Wholesale and retail pricing are crucial aspects of every business. In terms of pricing, wholesale prices are always cheaper than retail prices. In wholesale, there’s no need to sell products, hire a store, or consider how to display your passions. All you have to do now is deal with massive quantities of retailers, communicate with shops, and be prepared to ship products to different countries and cities.
However, in retail, you have to pay for marketing, packaging, salaries, bills, and paid plans for the platforms utilized in your retail business model, among others. Every little detail that is important to the consumer experience should be considered by a store.
Businesses need to set up both these prices separately to help identify their profit margins on the products they sell. In this blog, we will discuss wholesale and retail pricing, their strategies, and the steps to calculate these prices on your own. Let’s get started!
Before digging into different strategies for exclusive pricing, it’s essential to know what wholesale pricing is.
Wholesale price is the sum a wholesaler or distributor pays to a manufacturer for their goods. As you might expect, wholesale pricing is influenced by various factors, some of which may or may not be present in a specific firm.
Each supplier’s material procurement, manufacturing, B2B marketing, and sales processes are different. As a result, pricing for similar products may differ from one seller to the next.
Material availability, economic conditions, the growth of business owners’ operations, and client demand can all influence wholesale costs. In raw material shortages or economic downturns, it’s a good idea to verify your suppliers’ prices regularly.
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Different Wholesale Pricing Approaches
Absorption pricing is a pricing approach in which the price of a product is determined by taking into account all of the product’s variable expenses and the proportion of fixed costs. Because all costs are absorbed in the ultimate price of the product, it is also known as “absorption.” This is a variation of the full-cost price pricing concept.
These are the procedures you must follow to use the absorption method to determine the ultimate price of your goods.
- Calculate your product’s variable cost per unit.
- Make a list of your overhead costs. This class includes utilities, maintenance, storage, and employee compensation.
Total Overhead Expenses = Sum of overall operational cost
= utility expenses + maintenance + storage fees + employee salaries
- Calculate the administrative costs you estimate to incur during the product’s manufacturing.
- Determine the profit margin you want to make on your goods.
- After you’ve determined all of the factors listed above, use the following Formula to figure out the absorption pricing for your business:
Absorption Pricing Formula = Targeted profit margin*(Variable cost+((Total Overhead+ Administrative Expenses/ Number Of Units Produced)
Demand pricing, also known as customer-based pricing, is a pricing method that uses current consumer demand to set a product’s sale price. Consumer demand refers to how your customers view the worth of your goods in this approach.
Demand pricing can be used in a variety of ways:
This is a technique in which your company first sets a high price for your product, then gradually lowers it over time.
In the electronics business, for example, this method is extensively used. Exorbitant-end cellphones, for example, are released at costs so high that only a select few can buy them. When other brands introduce competitive cellphones, prices are steadily reduced over a few months.
This strategy involves determining prices based on what competitors are charging for similar products. Competitive pricing encompasses three price strategies.
This method entails pricing your products lower than those of your competitors. While you may lose money on some products, you can make up for it by having your customers buy more profitable items.
You may, for example, be a wholesaler of inkjet printers. You can make your inkjet printers inexpensive to entice clients to buy from you. Inkjet printers, on the other hand, rely on inkjet cartridges to function. You can then raise the pricing of inkjet cartridges to make up for the loss of selling low-cost inkjet printers.
You would set the price of your products the same as your competitors under this method.
You may, for example, be a wholesaler of fresh fruits. When you notice a competitor raising or lowering their pricing for a similar product, you will reduce your price to keep up with the competition.
You would price your products substantially higher than your competitors’ for this technique.
Apple, for example, has effectively implemented this strategy in the sale of its technological items, such as the iPhone. iPhones are easily the most costly smartphones on the market today, based on their specifications. However, millions of customers around the world continue to buy iPhones because they feel they are high-quality products.
Geographical pricing refers to adjusting a product’s price based on the buyer’s location.
Geographic pricing comes in a variety of forms. Here are a few examples:
Point of Production Pricing
Free on Board (FOB) origin pricing is another term for this. This method entails determining the pricing of your goods at the point of manufacture. When selling to clients and not paying any freight or transit costs, this strategy is widely utilized. On the other hand, your wholesale buyers will choose their mode of transportation for your products and bear the expense of transportation.
Uniform Delivery Pricing
You set the same price for a product regardless of where your customers are. Because it is similar to how mail services charge their services, this strategy is also known as postage stamp pricing.
This entails raising the price of a product as the distance between the seller and the buyer grows. Buyers who are further away from you pay more for the same product than those who are closer to you in this manner.
Using freight-absorption pricing instead of point-of-production pricing involves absorbing all costs related to conveying your goods to your buyer.
Any business that sells goods to customers must consider retail pricing. After all, when it comes to purchasing decisions, consumers are concerned about various aspects, but the price they will pay for any item is nearly always one of them.
Depending on your short- and long-term business goals, there are various techniques you can use when it comes to pricing products supplied at your store. However, in general, the retail price you set for any given item must include the item’s cost as well as whatever markups you make to benefit from selling it.
