February 20, 2013
Continuing with our discussion about pricing strategy, today we’ll look at wholesale pricing.¬† We’ll also then take a look at how to calculate your retail price point once your wholesale price is set.
When you start selling wholesale it means that you’re now starting to add middlemen into the equation.¬† This is not necessarily a bad thing.¬† Selling wholesale may mean that you’re now selling to a retail store or cafe who will put your product on their shelves or to a restaurant who will incorporate your product into their menu.
To be a bit more specific, today we’re really talking about your direct store delivery (DSD) wholesale price.¬† There are other subcomponants of selling wholesale – either through distributors or brokers – that we’ll talk about later this week.¬† In the meantime, today let’s focus on you selling directly to the retailer and then the retailer is selling your product to the end customer.
Regardless of who is taking your product and passing it along to the customer they will want to get their own margin on the product.¬† This makes sense because they are taking a risk when they purchase from you that the product might not sell as anticipated so they need to be compensated for that risk.¬† Not to mention that if stores, cafes, etc didn’t markup products then it would be hard for them to pay for their overhead and keep the lights on for customers!
One of the first things a retail account is going to ask you is what your wholesale price is.¬† Right on the heels of that question will be a question about your Suggested Retail Price so let’s tackle those in two parts.
Determining Your Wholesale Price
Remember your old friend the Cost of Goods Sold and how you¬†know, down to the penny, exactly how much each unit costs you to make?¬† It’s a good thing you do because now is when it’s going to come into play.¬† Once again, keeping in mind that every product category differs somewhat, you should plan to have, in an ideal world, a minimum of 50% margins in order to get your wholesale price.¬† As we talked about yesterday, this helps make sure that those items that aren’t directly related to your product are still being covered and will help you be net positive at the end of the day.
Let’s look at an example
Say your Cost of Goods Sold comes to $2.50 for every unit.¬† That means,¬†based on 55% margins and¬†our margin equation, that your wholesale price would be:
$2.50/(1-.55) = $5.56
So therefore you’re making $3.05 on every product you sell wholesale.¬† It may seem like a lot but you’ll be surprised how quickly it disappears once all your other business expenses get added in.
Using Your Wholesale Price To Get Your Suggested Retail Price
Now that we have our wholesale price we can determine our suggested retail price.¬† Keep in mind that even if stores ask you for the suggested retail price (SRP), they may price it well above or below that depending on their specific pricing strategy.¬†¬†¬† By using 50% as your guideline though you’ll be able to set a suggested retail price that should provide plenty of margin to the retailer.¬† This is important because they not only want to know that the product will sell but that they’re using their shelf space efficiently and getting maximum margin per product (same goes for a restaurant that wants to know that it’s stocking it’s freezer/fridge with items that will sell but that will also bring them a good return on their investment).
As such, using the example above again, with a wholesale price of $5.56 you would have a suggested retail price of:
I’ll give you a minute to stand there with your mouth open trying to understand how a product that costs you $2.50 to make can end up costing the customer $11.12 to purchase….
Oftentimes, after food entrepreneurs realize that¬†they won’t personally be making as much money selling wholesale as they would¬†be selling direct to customers based on the SRP they’ve calculated, they may determine it’s not¬†the right path for them.¬†Keep in mind though that selling wholesale can be very beneficial to your business.¬† Getting your product onto certain store shelves or into certain catalogues, cafes, restaurants, etc. can be a brand builder.¬† If the¬†top restaurant in town suddenly has your product name on its menu then everyone who eats there is going to start thinking that your product and your brand must be a pretty big deal.¬† Similarly, if the right retailer picks your product up it can be¬†a huge boon to your business as other retailers may follow (side note: my very first account for my company was Neiman Marcus and while I didn’t necessarily make a ton of money from that account, I was able to leverage that account into helping me open up accounts at other stores that were the mainstay of my business for years).
Not to mention that selling wholesale can help you be in more than one place at once.¬† If your strategy is to solely¬†sell retail then that’s going to limit how many places you can be seen by customers at the same time versus having your product in a handful of stores/cafes/etc.¬† Keep in mind, I’m not suggesting that wholesale is definitely right for your business.¬† Given your product, it may not¬†be an option at all or simply not fit with your business goals in which case you shouldn’t go down that road.¬† But if you have your eye on getting into stores/cafes/etc one day don’t let the fact that you’ll make less money by selling wholesale turn you off entirely.¬† Instead, price the products right so that whether you’re selling wholesale or retail, you’re still making money.
That’s not the end of the wholesale story though – tomorrow we’ll look at bringing brokers into the picture.