Wholesale price is a term you might see often as a retail or eCommerce business owner. While this term sounds relatively simple, it’s often a lot more confusing to people on the outside looking in.
A wholesale price isn’t the same as a distribution or retail price.
A wholesale price reflects the cost of an item when it’s sold in bulk to larger groups or distributors, as opposed to the price that a consumer might get.
Understanding wholesale price, as well as the impact it has on your profit margin, the role it plays in dropshipping and more is crucial to running a successful business.
Today, we’re going to explore the definition of the wholesale pricing strategy and walk you through the process of calculating wholesale price too.
What Does Wholesale Price Mean?
The price charged by manufacturer, wholesalers, or distributors for a product or products. The wholesale price will typically be dramatically lower than the price that is charged in a retail outlet, this mark up in price providing the retailer with the profit he needs to keep his business running. Wholesale prices can be low because the wholesaler depends on volume to make their profit, and are usually more than happy to provide a small mark-up in price if it means they can sell more goods.
When buying in bulk the retailer can make use of lower wholesale prices than when buying single items. The price charged by the manufacturer will be lower than that charged by the distributor, making up the supply chain for any given product. Wholesale prices are usually only slightly marked up from the manufacturers price, compared with retail prices, which can often be double retail price or more.
How to Calculate Wholesale Price
Defining wholesale price can be an important part of building a successful business.
A lot of companies need to learn how to calculate wholesale pricing when they’re looking into things like MSRP, and how to make a profit in their eCommerce business. Knowing how to calculate wholesale price is also important for anyone considering investment in a dropshipping venture.
Customers today have numerous options when it comes to buying the same products from various sites. If you want to continue selling and gaining customer loyalty, then you need to make sure your wholesale business is choosing the right pricing strategy.
On the other hand, if you’re a small business looking for a wholesale supplier, understanding how to calculate wholesale pricing could mean that you can look for a better deal. If you know how much you should expect when searching for costs, you can focus on finding the lower price for your needs.
The Wholesale Pricing Formula
The easiest way to find the wholesale price of an item is to follow a specific formula.
The formula for a wholesale business is usually:
Wholesale price = Total cost price + Profit Margin
Once you know the intended wholesale price, you can calculate the manufacturer’s suggested retail price for the item. This makes it easier to discover the right price point for your online store or business. The MSRP formula is:
Wholesale price x 2 = Recommended Retail Price
In some cases, following this formula is difficult, because the wholesale price can sometimes become unsustainably low for some companies. When you consider the labor costs that go into designing a product for sale, a lower price could mean lower quality, or problems with production.
To make the formula more attractive, many business leaders recommend calculating the Total Cost Price of a product before anything else. This means discovering the total cost of all the expenses that go into producing the product. Usually, this involves the following factors:
- Labor costs: The costs associated with the workers taking money in exchange for their skills.
- Overhead expenses: The costs of packaging, shipping costs, manufacturing plants
- Raw materials: The amount spent on the primal matter for the manufacturing process
Common Wholesale Pricing Methods
The pricing methods associated with the wholesale price index differ depending on who you speak to. Because different companies take various approaches to wholesaling, there are different pricing methods that you can explore.
Here are just some of the methods that you can think about.
Absorption pricing
Absorption pricing means that all of the costs are absorbed into the final selling price. This ensures that everyone can make the appropriate amount of profit. There are various steps involved in calculating wholesale absorption prices.
- First, calculate the total cost price. That’s the Variable cost of the product + overhead expense, and administrative costs, divided by the number of units.
- Next, calculate the profit margin – this is the ratio between the net profit and revenue. Net profit is your revenue minus the cost.
- Finally, calculate the wholesale price by adding step 1 and step 2.
Here’s an example of absorption pricing.
Variable unit cost ($20) + ((Overhead expenses ($30,000), + Administrative costs ($20,00) / units (10,000) = $25.
Absorption pricing gives businesses a simple way to calculate wholesale price. It’s an easy formula that’s simple to understand and doesn’t require any complex calculations. As long as the inputted information in the formula is accurate, you can ensure a marginal profit.
However, when calculating the price with this method, the competitor aspect isn’t evident. You might not be able to keep the set price low, which means that it’s harder to find customers. You might also end up setting a price too low, which leads your customers to underestimate the product.
Differentiated Pricing
Differentiated pricing is a lot like pricing in an auction. In other words, it follows the law of demand. Different customers in unique situations pay specific prices for whatever they need. This means that your pricing constantly changes according to the situation.
Differentiated pricing can also deliver a higher profit margin when you follow one of two strategies. You can:
- Set a price higher than the average market value: In situations where there isn’t much competition, customers may need to buy products at higher prices. This is common in airports, beach, and ski resorts, and so on.
- At lower price per product: This results in selling products rapidly, which means that you end up getting a more significant profit overall. Cheap tickets and last-minute sales are often good for getting rid of stock.
It’s possible for wholesale dealers to apply differentiated pricing strategies when dealing with smaller batches of wholesale products. When this happens, the shipping charges subtract the profit. So to deal with this, you can use the two methods above. Customers buying in bulk might get extra discounts and coupons.
It’s also important to remember that no company can flourish without the satisfaction of the customer, which means that you need to be aware of your customer’s satisfaction at all times. Wholesalers need to set a price where customers believe they’re getting value for their money.
Value-Based Pricing
If you were following the experts in the wholesale market, you might use the cost-based pricing formula to figure out all of your expenses. Then, you would markup the price you pay to bring your products to market by a certain percentage. This would bring you to the final selling price you’re going to use.
