One of the most common questions in the world of sales is, “How do I calculate the right price?” This is particularly true when dealing with wholesale.
The challenge with wholesale pricing mostly revolves around balance — how to choose the right price that allows you to move inventory quickly, at a price customers love, that still allows for both you and them to profit.
It’s an issue a lot of wholesalers struggle with, but the good news is with a little bit of work (and math), you can easily figure out how to calculate wholesale prices that will keep everyone happy.
So, grab your calculator and get ready to do some math, because we’re going to learn how to determine wholesale prices in today’s post.
How is Wholesale Inventory Priced?
At the most basic level, wholesale inventory is generally priced at 50% of the Manufacturer’s Suggested Retail Price (MSRP). Wholesalers will often tell buyers what the MSRP (also referred to as the Recommended Retail Price in some instances) is, and then retailers will price the item for customers with that guideline in mind.
Sometimes, a retailer will charge less than the MSRP to move product or as part of a promotion (thus lowering their profit margin), but overall this is the basic way inventory has been priced for years. If you want to know what a retailer paid for the item you’re buying off the store shelf, take that price and divide it in half and you’re in the ballpark.
For example, if a hat costs $30 at retail, you can guess the store essentially paid $15 for each one of those hats they have in inventory.
This method is commonly referred to as keystone pricing. It’s been used for years because it’s simple and it easily allows retailers to know what their margins are.
However, it’s not without issues. For starters, the keystone pricing formula never really takes external factors into consideration. While the hat in our example may command a $30 price in New York City, that might be exorbitantly expensive in a small town in Iowa. If you’re buying wholesale inventory for stores in multiple regions, keystone pricing may not be effective or feasible.
So, what does a business do when they have stores across the country or around the globe? They try some of these other pricing methods.
When it comes to how to calculate retail price from wholesale and markup, keystone pricing is just one way to solve your pricing issues. You can also consider cost-based pricing.
Keystone pricing is an example of cost-based pricing, but it’s not the only way to apply this pricing methodology to your products.
In a general cost-based pricing scenario, you determine a retail price for products based on a number of factors:
- Overhead costs
- Administrative costs
- Employee costs
- Rent/Utility costs
These are just a few of the things that should be factored in when considering a cost-based pricing approach. Using these factors, you can determine what an acceptable profit margin is and do the math from there to set the price.
What gets less consideration in a cost-based pricing methodology is the price your competitors are charging for the same product. This is one of the potential cons of using this approach, which can be a very important consideration if you’re in a highly competitive field.
Next up on our list is bundle pricing. This approach is not applicable for every business, but if you sell a suite of products that can be assembled into a package offering, this approach could be beneficial for you.
One of the big advantages of bundle pricing is that it tends to benefit the seller, whereas a single product a la carte pricing set up is more favorable to buyers. The bundle pricing method allows for wiggle room on the seller’s end as there’s more potential to manipulate profit margins.
The other upside of bundling is that the customer often perceives it as beneficial. Many of us already bundle services (your phone, cable, and internet is a common example), so we’re accustomed to this practice and accept the idea that it can save us money.
Where cost-based pricing isn’t concerned with what your competition is selling products for, loss-lead pricing is very focused on that metric when it comes to setting your own price.
Major retailers like Walmart and Amazon regularly use loss-lead pricing to entice customers to make purchases with the understanding those loss-leader items get them into the store (or onto the website), where they’ll invariably buy more things.
The idea behind loss-lead pricing is that you sell a product at a loss. This might sound crazy, but as mentioned above, the main goal is to increase the bottom line by enticing customers to buy other products along with the great deal they just received.
Loss-lead pricing is a fantastic way to beat your competition at their own game, but it does come with caveats.
Here are the major cons of applying this methodology to your pricing:
- Requires a sound and robust pricing strategy
- Can be dangerous if you’re not prepared to take potential losses
That being said, if your business is in a position to tackle these challenges, loss-lead pricing can potentially boost your bottom line and make life difficult for your competitors.
As the name suggests, the idea behind competition pricing is simply monitoring what your competition is charging and mirroring or beating it.
We see competition pricing quite often in the grocery industry as chains compete to keep prices close so you don’t switch over to the competition. The same strategy can apply to your industry.
The one potential downside to this approach is that your competition might have a better margin on the same items, which puts you at a disadvantage when matching their price. This is something you should consider before employing this pricing approach.
Our final method is absorption pricing, and it’s fairly similar to the cost-based pricing approach we discussed earlier.
If you’re using absorption pricing to set your prices, your final product price will be determined by a number of factors, including:
- Variable costs
- Fixed costs
You can actually use this handy formula to figure out what your absorption cost pricing might be for a specific item:
Total price = Variable Product Cost + ((overhead expenses + administrative costs)/number of units).
If you’re wondering what “variable product cost” is, it’s basically a fluctuating price point for a product determined by changes in the market. You may have a product or material that’s always the same price 99% of the time – meaning you can just plug in the current product cost and go from there.
Absorption pricing’s name springs from the fact that all of these costs are absorbed into the final price.
Like everything else on the list, absorption pricing has some pros and cons you should consider:
- Does not consider external factors
- Variables can affect overall accuracy
All of these approaches can be manipulated to fit your business, but you should also consider some additional things when setting pricing.
Some types of products have easier to manipulate margins than others. Bigger ticket items can often have their MSRP pushed beyond the two times wholesale price in order to generate a better profit margin without major issues.
However, if you sell smaller ticket items, there’s often less wiggle room. Consider the product when setting your price.
