As a competitive wholesaler, having a reliable price strategy is critical to the success of your business.
No matter what products or goods you are selling, competitive pricing is key to operating a smooth, profitable business in any industry. Some wholesalers get overwhelmed by the thought of setting prices, especially if they are new to selling.
We’re here to break down the process of setting wholesale prices to make it easy to understand for you.
What is Wholesale Price?
Set by the wholesaler, the wholesale price is the predetermined price for products and goods being sold at the manufacturing level.
Since wholesalers buy in bulk, the wholesale price is the total amount of the cost to manufacture the products, along with the manufacturer’s profit margin. Setting the wholesale price involves the manufacturer and the wholesaler agreeing on a fair price that benefits both of their businesses.
The Challenges of Setting a Wholesale Price
Setting wholesale prices comes with its own challenges, especially if you’re just starting out in the space. Here are the two primary difficulties when it comes to determining wholesale prices for your products.
Setting the prices too high
If you set the prices of your goods too high, you run the risk of losing customers to competitors in the space. Retail customers will shop around and find prices for their budgets. Maintaining competitive pricing is the best way to ensure you build consistent, reliable relationships with retailers and a reputation for fair pricing and quality products.
Setting prices too low
Some wholesalers get caught up in striking their prices in order to boost sales. Unfortunately, this can often have the opposite effect. By aggressively lowering your prices, you’re sending the message that your product is not high quality.
In turn, retailers may look elsewhere to purchase their goods. In the long term, this can lead to a decrease in sales and a threat to your profits.
Wholesale vs. Retail Price
While wholesale prices are typically very low, retail prices are much higher in comparison. This is because the profit margin for retailers is much higher when you account for a storefront’s rent, utilities, employee salaries, and advertising fees.
Since the wholesaler is just the middleman, they don’t have to consider these factors when buying their product from the manufacturer. Because their expenses are much lower, wholesalers have much more flexibility in their pricing strategy.
Wholesalers charge a retail markup to the retailers who buy their products. Here’s an example:
If your wholesale business buys 1000 products for $4,000, each product will cost $4. They might then sell these items in batches of 50 to retailers for a price of $400. As such, the price per item has been raised to $8, which means the wholesaler can make a profit of $4,000 once they have moved the entire shipment.
The retail price can be defined as the final price of a product after being produced by a manufacturer, sold to a wholesaler, sold to a retailer, and finally, purchased by a consumer.
How to Calculate Wholesale Price
Generally speaking, the wholesale price should be 50% of the retail price to ensure your profit is substantial enough to cover operating costs.
A wholesale price calculator is the most efficient way to calculate wholesale price on any goods you purchase. There are pretty basic formulas you can use to determine your price strategy in a straightforward way.
Here’s what you need to do as you calculate wholesale prices on your products.
1. Calculate the cost of goods sold (COGS)
This cost includes the money you spent to obtain the products you’re selling, including purchasing the products from manufacturers and any costs related to receiving the items (shipping, etc.)
2. Calculate overhead costs
Overhead costs are fixed expenses that don’t necessarily relate to the products you’re purchasing. These costs are related to running a business and include things like rent for a warehouse to store your products, insurance, bills, inventory software, etc.
3. Figure out your preferred profit margin
Determining your profit margin depends on the product you’re selling, industry trends, and average pricing in the space. The profit margin is the percentage of each sale that you’ll take. We recommend doing research on the average price that retailers are willing to pay for products like yours to determine a fair and realistic profit margin.
Once you have these three figures, you can calculate your wholesale price for products using the following formula:
Cost of goods manufactured + overhead costs + profit margin = wholesale price
Considerations to Make When Setting a Wholesale Price
Researching the market you are operating in as you determine wholesale prices is vital. With your own profit margin in mind, you should figure out the following:
- Your customer base
- How much they’re spending on products like yours
- What your competitors are charging for these products
- Trends in the market (current and forecasted trends)
- The wholesale price index (how pricing has changed over time from a manufacturing standpoint)
Knowing as much as you can about the end customer and the market you’re operating in will help you determine fair but profitable prices.
Wholesale Pricing Methods
Here are the two most commonly used wholesale pricing methods.
To optimize ROI (return on investment), many wholesalers use the differentiated pricing strategy by calculating the demand for the products they’re selling.
This pricing strategy follows the belief that consumer demand and acceptance of the market will determine the price of a product. Demand and acceptance relate directly to current trends, seasonal items, and competition in the area.
Differentiated or demand pricing requires wholesalers to set a price that retailers will accept as fair, knowing they can still make a profit off what they’re paying.
Absorption pricing is the strategy and formula we mentioned above, where the total sum of all costs associated with the product is included in the wholesale price.
Absorption pricing is easy to calculate and is a great pricing strategy for wholesalers who are just beginning to sell in the market.
Launch a Successful Wholesale Business Today
Creating a successful business takes time, effort, patience, and commitment. With resources like this pricing strategy and many other guides from Ecwid, we’re empowering entrepreneurs to start the business they’ve always dreamt about.