When you first start your wholesale business, it can be tricky to find the right price to sell your merchandise. If you are too expensive, you risk losing to your competitors, but if you are too cheap, you risk not making a profit.
In order to calculate the best price, it requires a little math and a little research in your industry. In this article, we will walk you through a few of those formulas as well as some steps you can take to create successful pricing strategies and profit margins.
Wholesale Price vs. Retail Price
In order to establish the right prices for your products, it is important to understand the difference between wholesale and retail pricing. 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.
1. What is the 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.
2. What is the 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
As mentioned earlier, when setting your wholesale price, it is best practice to multiply the cost of goods by two. This will ensure your wholesale profit margin is at least 50 percent. The profit margin is the gross profit a wholesaler earns when an item is sold. Apparel retail brands typically aim for a 30 – 50 percent wholesale profit margin, while direct-to-consumer retailers aim for a profit margin of 55 – 65 percent, according to Shopify.
“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 is the best way to calculate the 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.
Make Industry Connections
One of the best ways to succeed in the wholesale industry is to make business connections with other suppliers or companies who have experience in your market. They can help to give you the advice you need on certain parts of your business, such as setting wholesale prices and making sure you have 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. It might be messy, but having a plan will help you when you need credit and capital to buy inventory and equipment. So make a business plan and then network in the industry that you are interested in opening your business.”