Knowing how to calculate wholesale price and retail price is necessary to run a profitable business. Doing so correctly involves cost and markup strategies. If not done carefully, pricing errors could either lead to diminished profits or overpriced goods that deter customers.
According to the National Retail Federation (NRF), calculating wholesale price involves summing up production costs and desired profit. Retail price is determined by adding a markup to the wholesale price. It's simple, yet critical for a successful sales strategy. Accurate calculations ensure profits are maximized and products are competitively priced.
We’ll go over how price planning effects your product’s overall distribution strategy and how working with the right professionals can make a difference.
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Setting the right price for your product begins at the wholesale level. This is the point at which goods are bought and sold in bulk amounts.
In terms of distribution, the pricing of wholesale products is the foundation of every pricing decision that follows.
In this section, we'll break wholesale costs into three areas:
These will serve as the basis for exploring retail pricing at the customer level.
Wholesale pricing is the cost that manufacturers or distributors charge retailers or other business buyers for large quantities of goods.
In simpler terms, someone who buys wholesale is mostly looking to be able to re-sell those products. To improve profits down the line, they are going to want to get the best price to improve their rate of return.
Whether you get your product straight from the factory or in a business to business (B2B) transaction, you’re looking for the lowest price you can per unit.
This becomes part of the base cost of the product you are selling. Base cost refers to the amount of money that’s paid to cover initial production and distribution.
If you plan on selling wholesale, the price you charge other businesses needs to cover some basics on your end. However, pricing needs to be set in a way that allows wholesale buyers to still make a profit.
In essence, you’re operating under the knowledge that someone is going to be able to sell your products for more. That’s okay – it’s just part of doing business when you’re on the wholesale end of the supply chain.
Focus on making sure that what you do charge can cover the following costs:
It’s also worth noting that your product might be another buyer’s raw material. Perhaps you sell textiles that another company uses to make clothing, or source lumber for construction companies. The type of wholesale business you run will impact your pricing strategies.
If you are the one using raw material to make another product, then the base cost of what you sell is going to be more complex. For instance, if you are making purses, you may need to purchase leather, accessories, lining material, and more.
To get the base cost, you’ll need to figure out the value of each part of the raw material going into the product. We’ll look at a simplified breakdown as an example.
|Buckles and accessories||$3|
In this case, the base price only includes the materials used. It’s only a starting point. For a better breakdown, you would also need to consider the cost of machinery and labor used to actually put each product together.
Take a close look at how your company fits in the supply chain. Pricing strategy is going to be impacted by who relies on you and who your company relies on as well.
No matter where a company exists along the supply chain, the general plan is usually to exist long-term and makes some money at the same time.
The right strategy helps businesses be successful whether they are producing the basic building blocks or selling the final product to consumers.
Strategy helps with four essentials of business:
Wholesale pricing might seem straightforward. However, it forms a pivotal part of your broader business and pricing strategy. It ends up influencing your bottom line, and plays a part in how your products are thought of in the market.
The other side of the equation is retail pricing. This is the actual price your customers see and will need to pay. Setting this is just as important as understanding wholesale pricing.
We’ll show what retail pricing means for both the retailer and the consumer, and how to optimize it for profitability and market positioning.
Retail pricing is the price that your customers pay for a single unit of your product. On the retailer's side, this price includes the original wholesale cost of the product plus a markup to cover operating expenses and profit.
Markup is part of the business, and even consumers understand it to an extent. They are paying for an easily accessed finished product, an aspect of consumerism that companies do put a price on.
For the consumer, the retail price is the final price they see on the tag – or the final amount they end up paying to take a product home. As the retailer, part of your distribution strategy is finding just the right price point to make a profit and keep your customers happy.
The main difference between wholesale and retail prices is the number of products purchased, and the markup added by retailers.
If you are buying finished products to sell as is, there is a high probability that it comes with a Manufacturer’s Suggested Retail Price (MSRP). However, as the name implies, it is a suggested price and the manufacturer has no way to enforce it.
What a business pays wholesale for products is always going to be less than what they sell the product for. It has to be that way or they wouldn’t make a profit.
Wholesale products are also going to be priced and sold as bulk orders. In terms of numbers, each product is measured and valued according to industry standards. Construction and building supply store may purchase sand or gravel by the pound, but sell it by bag.
Retail pricing also needs to cover things such as:
These costs vary by industry, but every company wants to make sure they are covered. Fast selling products are going to reduce things like storage fees. The longer a retailer has to hang on to a product, the less profit is made from it.
Pricing things correctly is a balancing act. Prices that are too high run the risk of scaring away customers. Making the price too low might erode your profits or undervalue the product.
To find the sweet spot for maximum number of sales, remember the following four points:
The first step to setting a profitable price is knowing exactly what it costs to get your product to the market. This means calculating costs for production, distribution, and marketing needs.
Know what your target audience is willing or able to pay for each product. Find time to study their needs, preferences, and shopping habits. This affects their perceived value of your product.
The retail industry is fairly cutthroat, so expect competition. View it positively, and see what similar products selling for. Their prices can serve as a benchmark for figuring out your own pricing.
Finding the right price usually doesn’t happen overnight. It’s not a set-it-and-forget-it process. Test different price points, see how your market responds. Markets can also change, so be ready to adjust as needed.
You’ll know the price is right when there is a steady balance between incoming and outgoing product. Products flying off the shelves seems like a great problem, but it could also be a sign that you need to raise your prices.
We’ve reviewed the importance of pricing and many of the factors that impact it. Whether the business is focused on wholesale or retail, there are a number of pricing strategies and formulas that can help you to a final number.
Formulas for a wholesale business are going to focus on mass distribution. Remember, these are products being sold in bulk, your pricing calculator needs to account for the buyer to also sell the product for a profit.
There are three common wholesale pricing methods:
When setting the wholesale price, no matter what strategy you end up with, always keep careful track of your own expenses. Markets change, so expect those changes to impact your pricing choices for distribution.
Retail businesses have the task of setting the final selling price for the consumer. While there is the general understanding that this price is higher than wholesale, there is a limit. Products at a lower price can sometimes sell in greater numbers and make more profit, even at the retail level.
When selling per unit and not in bulk, there are times when multiple strategies will be used at once.
Every formula has its pros and cons. The trick lies in choosing the best for your business, based on your costs, competition, and customers.
Crafting an effective pricing strategy can be complex, which is why seeking out professional advice is a good idea.
Product distribution professionals can offer insights, strategies, and guidance to ensure your pricing strategy drives profitability and growth. Maybe you need higher prices to account for growing demand or high material costs.
When you’re just starting out, learning how to calculate wholesale price and retail price is just another part of running a business. That doesn’t mean you can’t get some help.
If you need help learning how to calculate wholesale price and retail price, you’re already taking the right steps. Pricing strategy can make or break your business. Navigating through all the different pricing methods and finding the best one for your product isn't easy.
At Product Distribution and Strategy, our experienced consultants can help you devise a robust pricing strategy tailored to your specific business needs.
Set up a 30 minute, 1-on-1 consulting session with one of our distribution specialists to get the answers you need.