Are you a retailer who’s considering selling your goods in bulk? Or are you a wholesaler unsure how to price your items? Whatever your current situation, setting the right wholesale rate can boost your business’s chances of succeeding.
The fact is, it’s crucial for every wholesaler to learn how to calculate wholesale rate from retail rate.
However, before you set about doing your calculations, understand that there’s no one-size-fits-all solution to your pricing concerns. After all, pricing strategy depends on the nature of your business as well as your current and future situation. Obviously, you need to price your goods before you can sell them, but you’ll need to determine your wholesale rates in a way that’ll earn you a hefty profit.
While the art of pricing is undoubtedly subjective, it also encompasses elements of scientific reasoning. For this reason, today’s article will help you choose the right pricing model strategy to set wholesale prices for your products.
Wholesale Rate: What Is It And Why Is It Important?
Before exploring the various pricing models you can use, we must first define what wholesale rates are.
Wholesale rate, also referred to as wholesale price, is the price set for products when they’re sold in larger quantities to businesses or individuals who intend to resell them. Or, as Shopify puts it:
Wholesale pricing is what you charge retailers who buy products in large volumes.
There’s more to it than that, however.
Typically, the wholesale rate is the discounted rate offered to buyers who purchase in bulk. This lets businesses acquire goods at a lower cost per unit, which in turn allows them to make a profit when they sell those products at higher retail prices to end consumers.
Setting the right wholesale rates for your business is crucial as it can directly impact your profitability and business sustainability. By implementing strategic wholesale pricing, you ensure that your costs are adequately covered, and you maintain a healthy profit margin.
Furthermore, setting the right wholesale rates enables you to attract more customers, build stronger connections with your existing wholesale customer base, and remain competitive in your industry.
If you want to set wholesale rates for your online store, we suggest downloading and installing Wholesale Prices. This WooCommerce plugin sets the wholesale prices for your entire product range that only registered wholesale customers can see and have access to.
Also, here’s a free wholesale pricing calculator if you want a quick fix to your wholesale pricing dilemma:
However, before doing all that, we suggest reading the rest of this post to determine what’s best for your enterprise! In this guide, we share four strategies you can explore to determine the most suitable wholesale rates for your offered products.
Calculating Wholesale Rate Using Cost-Based Pricing
Cost-based pricing is a pricing model strategy that takes into account the following factors when setting wholesale rates:
- Cost of materials (raw materials, tools)
- Labor expenses
- Overhead expenses
- Profit margin
This strategy provides a mathematically ideal approach to determining wholesale rates and protecting your profit margins. By factoring in all the expenses associated with the production of goods, you can calculate the wholesale rate using this formula:
Wholesale Price = Cost of Materials + (Labour Invested x How Much You Value Time) + Other Overheads (Rent, Fixed Costs, Electricity, Etc.) + Profit Margin
Aeolidia suggests a slight tweak to this concept that lets you calculate both wholesale price and retail price:
When planning your pricing, you first need to come up with a wholesale price that pays you for your time, labor, materials, overhead, employees, etc. This price should have profit built into it so that you are able to not only stay afloat but grow your business. Once you’ve set your wholesale price, double that price to create your suggested retail price. When selling the product yourself on an e-commerce site, use that retail price yourself.
Is cost-based pricing right for your business?
Using cost-based pricing can help ensure that all your expenses are accounted for, allowing you to protect your profit margins. In fact, most experts would recommend using this pricing model strategy to factor in all your expenses, then marking up that price by a certain percentage to arrive at your final selling price.
However, cost-based pricing can cause you to leave too much money on the table. Furthermore, it often results in a race to the bottom with your competitors.
In addition, this method doesn’t take buyer sentiment into account, which can be a huge problem. After all, the market’s perception of your products’ worth can be an essential factor in the calculation of wholesale rates.
Calculating Wholesale Rate Using Guesswork Pricing
Guesswork pricing is a simplified approach that business owners use to determine wholesale rates. Instead of making extensive mathematical calculations, they either pluck a number out of the air or set a price that’s close to what the competition charges for similar products. The most common formula used is:
Wholesale Price = Retail Price x 0.6
This means the wholesale price is 40% off the retail price.
Because this pricing model strategy involves a certain level of estimation rather than a precise calculation, we call it “guesswork pricing.”
Is guesswork pricing right for your business?
