The ultimate pricing guide for wholesale distributors
Transcript of The ultimate pricing guide for wholesale distributors
1The ultimate pricing guide for wholesale distributors
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2The ultimate pricing guide for wholesale distributors
Section 1: Introduction to wholesale pricing .......................................................................
1.1Retailvs.wholesalepricing:What’sthedifference? ................................................
Section 2: How to calculate your wholesale price ...............................................................
Section 3: Reviewing your pricing strategy ..........................................................................
Section 4: How to calculate retail markup ...........................................................................
4.1Differencebetweenmarkupandmargin ..............................................................
Section 5: Advanced wholesale pricing .................................................................................
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Table of contents
1The ultimate pricing guide for wholesale distributors
Introduction to wholesale pricing
Pinpointingtherightpricingstrategyforyourwholesalebusinessiskeytorunningasuccessfulbusiness.
Choosingtherightpriceforyourproductsisaboutstrikingabalancebetweenhealthysalesvolumesandprofitability.Setthepricetoolowandyouriskdamagingyourproductperceptionvalueorlosingmoney.Setthepricetoohighandyourisknotbeingcompetitiveenoughtoattractbuyers.
Forwholesalebusinesses,gettingpricingright–especiallywhendealingwithmultiplemarkets–canprovetobeatrickyandoftencomplextask.
InthiseBook,we’lltakeyouthrough:
• Themethodologyforcalculatingwholesaleprices• Howtoreviewyourpricingstrategy• Howtocalculatemarkup• HowtouseTradeGeckoforwholesalepricemanagement
Armedwiththisknowledge,you’llhaveasolidfoundationfromwhichtoimplementasmartwholesalepricingstrategyforyourbusiness.
2The ultimate pricing guide for wholesale distributors
Retail vs. wholesale pricing:What’s the difference?
Thegoalforbothretailandwholesalepricingistocoveryourcosts,staycompetitive,createavalueperceptionforcustomers,andultimately,makeaprofit.However,thestrategiestogettherearedistinct.
Thepricesofgoodsinretailarerelativelyhighwhencomparedtowholesaleprices.Thereasonforthisisthatretailprofitmarginsusuallyneedtobehighertoaccountforexpensesandoperatingcostslikeadvertisingandmarketing,rent,staffsalaries,utilities,and so on.
Traditionally,wholesalebusinesses’operatingcostshavebeenlowerthanretailersduetolessneedforskilledlabor,marketingefforts,upkeepofphysicalstorefronts,etc.Assuch,wholesalepricingisbasedontheprincipleofsellinginbulkatalowermarkup.Wholesalerscanstillmakeaprofitwithlowerpricesbecausetheirexpensesarelower.
Ifyousellretailandwholesale,knowinghowtodifferentiateyourwholesalepricefromyourretailpriceiscrucialbecausethere’sahighlikelihoodthatyourwholesalebuyerswon’tacceptyourretailpricingmodel.
Thegeneralruleofthumbisthatyourwholesalepriceshouldbe50%oftheretailpricetoensureyoucanstillmakeahealthyreturnoninvestment(ROI).However,agoodpricingstrategyishighlydependentonyourbusiness–sothere’snoone-size-fits-allapproach.
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How to calculate your wholesale price
ThefirststeptocalculatingappropriatepricesforyourwholesaleproductsistocalculateyourCostofGoodsSold(COGS)andoverheadcosts.
Your COGS represents how much you spend to acquire the products that you’ll resell.This includes costs such as:
• Acquisitionofproductsfromyourvendors/suppliers
• Freight & handling cost
Overhead costs, also called indirect costs, exist regardless of the volume of products sold. They include fixed or variable expenses, such as:
• Officerent• Rentforwarehousespace• Utilitybills• Insurance• Equipmentandsoftwareusedtorunyour
business,suchascomputersandinventorymanagementsoftware
If you are a manufacturer or entrepreneur making your own products, your COGS also includes all the costs such as:
• Rawmaterials(e.g.fabrics,threads,zipper,buttonsforadress)
• Labor(e.g.employees’salariesmultipliedbytimespenttoproduceitems)
• Equipment(e.g.amortizationormachinerentaldirectlyrelatedtomanufacturingproducts)
Cost of Goods Sold Overhead costs
Thislistisnotexhaustive,soit’simportanttoconsidertheexpensesyourspecificbusinessincurs.Forexample,youmightalsowanttoconsiderthecostofinventory shrinkageduetotheftordamage.
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How to calculate your wholesale price (con’t)
Total cost calculation
Example:
Georgie’s wholesale business has overhead costs of $2,500 a month.
Georgie will sell 400 jackets at a cost to the business of $35 during a six-month period.
Jackets COGS = $35 x 400 = $14,000.
Hence, Georgie’s total cost for a six-month period = ($2,500 x 6 months) + $14,000 =
$29,000.
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Onceyou’vecalculatedyourtotalcosts,it’stimetocalculateyourpricing.
Therearefourstagestocalculatingyourwholesalepricethroughabsorptionpricing:
• Calculatetotalcost• Profitmargin• Calculateyourwholesalepricebyaddingupstages1and2
Inotherwords,yourwholesalepriceforeachproductisthesumofthecostplusyourdesiredprofitmargin.
Ofcourse,calculatingpricesmanuallyusingthisformulaforhundredsofproductscanbetediousandtime-consuming.OurWholesalePriceCalculatorcanautomatethisprocess,savingyoumanyhoursofcalculations.
How to calculate your wholesale price (con’t)
Production cost per unit+
(Total overheads + admin expenses)
Number of units produced
1. cost price =
2. wholesale price = cost + profit margin
3. Recommended retail price (rrp) = wholesale price x 2-2.5
Absorption pricing method
Absorptionpricingworksgreatwhenyou’retryingtofigureoutyourwholesaleprice,asitensuresyouearnacertainprofitmarginoneveryproduct.Here’showitworks.
