February 22, 2013
Phew – it’s been a long week of pricing but hopefully you’re still hanging on with me because today we’re going to take a look at distributors and how to determine what your distributor pricing should be.
Distributors are similar to brokers in that they can help you open up new wholesale accounts, except unlike brokers they will actually physically take your inventory into their warehouse. They will also oversee all the logistics involved with moving that inventory to the stores after an order is placed.
For taking on this inventory risk and to help them offset the costs of transportation and other aspects of doing business, distributors most often will ask for the ‘distributor price.’ This, like all pricing, is not just a price you can pull out of thin air. Distributors want to be able to offer your product to their wholesale accounts at the same price that you would normally charge for wholesale so in order to make their money the distributor price is usually a price that is well enough below your wholesale price so as to provide the distributor with the margins they need to make money.
Read that last sentence again…the distributor price is a price that’s below your wholesale price. Again, you can now really understand why if you simply charged ‘whatever’ for your retail price it would have a cascading effect throughout your pricing channels and may inhibit you from working with distributors if you don’t have enough margin yourself to be able to profitably work with distributors.
How much lower than my wholesale price are distributors looking for?
Again, I wish I could give you a hard-and-fast number but different distributors will be looking for different margins and your product category will also play into this somewhat. That being said, a good ballpark figure to start with is 30%. The best way to calculate this is to take your Cost of Goods Sold and, following the same formula we’ve been using for everything else, come up with your distributor price:
$2.50/(1-30%) = $3.57
Let’s take a look at all of our pricing structures
This is what we’ve worked through this week:
Cost of Goods Sold: $2.50
Distributor Price: $3.57
Wholesale Price: $5.56
Broker Commission: $.56 per unit
Retail Price: $11.12
Keep in mind these prices are percentages are not set in stone and is totally variable depending on what your product is, what your market is like, and what sort of negotiating skills you have. But this gives you an idea of why pricing is so important especially if you have plans to add brokers/distributors/or others into your pricing structure as you grow your business.