Wholesale Price Vs Retail Price: How To Calculate Wholesale Price From Retail Price

Wholesale Price vs Retail Price

There are big differences you need to know about wholesale price vs retail price but first, let me first start with a disclaimer: Discussions on pricing are always subjective.

Pricing strategy is highly dependent on your business and your current and future situation.

You do obviously need to price your goods in order to sell them, so the problem is how to calculate wholesale price from retail price in a way that will leave enough profit on the table in both scenarios.

Yes, defining pricing may well be part art, but there is certainly some scientific thinking involved in it too. Below are tips you can use that will help you price your products for wholesale (and retail) properly.

What Is Wholesale Price?

Wholesale price is the sum or amount of money for which products or services are offered for sale to business buyers who are purchasing in larger volumes. Purchasing at wholesale describes the sale of goods in quantity for resale.

How To Calculate Wholesale Price From Retail Price

If you’ve been in business for a while, chances are you already have a retail price for products and are working the equation backward as you explore wholesale selling.

So knowing how to calculate the wholesale price from retail price is very important because you probably just can’t up and change your retail pricing model because you’ve decided to introduce wholesale distribution.

Most pricing experts would see this situation a bit backward because the mathematically ideal way is to follow a formula, something like this:

Materials Cost + (Labour Invested x How Much You Value Time) + Other Overheads (Rent, Fixed Costs, Electricity, etc) + Profit Margin = Wholesale Price

This is called Cost-Based Pricing.

In practice, store owners rarely go to that kind of level of maths to determine their wholesale pricing.

We either pluck a number out of the air, look at what the competition is charging for similar products, or (and this is most common) most people end up doing something like this:

Retail Price x 0.6 = Wholesale Price (40% off retail)

I call this strategy Guess-work Pricing.

Which Wholesale Pricing Strategy Should I Use

Both wholesale pricing strategies mentioned above have their merits. But I think both have some downsides when it comes to determining your final wholesale price.

Cost-based pricing is mathematically ideal and protects your margins, but doesn’t take into account buyer sentiment.

Guess-work pricing is easier and less time-consuming, but mathematically dangerous and could lead to making no profit at all.

So what is the other option?

As I mentioned in the introduction, pricing is subjective. You may have thought I was referring to your subjectiveness but I’m actually referring to the customer’s viewpoint.

When determining a price for a product for sale, whether it be for retail or wholesale, I recommend using what I term “Value-Based Pricing”.

Value-Based Pricing

If you were to follow the experts, you would use the above Cost-based pricing formula to factor in all your costs, then mark up that price by XX% to arrive at your final selling price.

There’s nothing wrong with this, but it can cause you to leave too much money on the table and it often results in a race to the bottom with your competitors.

On the flip-side, using Guess-work pricing if equally wrong. It’s likely the prices you are copying from your competitors are based on their business costs which will be very different from yours. It could leave you making a loss if you aren’t careful.

In either of these pricing strategies, the first part of your business to suffer will be your wholesale business.

Cost-Based pricing is probably the closest to being correct but it fails to account for one criterion which I personally think is incredibly important.

What does the market perceive your products to be worth?

Value-Based Pricing is based on conducting research and finding out what the market will bear then cross-checking this insight of the market with your business costs.

Steps For Using Value-Based Pricing:

I’ll preface this by saying that I personally advocate positioning your product somewhere in the top third of the market unless it’s oversaturated with others all trying to do the same.

Doing this allows for bigger margins and more flexibility when it comes to discounting prices later.

Below are the steps you must take and understand in order to use value-based pricing.

Again, the idea is to combine insights of the market with knowledge of your business costs.

Step #1. Gather customer feedback

Feedback is crucially important when determining the price. Get your product into the hands of real people.

Focus hard on finding out what you can do to improve the appearance of quality around your product.

Remember, higher quality = higher price and therefore better margins.

Step #2. Audit the competition

Survey the market and put all the competition data into a spreadsheet.

Make a graph of where each competing product sits price-wise in the market from lowest to highest.

You can also make a judgment about the “value” position of competing products here as well to draw further comparisons. Are they going up-market or down-market? Is this a high-value product or a commodity?

Once you have an idea of the overall market you can come up with an initial price estimate based on where you think your product sits in the market value-wise.

As I mentioned above, I suggest aiming for the top third because it will give you more flexibility later but this is where it’s subjective. Your strategy might be to come in cheaper with a commodity priced product so work this into your idea about price.

