Wholesale pricing is what you charge retailers who buy products in large volumes. Retail prices are what retailers set as the final selling price for consumers.
There are a number of mathematical formulas used in determining a product’s price, margin, markup, markdown, profitability, and sales history. While there are dozens of formulas to comb through, there are only a few you need to know when pricing products for direct-to-consumer sales and wholesale.
Here, we’ll walk you through a few of those formulas and some steps you can take to create successful pricing strategies for your product, whether you sell wholesale, retail, or both.
Table of Contents
Wholesale vs. retail pricing
Wholesale and retail are two fundamentally different processes: wholesale involves moving goods from manufacturing to distribution. 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, which is referred to as the retail price.
Distributors use a few different approaches to set wholesale prices. The goal 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.
Retail pricing starts with thinking about the customer. What would they be willing to pay for your product? A retailer will mark up the price on wholesale goods to earn a profit.
Retail prices are first set with knowledge of ‘what will the customer pay for it.’ It starts there. For me, if this came out to a 50% margin, I’d see what increasing the price to $28 or $30 would do. Once it feels good, I would leave it there.
Say a retailer buys your product for $10 and wants a $10 gross profit, they would charge $20 for the product in-store. This is also known as keystone pricing, or simply doubling the wholesale cost paid for a product. If you are a wholesaler, you can recommend a suggested retail price to retailers, but they do not have to use it.
How to calculate wholesale price
Now that you know the difference between wholesale and retail pricing, let’s look at how you can calculate a wholesale price for your products.
Research your market
Before you set a price for any retail product, determine which segment of the market you’re trying to capture and where you fit in. For example, are you a discount brand, a contemporary brand, or a designer brand?
If a lower price point is your competitive advantage, keep that in mind while doing your research. If your target customers are more budget-conscious or looking for a high-quality high-end product, these are also factors to keep in mind when conducting market research.
Calculate your cost of goods manufactured
Cost of goods manufactured (COGM) is the total cost of making or purchasing a product, including materials, labor, and any additional costs necessary to get the goods into inventory and ready to sell, such as shipping and handling.
A product’s COGM can be determined with the following calculation:
Total Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods Manufactured
Set your wholesale price
A good place to start when setting your wholesale price is to multiply your cost of goods by two. This will ensure your wholesale profit margin is at least 50%.
Profit margin is the gross profit a retailer earns when an item is sold.
In the apparel segment of retail, brands typically aim for a 30%–50% wholesale profit margin, while direct-to-consumer retailers aim for a profit margin of 55%–65%. (A margin is sometimes also referred to as “markup percentage.”)
For example, let’s say you sell swimsuits. If you pay $25 for each swimsuit you buy and you sell them for $50 each, your retail margin per suit is $25, or 50%.
Retail margin percentage can be determined with the following formula:
Retail Price – Cost / Retail Price = Retail Margin %
In the case of the swimsuits:
$50 (Retail Price) – $25 (Cost) / $50 (Retail Price) = 0.5, or 50% (Retail Margin)
Wholesale pricing methods
There are many different wholesale pricing strategies available. It’s not helpful to learn all of them if you’re new to selling wholesale. So let’s go over two simple and easy to use methods you can take advantage of today.
Absorption pricing
Absorption pricing refers to factoring in all the costs associated, including fixed cost and profit margins, when determining your price. It’s called “absorption” because all the costs are consumed in the product’s final price.
The formula for absorption pricing is as follows:
Wholesale Price = Cost Price + Profit Margin
Not sure how to calculate cost price? You’ll need to know your costs of goods sold (COGS) and your overhead costs. Here’s a little refresher.
1. Calculate your COGS. This represents how much you spend to make the wholesale products you’re selling. It includes costs such as:
- Raw materials like threads, zippers, wood, fabrics, etc.
- Labor, which is calculated by employees’ pay multiplied by time spent producing an item
- Equipment, which is any amortization or machine rental related to manufacturing the items
2. Calculate your overhead costs. This includes all indirect costs, as well as fixed and variable expenses such as:
- Utility bills
- Insurance
- Office rent
- Warehouse rent
- Maintenance
- Storage feeds
- Software used to run your business
3. Add the two costs together.Once you have those two numbers, combine them to create your cost price for the formula.
Pros
- This method is easy to use. It doesn’t require any training or complicated formulas.
- Your profits are almost guaranteed. If you can account for all expenses, you’ll likely turn a good profit.
Cons
- Pricing gaps are frequent with this method. It doesn’t take into consideration any competitor pricing.
- This method doesn’t account for value perception. You could charge too much, sending potential buyers to other providers.
Differentiated pricing
Differentiated pricing is a wholesale pricing method used to optimize return on investment by calculating the demand for a product. In this case, different buyers in different situations pay different prices for the same product.
Also referred to as demand pricing or time-based pricing, this method is based on the idea that buyer acceptance determines the price on any given market condition.
For example, if you are selling bathing suits, you can sell at a higher price than the average market value during peak seasons. You’ll notice in retail stores the price of bathing suits can rise quickly at the beginning of summer season, then come back down after the demand drops off. This also applies to areas where there is less competition and customers typically buy products at a higher price, such as a beach resort or an airport.
