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 bitbackward 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 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 forone 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 inthe top thirdof 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 dealand make it awin 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 yourwholesale 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.
FAQs
What is the formula for calculating the wholesale price? ›
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 keeping costs low can be tricky.
What percentage should you charge for wholesale? ›The vast majority or retailers, discount stores and pound shops will work on a markup percentage between 30%-40%. Some retailers that sell in high volume, either in bulk quantities or to a large amount of customers, can often survive and prosper in the 20%-30% range.
How do you calculate retail selling price? ›- Cost ($45) x Mark up (1.35) = Selling price ($60.75)
- Retail price = [cost of item ÷ (100 - markup percentage)] x 100.
- Retail price = [15 ÷ (100 - 45)] x 100 = $27.
- Production cost x Profit margin = Price.
Set your wholesale price
Profit margin is the gross profit a retailer earns when an item is sold. Apparel retail brands typically aim for a 30% to 50% wholesale profit margin, while direct-to-consumer retailers aim for a profit margin of 55% to 65%. (A margin is sometimes also referred to as “markup percentage.”)
Profit margin is the gross profit a retailer earns when an item is sold. Apparel retail brands typically aim for a 30% to 50% wholesale profit margin, while direct-to-consumer retailers aim for a profit margin of 55% to 65%. (A margin is sometimes also referred to as “markup percentage.”)
What is the rule of thumb for wholesale pricing? ›The general rule of thumb is that your wholesale price should be 50% of the retail price to ensure you can still make a healthy return on investment (ROI).
What is a typical wholesale fee? ›The difference in prices is known as the wholesale fee and can be 5% to 10% of the property price. This goes to the wholesaler. Usually, wholesalers look for a distressed property that the owner doesn't want to spend time or money on.
How do you price wholesale items for a small business? ›In general, you should offer retailers a 50% discount on the retail price. For example, if the Manufacturer's Suggested Retail Price (MSRP) is $50, then the wholesale price would be $25. Tip: If there is no set MSRP price, you will have to do market research to determine the value of your product.
What is the formula to calculate cost price? ›Cost price = Selling price − profit ( when selling price and profit is given ) Cost price = Selling price + loss ( when selling price and loss is given )
What is price formula? ›The selling price formula is: Selling Price = Cost Price + Profit Margin. Cost price is the price a retailer paid for the product. The profit margin is a percentage of the cost price.
What is the average markup from wholesale to retail? ›
The average wholesale or distributor markup is 20%, although some go up as high as 40%. Now, it certainly varies by industry for retailers: most automobiles are only marked up 5-10% while it's not uncommon for clothing items to be marked up 100%.
Why wholesale price is higher than retail price? ›As the wholesalers do not send the products directly to the customers, so the wholesale price differs from the one in the retail shops. They are a linking side between the manufacturers and retailers. Wholesale price is the cost charged by the manufacturer or business owner from the retailer.
Why wholesale price is lower than retail prices? ›The wholesale price is lower than the retail price for a few reasons: Bulk purchases: Wholesalers sell bulk items to retailers for a lower cost to create a profit for their business. By ensuring a bulk order (often with a minimum purchase), wholesalers can reduce shipping and handling times and the overall cost.
Who decides wholesale price? ›1.4. 1 The Office of the Economic Adviser in the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry is responsible for compiling WPI and releasing it.
How do wholesale prices work? ›As a guideline, this is around 2 x your cost price, but your actual trade or wholesale price depends on: If your cost price is relatively high (more than £100 per item) then you decrease this percentage. For example, if your cost price is £150, then your trade/wholesale price would be around £250.
Who makes more profit wholesaler or retailer? ›Yet a wholesaler makes more money as he sells products in a higher quantity than a retailer who has to bear all the expenses of retail to sell one product at a time.
How do you calculate wholesale markup percentage? ›To calculate markup from wholesale and retail prices, simply take the difference between the two prices and divide it by the wholesale price. For example, if a product is selling for $10 wholesale and $15 retail, the markup would be ($15-$10)/$10, or 50%.