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Reviewing your pricing strategy
Attheendofagivenperiod,it’sagoodideatocompareyourprojectedcostofsaleswithyouractualCOGStoensureyou’remaintainingahealthyprofitmargin.
Ifyoufindthatyou’renotmakingthenecessarymargintostayprofitable,youmayneedtoadjustyourpricingstrategyforsomeorallofyourwholesaleproducts.
TradeGeckoIntelligencesalesreportsprovideyouwithawealthofknowledgeonkeyaspectsofyoursalesandprofitabilityovertime.Intermsofwholesalepricing,it’sespeciallyusefulfortrackingyouractualCOGS,aswellasyouractualprofitscomparedtoyourprojectedprofits.
Here’swhattheTradeGeckoIntelligenceHubdashboardlookslike:
Onthedashboard,youcanseeTotalOrderValue,TotalProfitandProductsSold.Usingthedrop-downmenu,youcanalsobreakdowndatabyvariantssuchasCustomer,ProductBrand,Channel,etc.Thismeansyoucangetgranularinidentifyingtheproductsortypesofordersthatarepositivelyornegativelyimpactingyourbottomline.
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How to calculate retail markup
Whenitcomestopricingbetweenretailersandwholesalers,markupistheamountthatisaddedtothecostofaproducttodetermineitsresaleprice.
Thecommonmarkupratiothatisoftenusedisa100%markup,alsoknownasthe‘keystonemarkup’,whichis:
Beforesettingaretailmarkup,evaluateyourcompetitorsonlineandtakealookatprofessionalnetworkswithinyourindustryonforumsorLinkedIntogaugewhat’sappropriateforyourproductsandbusiness.
However,pricingcorrectlyisoftenfarmorecomplexthanthisandcomesdowntounderstandingthecompetitivelandscape,yourindustrystandards,andwhatyourcustomersarewillingtopay.
Forexample,herearesomemarkupbenchmarksintopindustries:
• Fashion:rangesfrom120%to160%(orfrom2.2to2.6)• Cosmetics:rangesfrom60%to80%(orfrom1.6to1.8)• Gifts:100%markup
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How to calculate retail markup (con’t)
Onceyou’vedoneyourresearch,useyourwholesalepriceandindustryretailmarkuppercentagetocalculateyourretailprice:
Example:
Georgie sells her jackets wholesale at $49 each (a markup of 40% on her $35 cost price).
She decides to sell her jackets at a retail markup of approximately 130%.
Hence, her retail price = $49 + ($49 x 130%) = $112.70.
She sets the RRP at $114.95, meaning she or other retailers can sell every jacket at a markup
of $65.95 (~135%).
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It’simportanttodifferentiatebetweenthetwowhensettingprices,becauseusingthesetermsinterchangeablycanleadtopricesettingthatissubstantiallytoohighorlow,resultinginlostsalesorlostprofits.
Difference between markup and margin
Markup
Markupistheamountbywhichthecostofaproductisincreasedinordertoderivethesellingprice.Forexample,amarkupof$30froma$70costwouldyielda$100price.Or,statedasapercentage,themarkuppercentageis42.9%(calculatedasthemarkupamountdividedbytheproductcost).
Margin
Margin(alsoknownasgrossmargin)issalesminusthecostofgoodssold.Forexample,ifaproductsellsfor$100andcosts$70tomanufacture,itsmarginis$30.Or,statedasapercentage,themarginpercentageis30%(calculatedasthemargindividedbysales).
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Forwholesalebusinesseswithextensiveproductlines,TradeGecko’sPrice ListManagementfeaturemakesimportingandupdatingpricelistseasy,fast and painless.
Advanced wholesale pricing
Forwholesalebusinesseswithextensiveproductlines,TradeGecko’sPrice ListManagementfeaturemakesimportingandupdatingpricelistseasy,fast and painless.
Themoreproductsyouhave,themorecomplexyourpricingstrategywillbe–makingitdifficulttokeeppricelistsuptodatethroughmanualmethodssuchasspreadsheets.
WithTradeGeckoPriceListManagementfeature,youcan:
• Eliminatetheneedtousespreadsheets• Manageallaspectsofmultiplepricelistsonasinglepagewithoutleavingtheapp• Gainvisibilityintotherelationshipsbetweendifferentpricesonmultiplepricelists
fromasinglepage• Assigncustompriceliststospecificcustomers• AccesscustompricelistsviaTradeGeckoMobile
AnyupdatesyoumaketoyourpriceswillalsobereflectedinyourB2BeCommercestore,includinguniquepricelistsforspecificcustomers.Thisgoeshandinhandwithcreatingacustomizedandseamlessexperienceforwholesalecustomers–helpingyoutogrowyourbusiness.
Bysettingtherightpriceforyourproducts,buildingstrongandauthenticrelationshipswithyourcustomers,andleveragingthedigitaltoolsalreadyavailableinthemarket,youwillhavelaidthefoundationforasuccessfulwholesalebusinessventure.
11The ultimate pricing guide for wholesale distributors
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About TradeGecko | tradegecko.com
Foundedin2012,TradeGeckoisacloud-basedinventorymanagementsoftware-as-a-service(SaaS)providerofferinganaffordable,versatileandpowerfulplatformtoautomateandreduceworkflowinefficiencies,throughintegratingfrontendeCommerceandPOSsoftwarewithbackendaccountingandshippingsoftware.Targetingsmall-mediumbusinesses(SMBs),TradeGeckoallowsSMBstomanagetheirinventorymoreefficiently,processordersquicklyandchangethepricingoftheirproductsdynamically.