Pricing Your Products for the Wholesale Market

Many people are confused with the terms mark-up and margin. The terms are not the same! Mark-up is how much a retailer "marks up" a product from the wholesale cost. For example, if a retailer keystones, she or he is doubling, or using 100% mark-up. In other words, marking up 100% on the WHOLESALE PRICE.

Margin is something different, and the more important and relevant term. Margin refers to a percentage of the RETAIL PRICE. So using the keystoning example, if you double the wholesale price, your MARGIN is 50% (of the retail price). The retail industry uses margins for virtually all their financial analysis and other factors, so when we mention a percentage margin in this guide, we are talking about a percent (i.e. margin) of the RETAIL price.

Many gift makers are appalled when they find out how much a retailer marks up products someone else made! Of course, you will find this true in nearly all retail businesses: most of the price you pay at check-out is the cost of distributing and presenting the item to the end consumer.

This issue makes it hard to price handmade products at a point where wholesaling is feasible. For example, a few years back a candle maker I represented, decided to retire. I looked high and low for a new company to replace her. Several different candle companies contacted me, so the prospects looked good. But when I asked each to send me a wholesale/retail price sheet, I was shocked by what I received.

One gal I ran across made beautiful candles. I wanted to represent her, but her wholesale price was 80% of her retail price! And this was not atypical. Eventually, I did find a producer whose pricing structure would work, but it took a long time!

With all the investment of time, supplies, and raw materials that go into a gift or gourmet product, it's hard to appreciate that a retailer needs to double your wholesale price to stay in business... but that IS the general rule of thumb! Again, gift stores operate mostly on the basis of "keystoning" or doubling the wholesale cost to get to a retail price. Some stores will double even the DELIVERED cost: wholesale price PLUS SHIPPING cost per unit.

WHY SO MUCH? After all, you put in the time, bought the materials, and made the product, right? Don't they just stand around at the cash register and ring up the booty as crowds roll in and out? Please understand that even a SMALL gift store may operate with several thousand dollars a month in overhead.

To make a basic living for the store owner, this fairly typical small store will need to AVERAGE several thousand dollars per month in sales (based on keystoning), TO JUSTIFY KEEPING THE DOORS OPEN! And the store owner will probably endure slow months where he or she is lucky to do even a small amount of sales. Which means customers will need to make up the difference in other months - and the holiday season better be pretty darn good!

And of course, part of the pricing issue is that producers often UNDER-value their products at retail. Producers selling at shows and fairs (or online) often make the mistake of trying to sell to consumers at a price that just about ANYONE can afford.

Again, as a general rule of thumb, your wholesale price should be 50% of a reasonable retail price found in a gift store for the same quality, size, and style of product as yours. In other words, wholesale should be half of what a reasonable end customer would normally be willing to pay for that product sitting on the store shelf.

But before you throw in the towel at this point, work with me! We will show you how to work toward a pricing schedule that will help you be successful with wholesaling.

As a "manufacturer" or producer, you should aim to retain around a 40% "gross" margin on the wholesale price. (Of course, more is always better, if the market will absorb the spread.) That may vary somewhat by individual product, or product category, but this is a good average for most gift and gourmet markets.

What this means, is if your wholesale price is $5 (for a product you think the retailer can move at $9.95 to his or her customers), you would want your direct costs per unit to be under $3 (60%). This leaves you $2 (or 40%) per unit. You can then apply that $2 toward your marketing expenses (e.g. sales reps, trade shows, web sites), income and property taxes, administrative or "OVERHEAD" costs, and hopefully, profits.
Overhead expenses refer to items that cannot be directly tied to the making of an individual product. For example, your building rent (the portion allocated to your business or shop), office equipment, business insurance, utilities, part of the merchant account credit card fees, and business internet connection. You pay the same amount for these whether you make and sell one unit or 1000 units.

