How to calculate wholesale price
Pricing is one of the most important things for a business to be viable and sustainable. From the perspective of the seller, a product must have a price tag that will leave enough profit. Nevertheless, it is obvious that customers can search for the best price for a product easier than ever thanks to the rise of the internet and ecommerce.
This makes it harder for retailers to set a price for a product. However, the biggest struggle is on wholesalers, as they need to get profit while providing the best price and competing with their rivals at the same time. In such a competition, the smartest move for wholesale companies is to learn wholesale pricing.
Cost-based pricing and value-based pricing are the two techniques to calculate wholesale price.
A) Cost-based Pricing
When it comes to wholesale pricing, many experts recommend a formula like the following:
Materials Cost + (Labor Invested x How Much You Value Time) + Other Overheads (Rent, Fixed Costs, Electricity, etc.) + Profit Margin = Wholesale Price
As it is not possible to calculate each item in the above formula for wholesale distributors, most people in the wholesale distribution industry prefer to use the following simple formula:
Retail Price x 0.6 = Wholesale Price (40% off retail)
Keep reading to dive into cost-based wholesale pricing.
1) Check Market Prices
To set a price for your product, you need to find its potential price in the market. Search for similar products in the market, and you will have an idea.
2) Determine Your Material Costs
Find out your material cost to produce each product. Consider every penny you spend for fabricating it from the beginning to delivering it to your customer.
3) Calculate Your Labor Costs
Think about how many people are involved in producing a single product and how much you pay these people. This gives you the cost of labor.
4) Include Overhead (Indirect Costs)
You have calculated your material and labor costs, but this is not all you spend. There are still other costs such as rent, insurance, advertising, and the coffee consumed at the office.
5) Don’t forget to add delivery costs
If you do not offer free shipping for your wholesale customers, you do not need to think about delivery costs. However, if you do offer free shipping, you need to take into account the delivery cost for each of your products.
If you use a best-in-class local delivery solution for wholesale like Metrobi, it is easy to calculate your costs, as Metrobi offers transparent pricing. If you have not started delivering with Metrobi, you can consider getting a quote, which is a good move to grow your business.
B) Value-based Pricing
Although cost-based pricing may work for many businesses, it has downsides such as leaving too much money on the table. There is another way to calculate wholesale price for your products: value-based pricing.
Key-point: Get yourself a position in the market
Analyze the market and try to get a position in the top third. Keep reading to learn how.
1) Talk to your wholesale customers
The best way to improve your product’s quality to be in the top third is with customer interviews. Visit your customers, listen to them and get feedback for better quality. They will tell you what they need and you will learn what you need to do best.
2) Set a price at least 2x of your cost of production for your wholesale customers
Go back to the cost-based pricing method and review your costs. You need to be able to offer at least 2x your cost of production.
3) Keep your margins high so your business is sustainable
Your wholesale customers will bargain for the best price. You may want to give discounts, but never forget to set a minimum limit for your margins to be in the top third in the market.
4) Set a retail price for your products
The best practice is to set the retail price at least 4x of your cost of production so you can let your wholesale customers play with the price for promotions while gaining profit.
In conclusion, you can determine your wholesale business’s fate by learning pricing techniques. If you want to learn good practices to grow your wholesale business, you can have a look at 5 good strategies to increase wholesale sales.
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