At the end of this step you should have a rough price range for your product.

Step #3. Cross-check against the cost of production

Although the value-based price is determined by the market and perceived value, you also need some business sensibility. Cross-checking that you have covered your cost of production margin is an important sanity check.

You can work backward using the Cost-Based formula for this if you need to so you can establish where you need to be at a minimum and see if the price you are considering is going to be viable.

Ideally, your price should be around 4-6x the cost of production. I would consider 2x as the minimum.

Again, this depends on your business, where you want to be in the market, and how cheaply you can get the product to market.

All I’m saying is that if you are looking at pricing lower than 2x your cost of production you’ll find it difficult to maintain. Look to trim costs or boost perceived value.

Step #4. Formulate your wholesale price

When it comes to wholesale customers, they expect deep discounts so they can make their money too.

It’s important to give them a good deal and make it a win for your wholesale customers.

But at the end of the day, you’re in business to make money. You have to have the margins built into your prices, even at your wholesale price point.

At a 4-6x cost of production, your retail price has plenty of room built in to support the wholesale business.

I would recommend sitting around the 40% off retail price point for wholesale which gives you up to 30% off retail for you and your wholesale customers to play with for promotions.

If you’re considering having multiple levels of wholesale, don’t go deeper than 50% off retail. Also, ensure you have minimum order quantities in place.

Other Questions & Considerations

I hope the above has helped you determine your product’s retail price and wholesale price. Now I wanted to cover off on a few other questions and considerations.

Minimum advertised price

While it’s not legal to restrict the price your wholesale customers sell your product at, you can legally (in most countries at least) have them sign an agreement that restricts the minimum price they can advertise your product for. A minimum advertised price will help put a stop to your wholesale customers competing too viciously with each other. It will also ensure that re-orders don’t dry up.

Take a look at promotions at retail locations nearby to you. You’ll often find marketing saying things like “Too hot to advertise, call for pricing!”. When you see this kind of promotion, it’s likely that there were restrictions on their wholesale contract from advertising too low.

One of the most prominent companies that employ this strategy is Apple. You will never see an Apple product advertised at a steep discount compared to other retailers.

Is wholesale price half of retail?

Taking 50% off of the retail price without any other intelligence coming into it is a bad way to set a wholesale price for a product. It doesn’t factor in the product’s cost structures or market intelligence and could actually lead to you making a loss.

What is the difference between the wholesale price and retail price?

Retail price and wholesale price are interrelated, but wholesale price is only available to business customers willing to purchase large amounts in exchange for the lower pricing.

Summary: Wholesale Price vs Retail Price

I hope this article has helped you with your wholesale price vs retail price dilemma. Even if you only take away a couple of points from this article and apply it to your business, I think you will be better off.

As you can see there are many different approaches to determining wholesale pricing and retail pricing. The important thing to remember is there is no “wrong” way.

How you calculate wholesale price from retail price is completely dependent on you, your market, your positioning, your business, your future plans, and much more.

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16 thoughts on “Wholesale Price Vs Retail Price: How To Calculate Wholesale Price From Retail Price

  1. Hi

    Very good article. I found it very enlightening. How would you convince a business to implement minimum order quantities. I have a client that his business is strictly based on the amount spent regardless of quantities. This makes it quite challenging to say the least when implementing wholesale rules and associated discounts.

    Thanks for the article.
    Lyse

    1. Hi Lyse, thanks for the kind words!

      For this I’d personally be looking at implementing a Minimum Order Subtotal restrictions for each order. You could also tier the min subtotals with multiple wholesale roles if there are smaller/larger customer groups.

      Oftentimes customers who are short on the order target will order just that little bit more to ensure they hit that target and get the wholesale pricing so maybe what you could do is:

      “how many times an average wholesale customer in this tier orders each month” x “the average order size” + another 10-20% on top of that as your minimum order subtotal

      This should also have the effect of subtly pushing them to place bigger orders but not so much that they can’t stretch to reach the order size.

      You’ll need to monitor and adjust of course, but hopefully this is a good starting point!

  2. I have a small business that just started up this year. I just got the opportunity to become a wholesaler for this company. Should I get them to sign a contract with me or just treat them like I would any of my other customers on a sale by sale basis, but charge them the wholesale pricing?

