The art of wholesale pricing: How to calculate wholesale price in 2 simple steps
The success of a wholesale brand, unquestionably, depends on the quality of products supplied. It is what your customers pay for. Yet, the financial success of a wholesale business also depends on finding the best wholesale pricing strategy for its products as well as increasing wholesale sales. Eventually, it is the financial outcomes that pays the bills at the end of the month. Therefore, business owners need to pay sufficient attention to wholesale pricing.
Then we’ll ask the question: “How can I calculate wholesale prices?”. Wholesale pricing is an art. From the perspective of the wholesaler or supplier, a product needs to have a high enough price tag that maximizes profits. On the other hand, your customers – retailers- want to have access to affordable products to maximize their profits.
There is not a silver bullet answer to this question. It depends on the business model you want to build. If wholesale prices are set high, a wholesaler may lose volume but increase product margins. If wholesale prices are set low, a wholesaler may gain volume but decrease product margins.
Economics of wholesale pricing
One answer is clear. A business must optimize wholesale pricing for the total margins – total business margins at the end of the month. In one scenario, decreasing product prices can increase your volume much more and therefore increases your total margins. In another scenario, increasing the wholesale price may not affect your sales volume at all, because people love your product, therefore increases your total margins. A business owner needs to test these two scenarios to understand the dynamics of market toward their wholesale products.
Yet, this formula is nowhere enough to explain the bigger picture. You need to take into account the fixed and variable costs of your products. ie, making double the amount of products doesn’t double your costs or vice versa. So, the formula for wholesale pricing becomes
Fixed costs decrease the opportunities you can discover. This is why we emphasize a pay-per-use local delivery solution for local businesses. You can be really flexible while increasing your sales and it is all variable costs!
However, this formula still doesn’t take into account one important factor: the cost of selling more. Acquiring new wholesale customers is not free. It takes time and marketing budget to earn new customers –customer acquisition cost(CAC). When it comes to including monthly customer acquisition costs, make sure to divide it into the expected lifetime of a customer. Say, it costs $1200 to acquire a customer and an average customer works with you for 12 months, then your monthly CAC per customer is $100. So, the formula becomes:
Now, we have a better understanding of wholesale pricing economics.
I’m gonna make you an offer you can’t refuse
We know the famous Godfather saying “I’m gonna make him an offer he can’t refuse”. Marlon Brando didn’t say this because he would formalize an offer the other person would love. He said that because he totally understood the circumstances of that person. He knew the rules of the game to make an offer that worked for everyone.
It could be anything – you’ll be surprised
- Your customer’s customers(end customers) LOVE your products and willing to pay anything.
- Your products are so much different than others that you are irreplaceable
- Your products have the best price point
- Your products complement an expensive product. Increasing your price won’t change the outcome much
Once you know, you are ready to make an offer they cannot refuse! This is to either increase your prices and keep your sales volume. Or, decrease your prices and increase your sales volume tremendously.
Preparation for calculating wholesale pricing
1. Research your competition
Research all the wholesale products that compete with your products. If you’re selling beverages, look at all the different kinds of beverages that can compete with you, not only the exact same flavors. A complete approach to competition is essential to understand the unique values of your products. Speak to your customers, and don’t stop there, speak to end consumers, discover complementary products, understand when people purchase your products. When done correctly, you’ll have a clear idea of why your customers work with you. I guarantee you that you’ll be surprised by the results.
2. Calculate your fixed costs
Fixed costs could be hard to pinpoint. This is why they are among the most dangerous type of costs for wholesale businesses. They make it extremely difficult to adjust wholesale pricing. Fixed costs include rent, insurance, advertising, and even the coffee at the office. There are also some people you need to have regardless of your volume.
A simple way to calculate your fixed costs is to think about what costs remain almost the same if you were to do half of the sales next month. You can also take advantage of the guides on how to calculate fixed costs.
Some costs, like delivery costs, may seem to be a variable cost but they are mostly fixed costs. Your van lease, insurance, driver salaries could be fixed regardless of what you deliver. (You may not hire someone just for 2 hours of deliveries per day, and you need to pay him more). Read more for the advantages and disadvantages of different local delivery solutions including your in-house fleet.
After a thoughtful calculation of your fixed costs, you may even find out opportunities to reduce them. This way you can still increase your margins even without changing your wholesale pricing, . With our local delivery solution in Massachusetts, several businesses saved 25% from local delivery costs. Businesses like Jacobson Floral turned local deliveries into variable costs and still saved 25%.
3. Calculate your variable costs
Find out your material cost to produce each product. Consider every penny you spend on manufacturing, storing, distributing, and even customer support. Yes, these costs include labor costs and also your time.
Variable costs are friendlier compared to fixed costs. Meaning, you only pay for these costs when you need them.
4. Calculate customer acquisition costs
Customer acquisition costs are among the overlooked costs. However, they are a part of business costs and therefore should be included in wholesale pricing. Business owners get excited to start working with a new customer. Because it brings revenue. Yet, one needs to understand how much they spend to make money. Needless to say time is also money – especially business owner’s time.
In addition to time, marketing costs such as advertising, attending events can add up to a significant amount.
Once you have a clear understanding of how much a new customer costs to acquire, you can start qualifying what type of customers are the best targets for your business (Not all customers are the same). And, you can focus on increasing your wholesale sales to these types of businesses. Or, create co-marketing partnerships to decrease your marketing costs.
How to calculate wholesale price(if you’re just starting)
- Calculate the fixed and variable costs of your wholesale products
- Estimate your customer acquisition costs(CAC)
- Set yourself a 3 months wholesale sales volume goal
- Understand the retail price point of competing products
- Estimate wholesale pricing
6. Measure weekly, and compare against your estimates
7. Re-adjust your wholesale pricing for new customers
How to calculate wholesale price(if you already have a customer base)
Wholesale pricing is not as flexible as retail pricing. Your customers will not appreciate it if you change your wholesale prices often. Because they won’t be able to calculate their costs. However, you can test your wholesale pricing with the new customers
- Calculate the fixed and variable costs of your wholesale products
- Calculate your customer acquisition costs(CAC)
- Increase your wholesale prices by 15% for new customers and see how they react: Give limited-time discounts if you feel like you will lose the new customer. But, tell them you’ll apply standard pricing after the trial.
- Measure the additional sales volume acquired and multiply with the new pricing to see if the new pricing results in larger total margins. (ie. new sales volumes could be slightly lower, but higher pricing makes you more profitable)
- Speak with your existing customers to see if they’ll be open to buying more products if you gave a 5% discount. Then, calculate the total margins for this customer and see if it increases.
- Review the results and decide if new wholesale pricing results in better economics to increase or decrease your wholesale prices.
- Iterate regularly. Wholesale pricing strategy takes time. But hard work pays off.
Keep your wholesale margins high to keep your wholesale business sustainable
Wholesale pricing strategy is not a one fits all approach neither it is a one-time job. It takes continuous experimentation to achieve the best wholesale price point for your products. Once it is done correctly, it can flourish your business.
Never forget. Your market determines the price of your wholesale products, not you. All you can do is an experiment.
Set a retail price for your products
Being focused on wholesale doesn’t stop you from retailing your products, especially online. In the post-COVID world, the connection between makers and consumers improved tremendously. Local e-commerce combined with local deliveries can create growth opportunities for your business.
In conclusion, improving the wholesale pricing can be the determining factor for your business’ future. And, it should be regarded seriously. If you want to focus on increasing your wholesale sales, you can have a look at 5 good strategies to increase wholesale sales.