The price is a really important factor when it comes to creating a wholesale strategy. Since the price compares your product with a particular value, it highly influences the market position of your brand and how it is viewed by its (potential) customers. It is not easy to change a wrong pricing decision in retrospect – because your customers often get familiar with the price they pay and might become frustrated if they suddenly need to pay a higher price for the same product. Therefore, it definitely makes sense to carefully think through your pricing strategy at the beginning of your wholesale activities.
Questions, that you should answer are the following:
How much does your product cost for the end consumer (= Recommended Retail Price)?
How much does your product cost for retailers (= Wholesale Price)?
Where is your break-even point (the price from which you start making a profit)?
Shall your product cost the same for every end consumer/retailer, or do you want to differentiate (e.g. based on the location)?
Is there a discount you would like to offer some customers?
Is the price supposed to be changing over time (e.g. after you reached certain visibility on the market)? How do you want to manage that change?
How do you wish to impose your price on the market?
Wholesale Price and Recommended Retail Price (RRP)
In wholesale, there are two different price points that must be defined to make sure that everything goes hand in hand. The wholesale price is the price that potential resellers need to pay to you to offer your products in their shop. This price should cover your cost and include a profit margin so that your business can grow. The recommended retail price, on the other hand, is the price that the end consumer needs to pay when he or she purchases the items in the shop (or on your own website).
Please keep in mind that in the end also the store wants to profit from selling your products. Only when the ratio between the wholesale price and the recommended retail price is reasonable, the shop owner as a business person will become interested in cooperation with your brand. The ratio between the recommended retail price and the wholesale price is called the factor. It divides the Recommended Retail Price (incl. VAT) through the Wholesale Price (excl. VAT) and is therefore very easy to compare.
What can be considered a good profit margin for a product depends on different aspects such as the business sector or the country. In Germany, it is e.g. recommended to work with a factor of at least 2.2 for lifestyle products. This means that your products do appear interesting to potential resellers if your recommended retail price is at least 2.2 times your wholesale price.
The higher you set your profit margin, the more attractive your products appear in comparison to your competitors. Additionally, defining a good profit margin for resellers can build the foundation of a very fruitful long-term cooperation between your brand and the shop and can make your brand stick out from your competitors.
General Pricing Strategies for Wholesale and Retail
How the exact price points (both wholesale price and RRP) are defined depends on many different aspects such as the market situation, product, or timing. Therefore, it is not easy to give general recommendations on how the exact price should be set up. A good starting point for your considerations can be the following three basic strategies:
demand-oriented pricing (the price depends on the value your potential clients will be willing to pay)
cost-oriented pricing (the price depends on your own cost structure)
competition-oriented pricing (your price depends on the market price of your competitors)
It usually makes sense to not only focus on one strategy but to keep aspects from all 3 strategies in mind. The perfect price for a product does cover your costs and results in profit but is also reasonable in comparison with your competitors. When you plan to sell your products at a higher price than your competitors, it is really important that you make sure that your potential customers understand the additional benefits your products can offer them. If your price is lower than from your competitors, make sure that your target audience understands why (and that it e.g. does not mean that your products have a much lower quality).
The Cost Structure and your Break-Even Point
To make sure that you clearly know which costs you need to cover with your prices, it is elementary to take a closer look at your cost structure. Make sure to list all the costs that occur when creating your products – and keep in mind that those also include your proportional overhead costs (e.g. for your office or wages). Your costs can generally be divided into 4 different cost types: Material Costs, Production Costs, Service Costs, and Administrative Costs.
Cost | Definition |
Material Costs | All the costs referred to the physical resources you need to produce the product (e.g. wood to create a chair) |
Production Costs | All the costs that come up when producing your product ( e.g. wages, overhead costs for electricity, warehousing costs) |
Service Costs | All the costs that come up when providing your product to customers (e.g. consultation, shipping costs) |
Administrative Costs | All the costs that come up generally in your business (e.g. external bookkeeping and tax advisory) |
If you know the exact unit costs, you have the minimum price that you can offer without generating a loss. This price is called the break-even price in the business and is an important parameter to consider in your pricing decisions.
The Profit Margin
Of course, the end goal shall not be to break even but to also make a profit out of your products. Therefore, it is important that you define a good but reasonable profit margin and add that to your costs. To define the profit margin, it usually helps to do some research on common margins in your business sector. You should also consider your personal business goals – since those are often financed by the profit that you make.
One last tip: It is really important to make sure that your pricing is consistent. Therefore, make sure to work with the same retail price on your own website and on the store market. It is never a good sign for customers if they need to pay more for your products in a boutique than on your own website. Therefore, make sure to have your pricing laid out when you start with your wholesale activities so that you can operate accordingly.