Different Retail Pricing Approaches
Although psychological pricing may sound like something from a research paper, we all deal with it daily.
This strategy, sometimes known as “charm pricing,” is based on the idea that customers trust prices that conclude in odd numbers like 5, 7, or 9, with the last one being the most popular. As a result, rather than offering an item for a rounded $200, the merchant may choose to price it at $199, which customers may perceive as a better deal based solely on the number.
As the name implies, competitive pricing is the technique of lowering your prices by using your competitors’ prices as a benchmark. Retailers who employ this method expect to compensate for their lower profit margins by increasing total sales volume.
As the name implies, discount pricing is the practice of selling things at a reduced price, whether through sales codes or coupons emailed directly to customers, in-store discounts, or even store-wide markdowns. However, businesses dislike the thought of discounting things because it reduces their profit margins; having a sale now and again can help you attract new clients who are seeking a bargain.
Bundle pricing, also known as multiple pricing, is when a collection of products is sold for a single price—think three-pack socks or five-pack underwear.
Retailers might benefit from bundle pricing if they wish to package and advertise their products as an experience for customers.
A deli, for example, could package crackers, meats, cheeses, and wine to indicate a picnic experience to clients. Alternatively, a butcher could package some items to suggest a BBQ. With bundle pricing, you may sell various things that would ordinarily be sold separately for a single price. Bundle pricing, when used creatively, can help businesses shift inventory that might otherwise be difficult to sell on its own.
As the holiday season is approaching, a lot of retailers and wholesalers should consider this pricing strategy. Shoppers are eagerly waiting for this holiday season to enjoy heavy discounts to buy special gifts for their loved ones.
Lower prices and large deals are always prevalent over the holidays. Take a peek at your competitors’ pricing strategy and see what they’re doing. They may set their sale prices lower than what you can compete with, but don’t worry; they’ll rapidly run out of stock. As a result, your profit margins will improve.
This is the greatest moment to wait and receive the best deal possible. It’s a buyer’s market right now. You should take advantage of it now because the opposite may be true later in the year.
However, this strategy comes with a few challenges. One of these challenges includes bulk editing for your holiday products in your stores. Manually changing the prices of every product in your store could be very exhausting and time-consuming.
In order to deal with this challenge, you should consider using a PIM tool that allows bulk editing for your products. With a PIM tool, you can centrally edit and change all the categories of your products, including prices.
Apimio is one of the PIM tools that lets you store, organize and manage your products in a central location, and also lets you bulk edit all your products and their categories.
So in essence there are 4 major strategies of wholesales pricing:
- Absorption Pricing
- Demand Pricing
- Competitive Pricing
- Geographical Pricing
And there are 5 different ways for retail pricing:
- Psychological Pricing
- Competitive Pricing
- Discount Pricing
- Bundle Pricing
- Holiday Pricing
However, you can also calculate the wholesale and retail pricing on your own, based on your cost and profit margin. In the next section, we will be discussing the steps to follow, in order to calculate cost-based wholesale and retail pricing.
How to calculate a Cost-Based Wholesale and Retail pricing
If you want to adopt cost-based pricing for your wholesale or retail business, there are the steps that you should follow to calculate one:
Step 1: Research your Market
Determine the part of the market you’re attempting to capture and where you fit in before establishing pricing for any retail product. Are you a budget brand, a contemporary brand, or a designer brand, for example?
Keep this in mind while you manage your research if a reduced price point is your competitive edge. When performing market research, keep in mind whether your target buyers are more budget-conscious or seeking a high-quality, high-end product.
Step 2: Calculate the cost of your manufactured goods.
Once you have researched your market, you should now calculate your cost of goods manufactured. To calculate the COGM (Cost of Goods Sold), add up all your input costs. This cost includes material cost, labor cost, capital costs, and overheads. To calculate your cost of goods manufactured (COGM), you can use this Formula:
Cost of Goods Manufactured = Total Material Cost + Total Labor Cost + Additional Costs and Overhead.
Step 3:Calculate the Average Cost of Goods Manufactured.
To calculate the Average Cost of Goods Manufactured (ACGM), divide the total cost of goods manufactured (calculated above) by the total number of units produced.
ACGM = TCGM / No. of units
Step 4: Calculate your Profit Margin
Put simply, the profit margin is the amount of money you make when you sell a product. The profit margin is generally calculated in percentage. You are in charge of determining the profit margin %. Wholesalers often aim for a profit margin of 30-50 percent.
Step 5: Calculate the Wholesale Price
Calculate your wholesale pricing using the figures you determined for ACGM and profit margin percentage, using this Formula:
Wholesale Price = ACGM / (1 – profit margin percentage)
Whatever price strategy you choose for your company, it’s critical to understand the costs of producing goods. This is to make sure that you know how low to sell your products and that you don’t lose money due to your pricing.
Formulating distinct wholesale pricing strategies can be tricky if your organization offers multiple types of products. Managing all of your pricing for various products and consumers can be a time-consuming procedure.
However, with that being said, it is all up to you and your organization. You can even have multiple pricing strategies for different product segments. Therefore, in that case, you should always adopt the most suitable one for your business.