Choosing how to price your products can be tricky, you want your products to be bought quickly while making a profit that works for your business. This can be especially challenging for businesses who sell products wholesale. There are actually three prices to consider, cost price, trade/wholesale price, and retail price.
Cost Price
Before you decide what price to set for your products, you have to determine how much it will cost you to produce the product first. This breakdown should include the time it takes you to produce, the materials you will need, marketing costs and overhead costs such as rent and transportation. This is an amount that you shouldn’t share with others as it’s up to you how much profit you want to receive from your business.
Wholesale Price
Wholesale pricing is what you charge retailers who will purchase your items in large quantities, this price is usually cheaper than retail price but still at a significant jump from the cost to produce. Even though you may make less on your products, you won’t have to do that work to get your products sold. The industry standard calculation for wholesale price tends to be two times the cost to produce your item or 30% to 50% profit margin, but there are a few other things to consider. For higher ticket items, it is common to mark up the wholesale price less than two times. If your business is just starting out, it might not make sense to double your cost price, you will also have to consider how this will eat into production costs. You will need to think about covering the cost of stock that doesn’t sell as well, you should factor that into the wholesale price too. It is ultimately up to you to decide how you will price your items, but it is imperative to consider how pricing will impact your success.
The following are different methods of wholesale pricing:
Keystone Pricing
The Keystone pricing method involves setting the retail price at double wholesale price. This is the most straightforward way to create your pricing strategy. The formula is: Wholesale Price = Retail Price / 2.
Absorption Pricing
Absorption pricing factors in all of the other considerations including associated costs and profit margins. The formula is: Wholesale Price = Cost Price + Profit Margin.
Differentiated Pricing
Differentiated pricing considers demand for a product. This involves different buyers paying different prices for the same product. This also includes selling products at a different price during different seasons, like selling swimsuits at a higher price during the summer, when demand for that type of item is higher.
Retail Price
The retail price is how much you charge consumers to purchase your products directly from you. The industry standard profit markup is two and a half to three times the cost to produce, or 55% to 65%. It can be helpful to consider the manufacturer suggested retail price (MSRP) for an item, which is the price the retailer suggests which prevents resellers from offering your product at a lower price than you. You can work backwards to determine your wholesale pricing as well, by setting the retail price first then choosing your ideal profit margin and choosing your wholesale price based on that. If you’re charging $70 retail, and you want to make a %50 profit, the formula is as follows: $70 (Retail Price) x (1 - 0.50) = $35 (Wholesale Price).
There are so many considerations when choosing how to price your products for your eCommerce site, but remember that it’s totally up to you to decide. If you’re looking for help with building a website, migrating eCommerce platforms, or attempting to tackle an eCommerce integration you don’t have the bandwidth to solve on your own, Virid can help. We’ve seen it all, and probably written a blog post about it too. Schedule your free consultation and get started today!
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