    1. Great question Marie and congrats on scoring your first wholesale customer!

      There’s no right or wrong way to do it. What people do varies greatly. In this situation, I’m guessing you’ll mostly be wanting to learn. I’m a fan of keeping things pretty simple in the early days. Assign them some favourable wholesale pricing, give them an account and ask them to order. If you want you can get them to sign a wholesale contract later, but there’s probably no reason to go to the expense of drafting something like that when you only have one wholesale customer.

      I hope this helps!

  3. Hello

    Thank you for sharing this article. I have a question regarding the margin a company is asking me for my product. They are asking they want a 40% margin, does that mean I take 40% off my retail cost correct? What’s the ebst way to find out if this viable for me and not lose on this deal. If at even 40% less I’m still getting double what I spent to do it, is that an ok thing? And maybe ask for a higher MQO?

    thanks

    1. Hey Mirko,

      Usually that is 40% off retail. As mentioned in the article this is the typical “working backwards” kind of equation.

      Things to consider would be your position in the market, how much margin you have on your retail, what you’d like them to be ordering as a minimum per order or per month and the volume they’d be able to do. Lots of factors as you can see and it’s highly personal to you and your business.

      Take another read through the article above, especially the value-based pricing section. Hopefully, it might help you in your decision!

      The good news, and the thing to remember, is you have someone there willing to buy. Set them up, get some orders through and if you aren’t happy you can always adjust your approach for your next wholesale customer :)

  4. Hi!
    Thank you very much for this article! it is clear and very usable.

    One thing that surprised me was that you only have a 40% reduction on the retail price to get your wholesale price?
    I have experienced that many retailers want a much greater discount with a mark-up on up to 3! so that means a 2/3 of the retail price… a discount on ex: 66 %
    Any one who has the same experience?
    P.S: I’m in the design business…

    best,
    // Else

    1. Definitely depends on the niche, the 40% is just indicative and gave me something to work with on the article. It’s a pretty average sort of number for physical goods.

  5. Hi Josh,

    So are you saying that if a wholesale price is less than costs x 2 it’s just not viable? I have a small clothing business and have been doing alright for 2 years online and with a few ‘sale or return’ shops, but want to move on to wholesale. At the moment it seems I cannot price things for anything more than costs x 1.5. What do you think?

    1. Fashion is an interesting area and markups vary wildly. Also varies a lot depending on where you are in the world too and what area of the market you are playing in (top end, low end, middle). I’d recommend touching base with some other fashion people in your general area/country that might be able to shed some insight.

      I guess what I was hinting at with those general figures is to make sure you are comfortable with the margin and that you give yourself some breathing room, otherwise it limits the way you can promote deals to wholesale customers.

  6. Hello I need help I’m starting a from home boutique and will be doing preorders. I will buying wholesale but need to have a good example of how to price my items.. one of the things is I’m buying a certain item it’s a 6 pack item my wholesale price would be $60.. and on the side it says suggested retail $120. So does that mean if I’m reselling the 6 pack item together to sell it at $120 or around $120 price.. supossable each item would as low as $7.50 each… also how muy should I price each item if I wanted to sell each of the item individually and also how much price if I wanted to resell the 6pack item as a wholesale. I woul appreciate if someone could help me out with the pricing thanks.

    Wholesale $60
    Suggested retail $120

    1. Really depends on your margins Deborah, if you are dropshipping on behalf of your customers they probably need to be prepared to soak up the shipping costs and I would give them less margin to cater for the packing and handling. Sending stock to a wholesale customer is very different to sending a small order to an end-customer on behalf of someone else.

  7. Great Article.
    Please, advice me about an average profit margin for a supermarket? (outdoor/BBQ product section)
    I am planing offer my product to be sale in a supermarkets, and try to determine a reasonable a MSRP price.
    My COGM price is around $1.00
    Obviously, the price will be determined by quantities purchased.
    Thanks

  8. Great article! Really helpful.
    I have a question. I have variety of candles in different fragrances. Each fragrance costs a different price to produce. How would you recommend pricing each product for wholesale? 1) Would you have a different wholesale price for each fragrance based on the cost. 2) Or would you find a medium so that the wholesale price is the same for each of the line items?
    Would be a big help.
    Thanks

    1. Hi Ollie,

      Personally I would be wary of setting wholesale pricing across the board (though in some cases this can work because it reduced pricing overhead). If each product has a wide variation of cost then you need to be accounting for that to make sure you’re making your desired profit at the wholesale level.

      Hope this helps!
      Cheers,
      Josh

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