What is the margin between wholesale and retail? ›The margin for a distributor may range from 3% to 30% of the sales price, the margin for the retailer may range from very little to 60%. This all depends on the type of product and who pays for the marketing activities. Are you looking for a distributor or retailers abroad?
How do you calculate a 80% markup? ›Simply take the sales price minus the unit cost, and divide that number by the unit cost. Then, multiply by 100 to determine the markup percentage.
How much I should add on the wholesale price? ›After figuring out your wholesale cost, you'll want to calculate your wholesale product price. To do so, add 20 percent or more on top of that number so that when selling products wholesale, you'll still earn some kind of profit per item sold. The standard mark-up is usually 50% – 100%.
What margin do wholesalers make? ›
Wholesalers typically have less of a profit margin when selling to retailers. While the percentage range will vary depending on the product, wholesalers usually make between 15% and 30% in profit, while retailers may typically make between 20% and 50% profit on the wholesale price when selling goods to consumers.
How much should you offer on a wholesale deal? ›Negotiate
Then, get ready to make an offer on your wholesale deal. You'll want to leave plenty of room for negotiation, so make your initial offer low. Experts recommend anywhere from 40 to 60 percent below the asking price. Just remember, distressed homeowners want to sell their property at the end of the day.
The 70% rule helps home flippers determine the maximum price they should pay for an investment property. Basically, they should spend no more than 70% of the home's after-repair value minus the costs of renovating the property.
What is wholesale price markup? ›Markup formula: pricing system for wholesale distributors
Markup is the amount that is added to the cost of a product to determine the product resell pricing. A product is marked up at each stage of the distribution.
The retail price is the final price that's displayed on the label, and the end consumer pays that. Whereas wholesale pricing refers to the price paid by a wholesaler, who then sells it to retail stores. Typically the wholesale price is 2 to 3X your cost price. But it depends on your industry.
What is the easiest way to price a product? ›To set your first price, add up all of the costs involved in bringing your product to market, set your profit margin on top of those expenses, and there you have it. This strategy is called cost-plus pricing, and it's one of the simplest ways to price your product.
How do you price a product for beginners? ›...
There is no one-size-fits-all pricing strategy
- Different fixed costs and product costs.
- Different target profit margins.
- Different strategic plans and business objectives.
- Step 1: Selecting the pricing objective. ...
- Step 2: Determining demand. ...
- Step 3: Estimating costs – ensuring profits. ...
- Step 4: Analysing Competitors' Costs, Prices, and Offers. ...
- Step 5: Choosing your pricing method. ...
- Step 6: Determining the final price.
There are those that use the Price Multiplier Method. They simply multiply the total costs by 2 (100% markup or 50% margin) or by 3 (200% markup or 67% margin) in order to determine the mark-up they will put on their products. You should also consider if your product is unique or not.
How do you profit from wholesale? ›Making money in the wholesaling business follows a simple formula: resell items at a higher price than you pay for them. The wholesaling customer base may include retailers, contractors, institutions and individual merchants.
What is a wholesale margin? ›
The value added by wholesalers in the chain of distribution ofa commodity from the producer to the final purchaser.
What is wholesale pricing? ›Wholesale price is the price that is charged for products sold in bulk to distributors. This price oftentimes differs from the price charged for products that are sold directly to consumers.
What is the list price formula? ›Calculate List Price from Discount and Sale Price. The list price is the sale price divided by the difference of 1 minus the result of discount divided by 100.
How much should I mark up wholesale? ›The average wholesale or distributor markup is 20%, although some go up as high as 40%. Now, it certainly varies by industry for retailers: most automobiles are only marked up 5-10% while it's not uncommon for clothing items to be marked up 100%.
How do you calculate list price and net price? ›To calculate the net price, start with the list price and add any taxes and other government-mandated charges. Then subtract any discounts, rebates or negotiated prices. The result is the net price.
How do you calculate 30 percent off? ›- Divide the number by 10.
- Triple this new number.
- Subtract your triple from your starting number.
- That's 30 percent off! For $30, you should have $21.