Another consideration is your location. Are you a single storefront? Are you a global company with multiple commerce channels? These things matter.
If you run a business where you’re the only game in town, then you have a lot more leeway when it comes to increasing your margin. If you’re in an area where there’s a lot of competition and options, you’ll want to select a suitable pricing method.
The key takeaway here is that while math is great and plays an important role in determining pricing, there are other additional factors to consider as well.
5 Steps to Set Prices for Wholesale and Retail
Now that we’ve talked about the philosophies behind determining retail and wholesale prices, let’s shift gears and discuss four ways to both set your wholesale price and how to calculate retail prices from wholesale and markup.
1. Market Research
The first step in any pricing scenario is to research the market.
Are you a high-end brand? An economy brand? Somewhere in between? Who are you trying to sell to? These are just some of the questions you need concrete answers to before you begin doing any actual pricing.
What you find here will have a major impact on how you proceed through the next steps. If you know your market, you’ll have a much better idea as to whether or not the lowest price is a benefit or a detriment, you’ll have insights into your competition, and just a general sense of who you’re selling to.
This is one of the most important steps in your pricing plan. Don’t skimp on market research.
2. Calculate the Cost of Manufactured Goods
For your next step, you’ll need to calculate the cost of goods manufactured (COGM).
If you’re not sure what the cost of goods manufactured is, here’s a simple definition:
COGM is the total cost of making or purchasing a product. This includes everything: materials, labor, shipping, handling, and so on.
Here’s the formula you’ll need to find this number:
Total Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods Manufactured
As a sample, let’s say we have the following costs:
Total material cost: $200
Total labor cost: $40
Additional costs and overhead: $100
When we add those up, the cost of goods manufactured equals $340.
3. Set the Wholesale Price
Now that we know the cost of goods manufactured, we can calculate our wholesale price.
The simplest way to do this is to take the cost of goods manufactured and multiply it by two. By doing this, you’re guaranteed at least a 50% profit margin.
Of course, this is just a general guideline – you can adjust this based on your industry, your competition and their prices, your desired profit margin, or how quickly you want to turn over inventory.
When you’ve done your market research, you’ll be able to make these decisions with more certainty because you already have an understanding of the landscape around you.
4. Set the MSRP
Earlier, we talked about the manufacturer’s suggested retail price (MSRP) and how wholesalers will often suggest that price to the retailers they sell to so that retailers understand what their profit margins will be.
And generally speaking, this number will be two times the wholesale price.
However, that’s just a basic guideline. As we discussed earlier, that guideline may not always be the right number for your business.
One of the biggest reasons for using the MSRP is tolet your retail partners know a baseline price so they’re not undercutting you – but sometimes they’ll want to go with a less than double wholesale price formula.
Here’s how to figure it.
Wholesale Price / (1 – Markup Percentage) = Retail Price
As an example, let’s assume the following: we have a $50 wholesale price item that we want to mark up at 60% instead of 100%.
So the calculation would look like this:
$50/(1 – .60) = $125
It’s really just a matter of plugging in your variables and doing some simple math to get the number. The real trick here is figuring out the right markup percentage to use.
You can get a good idea of what your market will sustain by comparing with your competitors and testing things out. Remember, the key goal here is to come up with a price that satisfies your need to make a profit (unless you’re using the loss leader strategy) while giving your customers a good price.
You can also play around with this formula to figure out what you should pay as far as a wholesale price if you want to turn a certain percentage of profit margin.
Here’s the formula:
Retail Price x (1 – Retail Margin) = Wholesale Price
Then you can use this formula to figure your target cost price:
Wholesale Price x (1 – Wholesale Margin) = Target Cost Price
As you can see, it’s all the same basic formula, but you can figure out a lot of different price points by playing around with it to find the price points that make the most sense for your business.
5. Set Two Price Points
If you’re in both the business of wholesaling your items to other companies and selling at retail to customers, it makes sense that you’ll want to create separate price points for each type of transaction to make sure you’re maximizing your profit.
This essentially means you’ll have two price points, one for retail and one you only offer to wholesalers.
The goal here is to entice businesses into buying in bulk by offering them a discounted rate on large orders while still hitting an acceptable profit margin on individual sales at retail.
Again, you can use the formulas above to help you figure out your wholesale margin, your MSRP, and your direct-to-consumer retail pricing.
Determining how to appropriately price your items is a challenge nearly every business wrestles with at one point or another. Whether it’s wholesale, retail, or both, determining a proper pricing structure that both satisfies your customers and allows you to make a profit is something you must solve.
Fortunately, it’s not nearly as challenging as you might have been led to believe.
A lot of understanding on how to price your items comes down to simple math. Once you know what your items cost to produce and what kind of margin you want to make, it’s really just a matter of plugging those numbers into simple formulas to get the answer.
However, there’s more to a good pricing strategy than just math.
Before you start plugging in numbers and setting up spreadsheets, you’ll need to do your homework. Select what kind of pricing system you think will work best for your company, then get busy researching what your competitors are doing, figuring out what your customers want, and what kind of pricing the products you sell demand.
Once you’ve done all that, you’ll not only have a better understanding of how to structure your pricing to appeal to your perfect customer base, but you’ll also come away with a broader understanding of your business and how it fits into the greater marketplace that is your industry.
That’s the kind of information that can really help you take your business to the next level.
The best part of all? Inventory management software can make solving all of your pricing and supply issues much more manageable. If you’re tired of spreadsheets and tracking things manually, today’s software solutions can simplify your pricing process at the push of a button.
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