A Comprehensive Guide To Calculate Wholesale Price

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For those starting a wholesale business or transitioning from retail to wholesale, knowing how to calculate wholesale prices has become an important concern because of increased rivalry in the business sector.

Nowadays, customers have the option of purchasing the same items from different eCommerce stores.

Sellers struggle with the decision of whether to match the price of a competitor or not. Should it be more expensive than the rival's price or less expensive? What level of profit margin is ideal?

You can determine the wholesale price using the best methods available by understanding the elements at play in this article.

The secret is to match customers' needs for a reasonable price while also making sure that the profit margin is taken into account. You should avoid turning off clients when looking for sky-high revenues.

In this article, we will cover:

  • the comparison of wholesale and retail prices
  • how to calculate wholesale price
  • formula for wholesale price calculator
  • strategy for wholesale pricing
  • difficulties when setting up a wholesale price

Let’s get to know more about wholesale pricing strategy by reading down below.

Understanding wholesale price vs retail price

In contrast to the price charged to consumers, the wholesale price is the cost of a product when it is sold in bulk to significant trade or distributor groups.

A Comprehensive Guide To Calculate Wholesale Price

The cost price of a certain product is added to the manufacturer's profit margin to determine the wholesale price. If we go into detail, we can add importers and exporters to the equation.

On the other hand, the retail price is the cost to customers from merchants. From the manufacturer to the merchant, there are often markups added to this price. State, federal, and value-added taxes must also be included.

Customers will pay the retail prices of a product when buying it from retail stores. 

The retail price is what consumers pay for the finished product when it is sold. This price could be considered the final cost after the product has passed through the supply chain.

How to calculate wholesale price

Let's explore the significant factors that will affect how you come up with wholesale pricing and different pricing formulas you need to know and understand for your goods.

02 calculate wholesale price - wholesale model

1. Analyze your market

Before you set prices for your products, you should first identify your target market. Determine if you’re a: 

  • Modern brand
  • Budget brand
  • Or designer brand

Those 3 factors largely affect how you should price your goods. 

Budget brands frequently have low quality since they emphasize low prices as a marketing point.

When you purchase them, you pay a low cost and receive a basic level of capability or service. The most popular examples are those related to the tourism sector, such as hotels and airlines.

Modern brands are built on listening, being open, and consistently providing excellent experiences.

If your company has a current brand, you must base your pricing decisions on market demand. The price will rise in direct proportion to the level of demand.

An example of a modern brand is Reliable Soft that offers digital marketing certificate programs. Their service offers modern solutions and their prices vary depending on the selected programs and its complexity.

Designer brands are driven by innovation and originality, which enables them to demand the prices they want. Customers of designer brands usually do not mind the prices of the clothes they buy.

As long as it suits their taste and is high-quality, the luxurious product would definitely sell. Setting up low prices will only give a bad impression to your customers.

If your target market are those who prefer lower price points, it’s important that you have a clear understanding of the break-even point calculation so you can 

bear that in mind while you conduct your study. Be aware of your break-even point and determine it using the break-even point calculation.

03 calculate wholesale price - breakeven point

When performing market research, take these aspects into account if your target clients are more cost-conscious or seeking a high-end, high-quality product.

2. Determine your cost of goods manufactured

Whether you’re creating or purchasing a product, the complete cost always includes labor and material.

Most times, the costs include the money you put in for inventory and good preparation like handling and shipping costs referred to as COGM or “cost of goods manufactured”.

Here’s the formula for COGM:

Cost of Goods Manufactured = Total Labor Cost + Total Material Cost +  Overhead &

Additional Costs

All expenses related to the product will be added up to create the Total Cost Price (TCP). Typically, this includes the following elements:

  • Labor cost - the price paid that is offered to the employees in exchange for their expertise.
  • Overhead costs - includes rent, packaging, shipping expenses, etc.
  • Cost of raw materials - the amount paid on the basic components of manufacture.

3. Decide on a wholesale pricing

To know what wholesale price to set, you can double your cost of goods as an initial step. This will guarantee a minimum 50% profit margin for wholesale sales.

04 calculate wholesale price - supply chain

Moreover, the gross profit you make for every sale is considered as the profit margin.

Direct-to-consumer merchants strive for a profit margin of 55% to 65%, while apparel retail firms typically aim for a wholesale profit margin of 30% to 50%. The term "margin" can also be used to refer to markup percentage.

Consider that you market clothing. Your retail margin per item is $30, or 50% if you purchase each one for $30 and sell it for $60.