Guesswork pricing is an easier and less time-consuming pricing model strategy. It provides a quicker way to determine wholesale rates by mirroring the pricing strategies of competitors.
However, it can result in pricing that’s inappropriate for your business. Notably, there’s a good chance that the prices you’re copying from your competitors are based on their business expenses, which can be extremely different from yours.
As such, guesswork pricing is mathematically dangerous and could even result in your business gaining little to no profit.
So, are there any other options?
As mentioned in the introduction, pricing is subjective. However, this has nothing to do with your subjectiveness as the business owner but with the customers’.
Therefore, when determining a price for a product for sale (whether it be for retail or wholesale), we recommend using what’s often referred to as “value-based pricing”, which we discuss in detail in the next section.
Calculating Wholesale Rate Using Value-Based Pricing
A type of pricing model strategy, value-based pricing involves conducting thorough research to determine the price the market is willing to pay for a product. This insight is then cross-checked with the costs incurred by your business. By aligning market demand with your business costs, value-based pricing aims to establish a pricing strategy that optimizes profitability while delivering perceived value to customers.
In short, this method combines the market’s insights with your knowledge of your business costs to determine your product’s wholesale rate.
However, before you use value-based pricing to determine your product’s wholesale rate, we highly recommend positioning said product somewhere in the top third of the market. This allows for bigger profit margins and more flexibility when it comes to discounting prices later. The only time not to employ this strategy is when the top third of the market is already oversaturated with other businesses trying to do the same thing.
With that in mind, here are the steps you must take to use value-based pricing.
Step 1: Gather customer feedback
Customer feedback is essential in determining wholesale rates. Therefore, give real consumers the opportunity to experience your product first-hand.
Place significant emphasis on understanding how to enhance the perceived quality of your product. Remember: higher quality often translates to a higher price and improved profit margins.
Step 2: Audit the competition
Conduct a thorough market survey and put all the data you’ve gathered about your competitors in a spreadsheet.
Create a graph that shows where each competing product sits price-wise in the market from lowest to highest.
Assess the “value” positioning of competing products on the graph, as this can help you make further comparisons. Determine whether they’re positioned in the high-value or commodity segment and whether they’re targeting up-market or down-market.
Based on your understanding of the overall market, develop an initial pricing estimate by considering where your product falls in terms of value.
While we recommend aiming for the top third as it offers greater flexibility, pricing strategy remains subjective. Your approach may involve positioning your product as a more affordable commodity, so consider incorporating this into your pricing considerations.
By the end of this step, you should have a rough price range for your product.
Step 3: Cross-check against the cost of production
While value-based pricing is influenced by market perception and perceived value, it’s important to balance it with business sensibility. Verify that your pricing covers the cost of production so that you can ensure a reasonable profit margin.
If necessary, you can use the cost-based formula to work backward and establish the minimum price required to cover production costs. Assess the viability of the price you’re considering.
Ideally, your price should be around double the cost of production. If the market allows for a higher price, that would be even more advantageous.
Again, this will depend on your business, your desired market positioning, and your ability to bring the product to market cost-effectively.
Also, keep in mind that pricing below double the cost of production may prove challenging to sustain. To address this issue, explore opportunities to reduce costs or enhance perceived value.
Step 4: Formulate your wholesale rate
When catering to wholesale customers, it’s crucial to offer substantial discounts that allow them to generate profits as well. Therefore, ensure you offer a great deal that will be a win for your wholesale customers.
However, at the end of the day, you’re in this business to make money. Thus, your pricing structure must include profit margins, even at the wholesale price point.
With a retail price set at 2 to 4 times the cost of production, there is ample room to support the wholesale business.
If possible, we recommend setting a wholesale price of around 40% off the retail price. This allows both you and your wholesale customers to have up to 30% off the retail price that you can use for promotional activities.
If you’re considering having multiple levels of wholesale, avoid exceeding a discount of 50% off the retail price. Additionally, ensure that you have minimum order quantities in place to cover unit costs, fixed operating expenses, and labor costs effectively.
Is value-based pricing right for your business?
Value-based pricing can be an effective pricing model to determine your wholesale rates. Since this strategy factors the value your customers place on your products, you can set wholesale rates that resonate with their expectations. This can lead to increased customer satisfaction and loyalty.
