We will show you how to calculate wholesale prices and develop a successful strategy for setting competitive prices for your business. In a short time, you will understand how to calculate optimal wholesale prices, determine profit margins, and learn the main factors that influence the success of wholesale trade. The tips in this article will be equally useful for experienced entrepreneurs and beginners.
Wholesale vs Retail Price
In order to establish the right prices for your products, it is important to understand the difference between the wholesale price and retail price. Wholesale and retail are two fundamentally different processes: wholesale involves moving goods from manufacturing to distribution, whereas retail involves acquiring goods and selling them to customers.
Producers or distributors charge wholesale prices to retailers. Then, the retailer charges consumers for that same product at a higher price — the retail price.
What is wholesale price
Wholesale pricing is what you charge retailers who buy merchandise in large volumes. The goal of wholesale pricing is to earn a profit by selling goods at a higher price than what they cost to make. For example, if it costs you $5 in labor and materials to make one product, you may set a wholesale price of $10, which gives you a $5 per unit gross profit.
Also: The Risks of Buying Wholesale from Chinа: Why You Should Choose American Suppliers
What is retail price
The retail price is what retailers set as the final selling price for consumers. Retail pricing is all about the customer. What would they be willing to pay for a product? A retailer will mark up the price on wholesale ecommerce goods to earn a profit, but it should not exceed what the customer will pay for it.
How to Calculate a Wholesale Price
Now that you know the difference between wholesale and retail prices, you can finally start setting the cost of your products. Here are some steps to follow:
- Research Your Industry
- Calculate Your Cost of Goods Manufactured
- Set Your Wholesale Price
- Make Industry Connections
Research Your Industry
Before you set any prices, it is important to research your market. See what other wholesalers are setting their prices at for the products that are similar to yours. You can also see the retail pricing and what the end consumers are paying for certain items, which can help give you a better idea of where you should set your price.
“It is typical to see about a 50 percent markup in retail pricing. If a retailer buys a shirt from you for $20, they will likely turn around and sell that same shirt for $40. Doubling is a safe bet for any small wholesaler,” Donna Johnson, President at Whyte Quartz, said. “You need to make a profit when you sell to a retailer, so it is a very generic standard in the wholesale industry to double the price of how much it costs you to make the product.”
Calculate Your Cost of Goods Manufactured
The cost of goods manufactured (COGM) is an accounting term that refers to a statement showing a company’s total production costs within a specific period. COGM calculates the total cost of converting raw materials into finished products that are ready for sale. Businesses factor in variables like labor cost, raw materials, and other overhead costs when calculating their COGM.
Indeed offers some steps to follow when calculating your COGM:
1. Understand the COGM Formula
Using the right formula is essential for getting an accurate COGM. The formula for calculating COGM is straightforward:
COGM = Beginning work-in-process (WIP) inventory + total manufacturing cost – ending WIP inventory
2. Choose a Period for Calculation
Like most other financial calculations, it is necessary to select a specific period to which the calculation applies to. This can vary depending on your market. For example, if you sell perishable food, you will want to calculate your COGM daily, weekly, or monthly. In contrast, wholesalers who produce more durable goods may calculate their COGM quarterly or annually.
3. Determine Your Beginning Work-in-Process Inventory
The beginning WIP inventory of a company is the value of products that are still in production. Companies can accurately determine this value at the end or start of a new business period. For example, if you produced 5,000 products last month but are yet to complete 1,500 of them, the beginning WIP inventory for the new month is 1,500 items. As you incur costs to complete the production of those goods, they contribute to your COGM.
4. Calculate Your Total Manufacturing Cost
The next step in the formula is calculating the total manufacturing cost for the period. This includes the cost of direct materials, labor, and other manufacturing overhead costs.
Set Your Wholesale Price
What is a retail price? This is the selling price you set for goods that are sold to a consumer. As mentioned earlier, when setting a wholesale price, it is recommended to multiply the cost of goods by two. This ensures that your wholesale profit margin is at least 50%. Profit margin is the gross profit that a wholesaler makes when selling a product. According to Shopify, retail apparel brands generally aim for a wholesale profit margin of 30 to 50%, while retailers who sell products directly to consumers aim for a profit margin of 55 to 65%.
“Profit margins are one of the most important aspects when running any business. They are what helps you keep the lights on and allows you to buy more inventory,” Johnson said. “The profit margin is the difference between whatever you sell a product for and what you paid for it, expressed in dollars as a percentage, but there are other factors that go into the cost of that item. You also have to include shipping costs, which are very high right now, as well as warehouse fees, banking and processing fees, and anything else that goes into the cost of operating.”
To summarize, here’s the best way how to calculate wholesale price:
- Calculate your cost of goods sold.
- Calculate your overhead costs.
- Add the two costs together. Once you have those two numbers, combine them to create your cost price for the formula.
Also: 6 Money-Saving Tips for Wholesale Businesses
Make Industry Connections
One of the best ways to succeed in wholesale is to establish business relationships with other suppliers or companies that have experience in your market segment. They can give you advice you need on certain aspects of your business, such as setting wholesale prices and ensuring the right profit margins.
“Talk to people who have started a business before, or are in the market for what you want to do,” Johnson said. “It is also a good idea to reach out to a consultant. I do not recommend starting a business without a plan, even if it is just one sheet of paper.
The difference between the wholesale price and the retail price is an important aspect a successful business should understand. What is the wholesale price? This is the selling price you set for a product which is sold to wholesalers, while the retail price is the selling price you set for a product that is sold to a consumer in a store. Wholesale pricing is a pricing strategy for wholesalers who buy large volumes of goods.”
This information will be a valuable tool for marketers seeking to optimize sales strategies, for companies aiming at increasing the profitability of their business, and for any entrepreneur seeking to understand the wholesale market operating principles. Don’t hesitate, dive into the world of wholesale trade and take the first step to success! Visit WholesaleCentral.com to get access to even more information, useful tips and tools to help you grow your wholesale business.
FAQ
The average profit of a wholesaler can vary significantly depending on the industry, business size, and other factors. Typically, it ranges from 10% to 30% of the cost of goods sold.
The profit margin in the wholesale business is the difference between the selling price and the cost of goods, expressed as a percentage. It usually ranges from 20% to 50%, but can vary depending on the specifics of a product and the competitive environment.
To calculate the profit margin, you need to divide the sales profit (selling price minus the cost of goods) by the selling price and multiply the result by 100%. For example, if the selling price of a product is $100 and the cost price is $60, the profit is $40, and the profit margin is 40%.