This is the formula you need to know to determine the retail margin percentage:

Cost / Retail Price = Retail Margin Percentage

In connection to the clothing example: $30 (Cost) divided by $60 (Retail Price) equals 0.5, or 50% (Retail Margin)

The following equation can be used to determine the wholesale price:

Wholesale Price = Total Cost Price + Profit Margin

Wholesale Price x 2 = Recommended Retail Price (RRP)

However, if we use this approach, the wholesale price drops to an unacceptably low level.

Making money is the fundamental point of doing business. We must first understand the Recommended Retail Price for the formula to produce a lucrative result.

The list price of a product, sometimes referred to as the manufacturer's suggested retail price (MSRP), or recommended retail price (RRP), or suggested retail price (SRP), is the amount that the distributors recommend the seller to charge for the item.

We must first add up the whole cost price to get the Wholesale price and Recommended Retail Price. Cost price simply refers to the price the merchant paid when purchasing the products.

4. Promote limited offers

This is very effective especially if you are just starting in the industry. If you want to increase your brand awareness then promote limited offers that will entice your potential customers.

05 calculate wholesale price - transparent labs

This pricing and marketing strategy is used by businesses worldwide. For example, Transparent Labs offers a 10% discount and free shipping for orders over $99 to increase sales as well as promote the effectiveness of their brands.

Wholesale price calculator: setting up wholesale prices

Don't worry—if you're just starting in the wholesale industry, you don’t need to learn all the wholesale pricing options accessible.

06 calculate wholesale price - formula

Instead, let's discuss two straightforward pricing methods you can use right now.

I. Absorption pricing

Absorption pricing refers to the process of 'absorbing' all cost prices to arrive at the final selling price. Utilizing the absorption pricing approach, the wholesale price is determined in three steps:

Step 1. Calculate the total cost price

As already stated:

Total Cost Price = Variable Cost of the Product + [( Overhead Expenses + Administrative costs) /Number of Units]

Step 2. Calculate the profit margin

The ratio of net profit to revenue is known as profit margin. The revenue less the cost is the profit margin.

Profit Margin = Revenue - Total Cost

Step 3. Calculate the wholesale price by adding up Step 1 & Step 2

Wholesale Price = Total Cost Price + Profit Margin

Note: A product's variable cost is its fluctuating price, which varies depending on how the market's demand evolves over time.

Here is an example:

Variable Cost Per Unit = $50.00

Administrative Costs = $40,000.00

Overhead Expenses = $50,000.00

20,000 units are produced by the company, after which absorption pricing is applied:

Cost Price = $50 + [(50,000 + 40,000) / 20,000] = $54.50.00

Advantages of absorption pricing

  1. We can easily determine the Wholesale Price using Absorption Pricing's straightforward methodology. It’s simple to comprehend and doesn't call for any intricate reasoning or challenging calculations.
  2. Marginal profit is guaranteed for the company as long as the inputs used in the calculations are sufficient and accurate.

Disadvantages of absorption pricing

  1. This method does not consider the competitor's aspect while determining the pricing. As a result, in the age of the competitive race, the strategy appears to be ineffective.
  2. When a small business employs this strategy, either they end up setting the price too high, which causes a reduction in the number of consumers, or they end up setting the price too low, which causes the customers to question the veracity of the product value.

This can also be used to determine the Recommended Retail Price.

Wholesale Price x 2 = Recommended Retail Price (or RRP)

II. Differentiated pricing

Differentiated pricing is comparable to auction pricing. It adheres to the demand law.

For the same commodity, different buyers pay varying prices because of the difference in circumstance. Simply said, changing circumstances fluctuates pricing for the same good.

Differentiated pricing accomplishes the objective of obtaining a bigger profit margin in two ways:

  1. Higher price than the typical market value in areas with little to no competition, requiring a customer to pay more than usual for the goods they purchase. For instance, airports, ski & beach resorts, etc.
  2. With a cheaper price per item, the supplied goods sell quickly, resulting in enough sales to generate a fair profit overall. For instance, discounted tickets and last-minute sales to get rid of unsold inventory.

When working with small batches of wholesale goods, the dealer can use differentiated pricing. In this instance, the transportation costs have the effect of taking away the profit.

Therefore, the two methods mentioned above will be used to address this. Big order quantity buyers should be given additional discounts or incentives. While working with small customers, a reasonable profit margin should be kept.

Take BrakesToYou for example, they give different prices to different customers depending on the urgency, distance, and the services that customers would need from them.

07 calculate wholesale price - brakestoyou

In conclusion, client happiness is crucial to a successful business's growth. This must therefore be kept in mind, even at the wholesale level of the market.

An example of this is the Medical Alert Buyers Guide which offers discounts to American Association of Retired Persons (AARP) members. They also give excellent customer service to boost their customer loyalty.