While this is the case, it’s critical to consider if it aligns with your business goals and available resources. Implementing a value-based approach will require in-depth customer research and analysis of their perceived value. It can also require continuous market monitoring to ensure your pricing remains competitive.
Ultimately, value-based pricing can provide opportunities for differentiation and customer-centric pricing, but it’s essential to factor in the complexity and resources required on your end to ensure its long-term effectiveness.
Calculating Wholesale Rate Using Simplified Wholesale Pricing
Simplified wholesale pricing means setting fixed wholesale prices for your product range. There is a rationale behind this approach, which we’ll explore as we explore the benefits of implementing simplified wholesale pricing.
If you’re offering tiered or volume-based pricing, where the wholesale rate decreases as bulk purchases grow larger, you should make the wholesale pricing as simple as possible so that it is comprehensible to everyone involved.
According to NYTimes:
Simplified pricing aims to eliminate the system of markdowns buyers have confronted for years. With it, retailers seek to re-establish credibility in the wake of a former practice of sales versus regular prices.
Is simplified wholesale pricing right for your business?
Below are the advantages you can expect to enjoy when you implement a simplified wholesale pricing model.
1. Less conflict and less hassle
When you implement a simplified wholesale pricing model strategy, you can establish a consistent and uniform approach across your online store. This not only reduces conflict but also minimizes the complexities involved when dealing with wholesale buyers.
Remember: wholesale customers typically place orders for hundreds or even thousands of units. Therefore, having a simplified pricing structure makes it easier for them to comprehend the pricing tiers. Also, it allows them to make informed decisions regarding wholesale purchases.
Moreover, the simplicity of the pricing model facilitates its inclusion in the wholesale agreement between you and the merchant, streamlining the entire process.
So, how does a simplified wholesale pricing model benefit your wholesale customers? One major benefit is that your wholesale customers don’t need to decipher intricate pricing models. This leads to smooth and steady business transactions between you and the merchant.
2. Ease of payment
Implementing a simplified wholesale pricing model strategy simplifies accounting and inventory management for your business. Furthermore, it streamlines the process for wholesalers to calculate, account for, and pay for their wholesale orders.
3. Opportunities to run special deals and offers
Having a simplified wholesale pricing model strategy in place allows you to easily conduct product-wide special offers and apply discounted pricing.
Once you’ve installed the Wholesale Prices plugin for WooCommerce, you can easily set discounted prices for your products with one click.
Factors To Evaluate When Deciding On A Wholesale Pricing Strategy
By now, we’ve explored four pricing strategies you can use to calculate wholesale rates, each with its advantages and drawbacks. However, if you’re still undecided about which approach suits your business best, we’ve provided additional considerations to help you make an informed decision.
Below, we discuss key factors to consider when choosing the right wholesale pricing strategy for your business.
1. Business goals
Are you looking to maximize profit, build long-term customer relationships or expand into a new market? No matter what your business goals are, your pricing strategy must align with your intended outcomes.
For instance, if your primary objective is to enter new markets or expand your wholesale customer base, a pricing strategy that focuses on competitive pricing may be more effective. This entails setting wholesale rates that are more favorable than those of your competitors.
On the other hand, if your priority is building long-term customer loyalty, you’ll want to offer a customized wholesale pricing strategy that incentivizes repeat purchases. This may include implementing volume-based discounts or offering tailored discounts for loyal customers.
2. Expenses and profitability
When determining the best wholesale pricing strategy, evaluating your current cost structure and desired profit margin for your business is crucial. Start by analyzing the overall cost of bringing your product to market and determine the minimum price you need to cover these costs. Your pricing strategy should not only cover these expenses but also allow you to gain reasonable profit that can support sustainable business growth.
Next, consider how different pricing strategies may impact your desired profitability. For instance, implementing cost-based pricing can allow you to cover your costs while maintaining a margin for profit. On the other hand, value-based pricing can allow you to capitalize on your product’s perceived value and potentially set higher price points for maximum profitability.
Balance is key– you’ll want to ensure that your chosen strategy aligns with your cost structure and gives you a profit margin to support your business objectives. Lastly, make sure to regularly reevaluate your pricing strategy to ensure it remains aligned with your goals and current market conditions.
3. Customer preferences and behavior
Understanding your wholesale customers’ preferences, price sensitivity, and purchase behavior can help you choose the right pricing approach. For example, some customers may be highly price-conscious, while others may be more willing to pay a premium for superior-quality products.