Again, that $3 direct cost, from this example, includes the cost of materials and labor based on when you reach critical mass. Until you get to that point, you will likely end up with higher costs, and less than $2 per unit to put in your pocket. Of course, if you are selling 48 units, on average, to a store, you will make nearly $100 per order (actually $96 in this example = 48 x $2), once you reach critical mass. And, if you are making the product yourself, you also take home the full amount you allocated to labor. At least for now.

With your direct costs per unit in mind ($3 in our example), you need to develop a wholesale pricing schedule based on either MARKET or COST PLUS as detailed below:

'Cost Plus' Pricing Analysis

Go through the "direct cost" pricing analysis in the previous section. Let's say for example, you came up with $2.70 as the unit cost for your products once you reach critical mass. (And again, a spreadsheet is very helpful to find this price point.)

Now, divide by .6 (same as 60%). What we are doing, is determining the wholesale price you should sell for, to allow you a 40% gross margin at the point where materials and direct labor are at a reasonable and sustainable level.

You divide the direct manufacturing cost by .6, because you want to show that this cost represents 60% of the desired wholesale price, thereby leaving you .4 (40%) as YOUR margin. As you know, 60% + 40% = 100%.

So when you divide by .6, the number you get is your target wholesale price point per unit.

In this case, then, you get a wholesale price of $4.50 ($2.70 divided by .6). So, $2.70 represents the 60% direct cost per unit, while the remaining $1.80 ($4.50 - 2.70), is the 40% gross amount you make on each unit, towards profits and towards non-manufacturing expenses NOT directly tied to making the product (e.g. overhead).

Based on our Cost Plus analysis, we know our target wholesale price for this product is $4.50, and most gift stores who purchase at that price, will likely sell it for an average of around $8.95.

'Market' Pricing Analysis

Now, we are going to compare our "cost-plus" analysis, to what the market will bear, through a competitive analysis. The price of products like yours, of approximately the same size and similar quality of packaging and raw materials (or ingredients), should indicate the appropriate market price level.

Go to several stores, especially stores which you think are profitable and carry a large inventory in your niche (e.g. candles, soaps, gourmet foods, jewelry, woodcrafts). What do you believe, objectively, your product would sell for on the average store shelf? Write that figure down. Compare this figure with your Cost-Plus Analysis figure - which was $8.95 in our example.

If your Market analysis indicates that a product like yours would normally sell for $9.95, and your Cost Plus analysis was $8.95, you are home free. This situation gives us three choices:

** You can actually raise the wholesale price from $4.50 to $5 - the level of the competition (while keeping the extra 50 cents in our pocket).
** Or you can split the difference, say to maybe a $4.75 wholesale price, which will yield an average retail price of $9.49. That way you are pocketing the additional two bits (25 cents/unit), AND you are competing a bit on price.
** Or you can maintain the 'Cost Plus" $4.50 wholesale pricing, and gain market share, by competing on price.

However - and this is more often the reality - what if you find the market likes a price around $7.95 (compared to your calculation of $8.95). So you would need to offer a wholesale price around $4 (half of $7.95), to stay within the competitive range. Now you own a challenge. You do, however, "enjoy" several options:

A) Stick with the original pricing, and position yourself as a premium brand.
B) Stick with the original price, and put up with lower sales.
C) Sharpen your pencil, and look for ways to reduce unit costs (to $2.40, which represents 60% of $4). For example, find ways to increase labor productivity, or reduce costs for packaging and/or raw materials.
D) Re-design your product, in a way that makes more efficient use of raw materials and/or labor.
E) Drop the product idea, and look for something more profitable.
F) Give up wholesaling, at least for now (but keep selling at retail shows and fairs).

Sometimes if you just move forward with the lower margin, selling at $4, you find ways to reduce costs over time which you did not foresee after just an intellectual analysis. Don't count on it. But it does happen. Regardless, over time, you must reach a sustainable pricing level.

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Packed full of an array of information to help you take your product success through the wholesale channels.