Wholesalers must therefore determine pricing at which consumers believe they are getting a good value for their money and where a marginal profit also serves to fulfill the business's objectives.

Another key consideration is the market environment.

No matter the circumstance, consumers should feel they’re making a worthy buy while you still make a profit.

Advantages of differentiated pricing

  1. This provides the highest ROI. It allows you to leverage market conditions in real time, and gives you access to consumer information.
  2. Consumers are usually willing to pay more for a product with greater demand. Thus this pricing strategy is best for in-demand, well-liked, or hard to locate products.

Disadvantages of differentiated pricing

  1. Maximizing profits at the wholesale level can mean overcharging end users. You might come off as opportunistic which makes your brand suffer. Customers won’t likely come back for another buy.

Proven strategy for wholesale pricing

A strategy and process for establishing your wholesale prices must be developed in addition to the methodologies for wholesale pricing.

08 calculate wholesale price - strategy

If you set your rates too low, you might not be able to cover your operating costs. If you set your wholesale pricing too high, your clients would gladly transfer their business to your rivals.

It's time to develop your pricing plan now that you have a better understanding of the formulas utilized to determine product pricing.

Make a spreadsheet with columns for the cost of goods, wholesale price, retail price, and retail margin that identifies your wholesale products by style number and name.

Create a costing chart using the given formulas so that you can enter data into it whenever you need to establish a price for a new product. A financial model template can also help you in managing your finances for your product.

Returning to the wholesale pricing strategies:

When you are selling a product that is fresh on the market, use absorption pricing. Why? 

Because there aren't any rivals yet. Absorption pricing calculation does not take into consideration the existence of competitors. Thus, in a market with fierce competition, this tactic should be avoided.

Don't merely concentrate on client demand when it comes to differentiated or demand pricing. In addition, there are additional variables that can affect consumer demand, including product quality, production costs, and market position.

If you are still having a hard time dealing with poor cost management, you can also use project cost management software to help you achieve a successful business.

If you want to utilize Shopify or WooCommerce to sell wholesale goods to other companies, you can do so by adding the wholesale channel to your eCommerce site or by setting up a password-protected storefront.

Shopify is a popular e-commerce platform used by many businesses, but like any tool, it has its drawbacks. One of the main cons of Shopify is its cost - while there are pricing plans available for businesses of different sizes, they can add up quickly, especially when you factor in additional apps and plugins. 

Additionally, Shopify's customization options can be limited, which can be frustrating for businesses with unique needs. Finally, while Shopify is user-friendly overall, there can be a learning curve for some users, particularly when it comes to advanced features.

If you are using Amazon as your eCommerce site, there are Amazon repricer you can use to increase profits.

Typical difficulties with determining wholesale price

Undoubtedly, a lot of thought and consideration goes into arriving at wholesale pricing.

Due to this, many business owners consider this to be among the most challenging aspects of selling. However, there are a lot of other difficulties that wholesalers could run against while determining their wholesale price.

A. Competition

Competition between wholesalers can be fierce in some businesses. This implies that you must either be content to set your product's price at the going rate in the market or lower it. However, this could start a price war, driving costs even lower.

09 calculate wholesale price - affinda

There are even companies that offer free services or free product usage such as Affinda which offers free resume parser tools.

Naturally, people would prefer their services unless you can offer a feature or services that far surpass their existing offers.

B. Brand positioning and identity

The worth of your products and how your customers perceive your company are both largely determined by pricing.

10 calculate wholesale price - digitarial

But it might be difficult to strike the ideal balance between a price that accurately reflects the worth of your goods and a price that customers will be prepared to pay.

Digitarial uses influencer marketing to boost the brand image of its customers. Increasing your brand value can also leave a good impression on your customers.

C. Discounts

Discounts are sometimes an effective sales tool. However, they need to be applied wisely. If you give clients insignificant discounts, they might not be tempted to buy. But if you provide outrageous discounts, you risk losing all of your revenues.

D. Seasonality

Some products have a seasonal aspect, which means there are times when demand is high and other times when demand is low.

It might be challenging to keep your financing strategy effective, particularly if other factors also influence the seasons.

Conclusion

A variety of challenges affect developing businesses. Fresh issues and possibilities arise as a business expands, necessitating different answers; what worked last year might not be the best course of action today.

All too frequently, missteps can ruin what could have been a successful company.

A customer-focused strategy without harming the industry's immediate profitability is the best one for figuring out wholesale pricing.

Utilize wholesale pricing strategies with caution, keeping in mind market dynamics and other factors aside from client demand.

Learn the most effective strategies on how to grow your business with Onlinebiz Booster. Use reliable business tools to get the upper hand in your industry. Get more business ideas to boost up your business by reading more of our blog posts.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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