Here’s another example of how knowing your customers’ buying behavior can help you identify the right pricing approach. For instance, if your wholesale customers prefer placing frequent, large-volume orders rather than occasional but more substantial purchases, you can structure your pricing to offer volume-based discounts to encourage them to increase their order sizes.
Consider conducting thorough market research and gathering feedback to gain customer insights. You can use interviews, surveys, or focus groups to learn more about their behavior and preferences.
4. Competitive landscape
It is also helpful to assess the competitive landscape in your niche to identify how implementing different pricing strategies can give you a competitive edge. Assess the pricing models of your competitors. What pricing structures, discounts, or promotions are they running to attract customers?
Think about how you want your business to be perceived compared to your competitors. For example, you may focus on providing faster delivery times or exceptional customer support to justify your wholesale pricing. Ultimately, the goal is not to copy your competitors’ strategies but to discover opportunities to differentiate your business.
Frequently Asked Questions
We hope the discussion above has helped you determine your product’s retail and wholesale rates. Now, we’d like to answer a few other questions about pricing model strategies.
What is the minimum advertised price?
Typically, it’s not legally permissible to restrict the price your wholesale customers sell your products for. However, in most countries, you can legally implement an agreement that restricts the minimum price at which they can advertise your products. By establishing a minimum advertised price, you can prevent excessive competition among your wholesale customers and maintain a sustainable market for re-orders.
Take a look at the promotions at retail locations near you. You’ll often find marketing campaigns making statements such as “Too hot to advertise, call for pricing!” This indicates that there are likely contractual limitations on advertising the product at excessively low prices.
One of the most prominent companies that employ this strategy is Apple. You’ll never see an Apple product advertised at a steep discount compared to other retailers.
What is the difference between wholesale rate and retail rate?
When considering a pricing model strategy, it’s important to understand that wholesale price and retail price are closely related. However, wholesale rates are only available to business customers willing to purchase large amounts in exchange for the lower pricing.
Is wholesale rate half of retail rate?
Basically, setting a wholesale rate solely by applying a 50% discount to the retail price is an inadequate approach. This is especially true if you don’t consider other crucial factors such as cost structures and market intelligence.
Avoid this simplistic method as it disregards essential business aspects and increases the risk of incurring losses rather than generating profits.
How can I monitor the impact of my wholesale rate pricing strategy on customer satisfaction?
One effective way to gauge the effectiveness of your wholesale pricing model is to collect feedback from your wholesale customers directly. You can do this by conducting surveys or gathering customer reviews.
Likewise, it’s crucial to assess key performance metrics to evaluate the impact of your pricing strategy. Key metrics include order value, order frequency, and customer retention rates. By tracking these metrics over time, you can measure the effectiveness of your wholesale pricing and make informed decisions to optimize it.
Should I offer different pricing tiers for my wholesale customers?
Offering different pricing tiers to different customer segments can be a strategic approach to help you acquire new customers or foster loyalty from existing ones. To design effective pricing tiers, assess key factors such as order volume, frequency, and customer relationship. For example, you can offer a special wholesale rate for customers who consistently place large orders or have a long-standing partnership with your business.
One way to implement customized pricing tiers on your wholesale store is by utilizing powerful plugins like Wholesale Prices Premium. This tool allows you to set up different wholesale customer roles and assign pricing rules to each role. By segmenting your customers into distinct groups, you can provide tailored wholesale rates based on their purchase behaviors and commitment levels.
We hope this article has helped you determine the ideal pricing model strategy for your business! As we’ve shown you, there are many different approaches to calculating wholesale pricing from retail pricing. Ultimately, your method of choice completely depends on your business, market, positioning, future plans, and more.
To recap, you can calculate wholesale rate from retail rate using the following four methods:
Before deciding whether to use cost-based pricing or guesswork pricing, you should consider their drawbacks. If neither pricing model strategy suits your business, you can opt for value-based pricing. You can implement this pricing strategy by observing the following four steps:
- Gather customer feedback
- Audit the competition
- Cross-check against the cost of production
- Formulate your wholesale rate
To further assist you in making an informed decision about the right strategy to use, we’ve also provided the following key factors you can evaluate:
Do you have any questions about the ideal pricing model strategy for your business? Let us know in the comments section below!