Wholesale pricing – How do you get it right?
What is wholesale pricing? And how do you ensure you set just the right wholesale price for your products?
Whether you are a new wholesale brand just getting started or an established brand launching a new product line, determining the best wholesale pricing strategy can be tricky.
That’s why we wrote this blog post to push you in the right direction.
First of all, let’s make it clear what wholesale pricing is.
Wholesale pricing is the prices used for a transaction of goods in bulk (large volumes). When someone is purchasing, let’s say 100 pairs of shoes instead of one or two pairs, they are buying wholesale.
(if you want to learn more about wholesale in general, we suggest that you read our definitive what is wholesale guide).
Due to the sheer volume, wholesale transactions typically take place between two businesses, making it a B2B transaction.
On the seller side of a deal are manufacturers, brands, suppliers, and distributors. These businesses design and/or manufacture their products themselves, have them imported from abroad, or perhaps purchase them wholesale themselves. They then sell their products wholesale to other businesses on the buyer side. Most often they are doing so by using wholesale price lists, although it is an old fashion way of doing business.
On the buyer side of a transaction, you will often find retailers. These retailers are either brick and mortar stores or webshops focused on selling to consumers. The buyer then resells the products retail to consumers, also called B2C (Business to Consumer).
Next, let’s look at some of the characteristics that make wholesale pricing so special compared to retail pricing.
Difference between retail and wholesale pricing
The main difference between wholesale and retail is the volume of goods in a transaction. As mentioned in the section above, wholesale is selling and buying in large quantities.
Due to the size of the orders, wholesale prices are almost always lower than retail prices. Simply put, the wholesale prices are lower because a discount is given for buying multiple units.
But there’s a bit more to it than that. In the subsections below, we will explain some of the things that make wholesale prices different from retail prices. On the following link, you can find a price calculator that you can use to determine your wholesale prices.
Wholesale bulk discounts
As mentioned above, the main characteristic of wholesale prices is that they are lower than retail prices due to bulk discounts.
Bulk discounts are not uncommon in retail. When consumers shop in the supermarket, for example, they are exposed to numerous deals offering lower prices, given that they purchase multiple units.
But there still is a difference between wholesale and retail bulk discounts. The difference is that while wholesale discounts are continuing and for all products, the retail discounts are typically only for selected products and as part of a sale.
Negotiation is customary in wholesale. Wholesale customers are making recurring purchases from the same vendor, and as such, are expecting to negotiate prices and terms.
These negotiations will often revolve around prices, discount levels, and payment terms. But some customers might also demand product exclusivity, meaning, for example, that they are the only retailer in a region that is allowed to buy and resell certain products.
Depending on the size and negotiation power of the customer, they can negotiate different deals. As a result, it is very common to use differentiated pricing in wholesale.
Negotiation of prices and payment terms in retail is a lot less common. Sure, some might try to “haggle” the price, but it’s rarely allowed or considered appropriate.
Wholesale payment terms
As mentioned above, sometimes, the payment terms are also negotiated between wholesalers and their customers. While payment terms are not the same as pricing, it is definitely related.
For instance, it is customary for wholesale customers to have delayed payments. Instead of paying for the purchase instantly as in retail, they get to pay by invoice 8, 30, 60, or 90 days later.
For a more in-depth read about different wholesale payments, we suggest that you read our dedicated blog post: Wholesale payments – a guide to the benefits and drawbacks.
Why is it important to get the pricing right?
Getting the pricing right is always important – not only for wholesale. According to Marketwatch, 18% of startups fail due to pricing and cost issues. That’s even more than the percentage of companies failing for having a poor product (17%)!
But for wholesale, since you are dealing in bulk, getting the price right might be even more critical. Even a small adjustment in price can result in huge revenue and profit jumps.
Prices too high
But you cant just amp up your prices indefinitely to increase revenue and profit.
If your wholesale prices are too high, you risk losing interest from your customers. It simply won’t be attractive for them to order your products.
Prices too low
And you don’t want to set your prices too low either.
First of all, decreasing your prices will, of course, diminish your revenue and profit per product sold. This means you will have to sell additional units to make up for the lower price.
Another issue if your wholesale prices are too low is the risk of making your products appear “cheap”. If the customers’ perceived value of your products is low, they might not want to purchase them even if they get a great deal.
So how do you ensure you land your prices somewhere between too high and too low? We will give you some hints in the next section.
How to set the correct prices
First, you should know that there is no one-size-fits-all approach. Unfortunately, we are not going to give you a formula that will ensure you 100% correct wholesale pricing.
What we are going to do, is to give you some tangible tips to help you narrow in on the best price for your business and products. From here, you can manoeuvre the rest of the way to that perfect wholesale pricing for your products.
Things to consider when setting your wholesale price
In theory (economic theory, that is), setting the right price is a question of supply and demand. In a simple supply and demand model, the price essentially depends on the quantity, and setting your equilibrium price is fairly simple.
The reality, of course, is a lot more complex. And there are a lot of factors to consider. A few of them are:
- What products you are selling (their value, for example)
- Where you are selling your products (directly to retailers? Or perhaps via an online marketplace?)
- The competition (how many competitors do you have, and what are they pricing their products?)
- Your general strategy (are you relying on exclusivity or volume?)
- Your customers (who are your customers, and how much can they afford to pay if they are to make a profit as well?)
Below, we are going to show you three wholesale pricing models. These models take one or multiple of these factors into consideration in order to determine the optimal price.
Three different wholesale pricing models
The three models are:
- Value-based wholesale pricing
- Cost-based wholesale pricing
- Competitor-based wholesale pricing
Value-based wholesale pricing
Also called demand pricing, value-based wholesale pricing is determined by the value of your products. More precisely, it’s based on what you expect is your customers’ perceived value of your products.
In this model, the actual cost of manufacturing is not considered relevant for determining the price.
This pricing method is relevant for companies that have managed to build a certain level of brand value. Then the customers will be willing to pay more for the brand irrespective of the actual cost of materials and manufacturing.
Cost-based wholesale pricing
Also called absorption pricing, cost-based wholesale pricing does what value-based pricing does not; Take costs into consideration.
Essentially, what you are doing in the cost-based pricing model, is calculating the total costs of making your product. These costs include, for example, materials, labour, production facilities, and overhead. Divide the total costs by the units made, and you have the cost per unit.
Once you know what it cost you to make your product, you simply add a markup. This markup will then be your profit when you sell your products.
Don’t go too crazy with the markup. A higher is not necessarily better, as you need to ensure that your customers are also interested in purchasing your products.
The last wholesale pricing model is competitor-based pricing.
Not relying on perceived value or production costs, competitor-based wholesale pricing is based on information from the market.
Essentially, what you are doing, is looking at the prices that your competitors are charging and then pricing your products based on this. It doesn’t necessarily mean that you will set the same prices as your competitors, but rather that you will determine your prices in relation to your competitors.
Now go and set those wholesale prices!
Now it’s time to take what you’ve learned and determine the wholesale prices for your products.
As mentioned above, there is no one-size-fits-all model. The best you can do is to try to get as close as possible, and then remember that you will need to readjust. Most likely multiple times.
You need to evaluate your prices constantly and make changes into consideration. These changes might be your costs, the competitive landscape, or just general trends.
As long you are willing to stay agile and adjust prices to the current situation, we are certain that you prevail!
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