Using differentiated pricing, wholesalers can also offer products at a lower price. For example, if you have too much old stock on hand, you can run a flash sale last minute and walk away with some profit.
Regardless, you need to set a price that buyers believe is fair for the product’s value and still earns them a healthy profit at the end of the day.
Pros
- This method can deliver maximum return on investment. It lets you take advantage of market scenarios in real time, keeps you competitive, and allows you to gain data on buyers.
- When there is higher demand for a product, buyers are often willing to pay a premium, which means more profit for you. You can use differentiated pricing to sell trending products and other items that are hard to find or extremely popular.
Cons
- There’s a fine line between maximizing profit and overcharging wholesale customers. If you are perceived as opportunistic, or people get the sense you are price gouging them, it’ll hurt your brand’s reputation.
- Think about how crazy expensive KN95 masks and cleaning products were at the beginning of the COVID pandemic. People were outraged and the government enacted more strict laws on demand pricing for certain products. You don’t want to be associated with this kind of greed because buyers will not come back and purchase from you.
PRO TIP: Want to see peak sales periods for certain products and plan for surge pricing? Go to Reports from the Shopify Admin and select the appropriate Retail Sales report. From there, you can see sales by product, vendor, product type, or even for a specific SKU across all retail stores using Shopify POS.
How to set a suggested retail price (SRP)
A suggested retail price (SRP), also known as a manufacturer’s suggested retail price (MSRP), is the price a brand or manufacturer recommends retailers set for their product. It’s important to make sure retailers follow your SRP, so they’re not undercutting you or your other retail partners.
Retail price is calculated with the following formula:
Wholesale Price / (1 – Markup Percentage) = Retail Price
Here’s an example based on a wholesale price of $30 and a 60% markup percentage:
- Convert the markup percent into a decimal: 60% = .6
- Subtract it from 1 (to get the inverse): 1 – .6 = .4
- Divide the wholesale price by .4
- The answer is your retail price
$30 (Wholesale Price) / (1 – .6) = $75 (Retail Price)
Research your market to see how other comparable brands or retailers set their prices. Then you can work backward to see if your target retail price is feasible, based on the costs you incur to produce your products.
For example, if your target retail price is $60 and you want to give your wholesalers a 55% retail margin and yourself a 50% wholesale margin, you can use this pricing formula to work backward and calculate the wholesale price:
- Convert the markup percent into a decimal: 55% = .55
- Subtract it from 1 (to get the inverse): 1 – .55 = .45
- Multiply .45 times the retail price
- The answer is your wholesale price
Retail Price x (1 – Retail Margin) = Wholesale Price
$60 (Retail Price) x (1 – .55) = $27 (Wholesale Price)
Calculate your target cost price (cost of goods) to maintain a 50% wholesale margin:
- Convert the markup percent into a decimal: 50% = .5
- Subtract it from 1 (to get the inverse): 1 – .5 = .5
- Multiply .5 times the wholesale
- The answer is your target cost price
Wholesale Price x (1 – Wholesale Margin) = Target Cost Price
$27 (Wholesale Price) x (1 – .5) = $13.50 (Target Cost Price)
Using a dual pricing strategy
As demonstrated, if you wholesale your products to retail partners and sell direct-to-consumer through your website or popup shop, it’s smart to create a dual pricing strategy to ensure you’ll still profit, regardless of whether you’re selling your products at wholesale or retail.
That means you’d create an external retail price for your products listed on your website that your direct customers see and a separate wholesale price you share with wholesale or potential wholesale accounts in the form of a line sheet.
When you sell wholesale, you’re likely selling a higher quantity in each order, which allows you to sell the products at a lower price.
Here’s where the formulas come in handy. You can do the math to determine your margins and set wholesale and suggested retail prices for your products.
For example, if you design and manufacture swimsuits and sell them via wholesale and retail, you’ll need to look at the following numbers:
- Cost of Goods (COG): $15 to make one swimsuit
- Wholesale Price: $30
- Suggested Retail Price (SRP): $75
- Your wholesale margin:
- 50% Wholesale Margin = $30 Wholesale – $15 COG / $30 Wholesale
- The retailer’s margin when they use your SRP:
- 60% Retail Margin = $75 Retail – $30 Wholesale / $75 Retail
- Your retail margin when you sell direct-to-consumer (D2C):
- 80% Retail Margin = $75 Retail – $15 COG / $75 Retail
With the above wholesale and retail pricing strategy, you’re making a gross profit margin of 50% on your wholesale orders and 80% on D2C orders.
Creating your wholesale pricing strategy
Now that you have a better understanding of the formulas used to calculate product pricing, it’s time to get started. You can create a spreadsheet that lists your products by style number and name and includes columns for the cost of goods, wholesale price, wholesale margin, retail price, and retail margin.
Use these formulas above to create a costing chart you can plug numbers into each time you need to define pricing for a new product.
If you want to use Shopify to sell wholesale products to other businesses, you can sell on the Handshake marketplace or create a password-protected storefront by adding the wholesale channel in your ecommerce store.
This post was originally written by Alexis Damen and has been updated by Michael Keenan.
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