profit. By now, you probably understand that finding your cost is key to set pricing for your business.
As promised, here is a summary of the step-by-step process to set your price:
The golden rule to remember is this: Always price for profit.
Any feedback? We'd love to hear from you. Share with us other variables or maybe a completely different method you use for finding the right price. Email us at contact@erplain.com.
