I know we’ve written about wholesale pricing before, but we still see many retailers struggling to price for profit, especially when they’re moving from pure retail to wholesale. Sometimes, a retail price that offers retailers a comfortable profit becomes too low when it’s cut into half for wholesale pricing.
After all, the most common way to calculate your wholesale price is by simply dividing your retail price by half. Ideally, your costs should only take up 25% of your retail price, but real life is rarely that simple. Your costs are made up of overhead costs, which are your ongoing operating expenses, along with material costs that include raw materials and the finished products that make up your inventory.
So if your wholesale price leaves you with little profits and you’re looking for an alternative to the 50% one-size-fits-all approach, you might want to try implementing absorption pricing or differentiated pricing.
Absorption pricing works great when you’re trying to figure out your wholesale price, as it ensures you earn a certain profit margin on every piece.
There are five stages to calculating your wholesale price through absorption pricing:
- Production costs from your materials and labor.
- Overhead expenses are the ongoing costs that come with operating a business like maintaining storage facilities, insurance, and salaries.
- Profit margin
- Calculate your wholesale price by adding up stages 1 +2 + 3
- To get your RRP (Recommended Retail Price), multiply your wholesale price by 2 or 2.5 to get your retail price.
Differentiated pricingIf you’re constantly dealing with small batches of wholesale orders and you find yourself your shipping costs eating into your profits, you might want to look into implementing differentiated wholesale pricing.
Differentiated wholesale pricing means that your wholesale pricing changes with the number of products ordered, letting you reward bulk buyers while maintaining a fair profit margin when dealing with smaller buyers.
- 1 - 5 items: 10% off retail price
- 6 - 19 items: 25% off retail price
- 20 - 49 items: 40% off retail price
- 50+ items: 50% off retail price
Differentiated pricing works a little like Minimum Order Quantities, in the sense that it allows you to make up for reduced prices by selling larger volumes. As seen in the above breakdown of different price-break discounts, a customer would need to purchase more than 50 items in order to enjoy 50% off retail price.
How to raise your prices and keep your customers happy
Sell off your existing stock and start anewThis measure might sound a little extreme, but it works if you regularly release new collections for your brand. This way, once you finish selling off your existing inventory, you’ll can release new collections with higher prices, while clearing out your inventory.
Also, by announcing that you’ll be raising prices for subsequent collections, you should also enjoy a surge in sales as customers are motivated to place more purchase orders due to the pending price increase.
Be honest and explainDon’t let your customers think that you are increasing prices for a better profit margin. Instead, offer a breakdown of your costs and how these costs have increased over the years. Ultimately, you need to raise your prices in order to continue offering quality products to your customers, so just tell them the truth.
Pricing for wholesale is a challenge for many businesses, especially established retailers that are looking to add wholesale to their lists of channels. We'd like to make that transition easier for businesses, so do let us know if there any tools you’d like that would ease the transition to wholesale for your business.