There’s nothing wrong with this strategy. However, it can sometimes mean that you end up leaving too much money on the table. This often leads to a race to the bottom with your competitors. On the other hand, guess-work pricing, when equally wrong, could mean that you end up in a similarly awkward situation.
It’s likely that the price you copy from your competitors are based on the business costs that they are working with. This could be quite different to the costs that you face for your own company. If you’re not careful, following someone else’s strategy could leave you with a loss.
Sometimes, cost based pricing is the closest way to make sure that you’re correct in your assumptions., However, it fails to consider what your customers actually think your products are worth. This is what leads people to consider value based pricing.
Value based pricing is conducting research and finding out what the market will be willing to deliver in terms of demand. Once you do that, you can cross-check this information with the insight of your business costs.
How to Calculate Value-Based Pricing
Generally, it’s a good idea to position your product as a competitor somewhere in the top third of the market, unless you find that you’re dealing with an oversaturated space. If your industry is highly saturated, then you’re going to need to be a little more cautious.
If you’re in an industry where there’s a lot of room for competition, then you should always position yourself higher. This will allow for greater flexibility and bigger margins when you’re calculating and discounting prices later.
The first step in calculating value-based wholesale pricing is gathering customer feedback. This is crucially important when determining price. Getting your product into the hands of real people is crucial. You can also focus hard on finding out what you can do to improve the appearance of quality around your product.
The more customers believe that you offer a better quality than other retail stores, the higher your market price can be.
Once you’ve considered your customers and their perceptions of your company, the next stage is surveying the market and putting all of the correct competition data into the appropriate spreadsheet. The next step is to make a graph where each competing product should sit price-wise in the market from highest to lowest.
You can also make judgments about the position of other brands at this stage to draw further comparisons. Consider whether they’re going up-market or down-market. Is this solution high-value, or a commodity? Once you have an idea of the overall market, you can start to come up with an initial estimate for price based on where you think your product should sit.
Again, when you consider things like material costs and overhead costs, it’s important not to go too low with your retail pricing. You need to aim reasonably high so you can earn more flexibility later. Your strategy depends on your business; however, you might decide that you prefer to come in cheaper and work your way up depending on the perceptions of the market.
Cross-Checking Your Market Value
Remember, when you’re determining market value, the value based price is determined by the perceived value and market. You also need some of the right business sensibility. Cross-checking that you’ve covered the cost of production margin is crucial here.
Start by working backward using the cost-based formula to begin with. This will give you an insight into how much money you need to earn from your products at a minimum. It’s crucial to ensure that you’re making enough of a profit to keep your company off the ground.
Ideally, your price should be around 6 times the cost of production. 2 times is the minimum. Again, this is dependent on your business, where you hope to be in the market, and how cheaply you can get the product through to market. If you’re looking on pricing lower than 2 times your cost of production, you may find that difficult to maintain.
After cross-checking your value and ensuring that you can continue to afford to live and run your business with the price that you choose, then you can formulate your wholesale price more completely. Remember, your wholesale customers typically expect relatively significant discounts. They want to make as much of a profit as possible.
It's important to give your clients a good deal and make sure that they’re winning. However, at the end of the day, you are in business to make money. You’ll have the right margins built into your prices, even at your wholesale price-point. At approximately 6 time the cost of production, your retail price will have plenty of room to support your complete business.
Usually, it’s a good idea to sit at approximately 40% off the retail price for your wholesale selling. This should mean that you and your wholesale customers have more room to play around with their promotional strategies. If you’re thinking of having multiple pricing strategies at first to see what works best, don’t go beyond 50% off retail.
Wholesale Pricing: Questions and Considerations
There are various wholesale pricing strategies available depending on what you want to accomplish as a growing company. The key to success, as with all business is to determine an approach and strategy for your wholesale prices. Set your prices too low, and you might not be able to handle your business expenses. On the other hand, if you set your wholesale prices too high, your customers will switch over and take their purchases to your competition.
There are a lot of great ways to get started with pricing. Usually, absorption pricing is a good option for those who want to sell products that are new to the market. However, the absorption strategy doesn’t fully consider the presence of competitors.
For demand or differentiated pricing, don’t just focus on customer demand exclusively. There are other factors that can influence customer demand, including quality of product, position in the market, production cost, and more.
It’s also worth making sure that you understand some of the other questions that might occur when you’re exploring the wholesale market. While it isn’t legal to restrict the price of your wholesale customers’ products, you can allow them to sign an agreement which restricts the minimum price at which they can advertise a product.
Look at the promotions and retail locations around you to consider which steps you need to take. You might find marketing that asks people to call for pricing instead. Often, if you see this, then this means that there are restrictions on the amount that a company can advertise for.
Summary: Understanding Wholesale Price
Ultimately, wholesale price can be a complicated thing for any business owner to consider, particularly during the early stages of attempting to launch a profitable company. However, understanding how wholesale pricing works is essential for many entrepreneurs.
There are many different approaches to consider when determining wholesale and retail pricing. The important thing to keep in mind is that there isn’t a wrong way here. How you calculate your wholesale and retail price is fully dependent on you, your positioning, your market, and your future plans, among other things.
Take the time to assess your current business plan, as well as the competitors in your region. It’s important to learn everything you can about how each wholesale pricing strategy works according to your needs. Remember that the solution that works for one company might not necessarily work for other organisations, even those following a similar process.
It may also be important to keep track of your wholesale pricing methods and adapt or adjust them over time. This will allow for constant growth and development over time. Don’t be afraid to adjust as you go.
