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How do I calculate wholesale prices?’ has become a major question for wholesale business entrepreneurs, or people switching from retail to wholesale businesses. The reason behind this is the rise in competition in the business sector.
Customers nowadays have multiple options for buying the same products from different sites.
Sellers get confused about whether to set the price according to the competitor’s price. Should it be higher than the competitor’s price or lower? How much profit should be there?
This article will help you understand the factors involved and the best methods possible for determining the wholesale price.
The key is to make sure that the profit margin is kept in consideration as well as meeting customers’ demands for a satisfactory price. When aiming for sky-high profits, you do not want to scare customers off.
In the long-run, customer loyalty is extremely beneficial to the industry. So the best method for determining the wholesale price should achieve a perfect balance in contemplating both of these aspects.
The first step is to accept the Challenge. Boost your confidence! Only then you will be able to boost your sales which in turn will boost your bank account!
Don’t let ideas like ‘lesser price will be equivalent to more sales‘ hover in your mind.
This way you might end up setting an unfair price and cause a loss to yourself as well as other sellers. Is this a good thing? Also, buyers get accustomed to low prices and feel short-changed when they are asked to pay the ‘right’ amount.
So let us first understand a few basic terms and then try to master the Art of Wholesale Pricing.
Before we proceed, let’s revisit exactly what we mean by “wholesale price”.
I think we can agree that wholesale price is the price charged by one business to another business. We typically lump these businesses into wholesale and distribution firms. Going into further detail, we can introduce importers and exporters into the mix. And let’s not forget retailers, the ultimate point of sale for consumers.
On the flip side we have the retail price. This is the price that consumers pay from retailers. This price typically has markups along the way from the manufacturer to the retailer. Plus, you need to add in state, federal and value-added taxes, too! You could say that this the final price after the product makes it way through the supply chain.
The simplest formula to calculate the wholesale price is:
Wholesale Price = Total Cost Price + Profit Margin
Wholesale Price x 2 = Recommended Retail Price (RRP)
But if we follow this formula the wholesale price becomes unsustainably low. The whole idea to do business is to make a profit. To make the above formula give us a profitable output we need to understand Recommended Retail Price first.
According to Wikipedia: “The list price, also known as the manufacturer’s suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP), of a product, is the price at which the manufacturer recommends that the retailer sells the product.”
To determine the Wholesale price and Recommended Retail price we need to first sum up the total cost price. Cost price simply means the price at which the goods have been bought by the merchant.
The Total Cost Price (TCP) will be the sum of all the costs incurred on the product. This typically includes the following factors:
As the name suggests, in Absorption Pricing all the cost prices are ‘absorbed’ to determine the final selling price. There are 3 steps to calculate the wholesale price through Absorption Pricing method:
As mentioned above:
Total Cost Price = Variable Cost of the Product + (( Overhead Expenses + Administrative costs) /Number of Units )
Profit Margin is the ratio between the Net Profit and the Revenue.
Net Profit is the Revenue minus the Cost.
Wholesale Price = Total Cost Price + Profit Margin
Note: Variable cost is the fluctuating cost of the product that changes as per the result of the change in demand in the market.
Let us understand this better with an example:
Overhead expenses= $30,000
Administrative costs= $20,000
Variable cost per unit= $20
The company produces 10,000 units, then according to absorption pricing;
Cost price = $20+ (($30,000 + $20,000) ÷ 10,000) = $25
This can be further used to set the Recommended Retail Price as well
Wholesale Price x 2 = Recommended Retail Price (or RRP)
Differentiated pricing is similar to pricing in an auction. It follows the law of demand. Different customers in different situations pay different prices for the same product. In simple words, the price of the same product changes in different situations.
The goal of getting a higher profit margin is achieved by differentiated pricing in two ways:
Differentiated pricing can be applied by the dealer when he is dealing with small batches of wholesale products. What happens, in this case, the shipping charges are subtracting away the profit.
So to deal with this the two ways above will be implemented. Customers buying in bulk will be given additional discount or coupons. Whereas, while dealing with small buyers a fair profit margin will be maintained.
Lastly, no business can flourish without the complete satisfaction of the customer. So even at the wholesale level of the market, this thing needs to be kept in mind.
Thus wholesalers need to set a price at which, customers think that they have value for their money and the purpose of the business is also solved by marginal profit. The market scenario is an important factor as well.
Wholesale pricing methods aside, you need to craft a strategy and approach to setting your wholesale prices. Set your prices too low and you may not be able to recoup your business expenses. Set wholesale prices too high and your customers will gladly switch their purchases to your competitors.
Back to the wholesale pricing methods:
Use absorption pricing when you are selling a product that is new in the market. Why? Because you don’t have any competitors yet. The absorption pricing formula does not take into account the presence of competitors. So this method is best avoided in a highly competitive market.
For differentiated or demand pricing, don’t just focus on customer demand alone. There are other factors that can influence customer demand such as quality of product, production costs, and its position in the market amongst other things.
The best method for determining the wholesale price is the one which is customer oriented without affecting the instant profits of the industry. Use wholesale pricing methods carefully with an eye on the market dynamics and factors beyond customer demand.