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”.
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 is 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 2x the cost of production. If the market will bear higher, that is even better.
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 2-4x cost of production, your retail price has plenty of room built in to support the wholesale business.
If you can, I 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 and are covering your unit costs plus also your fixed operating and labor costs.
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.