There are big differences you need to know about wholesale price vs retail price but first, let me first start with a disclaimer: any discussion on pricing is always subjective and it is hard to apply a single formula across the board for pricing of products.
Pricing strategy is highly dependent on your business model and the product itself as well as costs to produce those products.
Without question you need to your products to make a profit, so the issue is how to calculate wholesale price and retail price for the same set of products in a way that will generate profits under both scenarios.
While there is certainly some rational thinking involved in it, some of the pricing may need to be based on creative thinking as well as well as the market demand, your retailers and other factors outside of your control. This post gives you tips that you can consider to help you price your products for wholesale and retail properly. Always keep in mind that building a sustainable business model without a working pricing strategy in place is next to impossible for you long term goals.
How To Calculate Wholesale Price From Retail Price
If you’ve been in business, you should already have a retail price for products in place and are now working the equation backwards as you explore the world of wholesale pricing. If not, I suggest going back to the basics to calculate retail prices to ensure profit margins. And for that you can apply a simple formula:
Materials Cost + (Labour Invested x How Much You Value Time) + Overheads (shipping, packaging, etc.) + Other Overheads (Rent, Fixed Costs, Electricity, etc) + Profit Margin = Retail Price
Just keep in mind not to exaggerate certain costs, otherwise you will end up with astronomical numbers that don’t work. Doing a market study to see what your competition is doing is crucial and not a part of any formula anyone will ever give you. Be realistic about your hourly rates. Don’t forget to include overheads like packaging of your products as a part of the cost of the product. You will be surprised how many businesses forget to factor in these small things, and only in the long run realise they are running in the red as far as their books are concerned. But we are here to discuss wholesale pricing and how to come up with it.
Knowing how to calculate wholesale pricing from retail price is very important because you can’t change your retail pricing model because you’ve decided to introduce wholesale distribution now.
Most pricing experts would see this situation a bit backwards because the ideal strategy is to follow a formula which goes something like this:
Retail Price x 0.6 = Wholesale Price (40% off retail)
Value vs. Cost
Too many sellers think low prices mean selling more. Are you one of them? Pricing low could mean pricing yourself out of a sale. Your price communicates your product’s value to the consumer and is a major factor in your success.
How do you choose your prices? Do you look at competitors’ prices and chose a comparable price, or do you aim lower? Do you factor in labour, materials and profit? Do you keep your prices low because you’re afraid pricing higher will mean selling less?
Instead of asking yourself what an item is worth, you might tend to ask what will consumers pay? In other words the price point for your items should not solely be based on cost, but also on value. While a cost based price is easier to arrive at, since it involves calculating the cost of materials, labour and other overheads; value based pricing is trickier since it involves market research. It isn’t easy to determine or measure the “value” of goods. This is why checking out your competition is crucial.
How To Price Your Items
Aside from the formulas mentioned above, this formula below is the simplest one you can use:
(Labour + Materials) x 2 = Wholesale price
The x2 takes into account your profit and overhead as well, so you’re covered. As far as what your labour costs should be, think about how much you want to pay yourself per hour or how much you would pay someone per hour to make your products and divide that number by how many products you think you can make per hour. If an hourly wage is not what you want to measure, then think about how much salary would want to pay yourself per month (or per year) and use that number instead of the hourly rate.
If you plan on selling your products to other retail stores, you’ll have to take that into account. Your retailers will usually mark up your wholesale price at least 2 times.
To set your retail price, use this formula:
Wholesale Price x 2 = Retail Price (or MSRP)
So if an item you make costs you $2 in materials, and you pay yourself $15 for the half hour it takes to make them, then your wholesale price is ($15 + $2) x 2= $34 and your retail price is ($34 x $2) = $68.
But do remember this, this is a very subjective formula, as strange as that sounds. It all depends on your business model, your target audience and your items. For example, you can’t apply the same logic to art prints that you do to jewellery. Even within the realm of jewellery, you can’t compare beads to stones. Some people tend to quadruple their costs to arrive at a higher wholesale price. Do some maths using a set labour and material cost, but with varying profit margin percentages. See what numbers you arrive at and see what your competition is doing. Consider these formulas as ways to ensure that you are not running into losses.