Product Pricing: How to Set Prices For Wholesale and Retail

Every retailer at one time or another has wrangled with the issue of product pricing, especially those who sell products direct-to-consumer and wholesale. If you’ve been struggling with this question lately, you’re not alone.

There are a number of mathematical formulas used in determining a product’s price, margin, markup, markdown, profitability, and sales history. Thankfully, there are only a few you need to know when pricing products for direct-to-consumer sales and wholesale.

Here, we’ll walk you through a few of those formulas and some steps you can take to create successful pricing strategies for your product, whether you sell wholesale, retail, or both. Wholesale vs. retail price

Wholesale and retail are two fundamentally different processes: wholesale involves moving goods from manufacturing to distribution. Retail involves acquiring goods and selling them to customers.

Producers or distributors charge wholesale prices to retailers. Then, the retailer charges consumers for that same product at a higher price—the retail price. What is wholesale price?

Wholesale pricing is what you charge retailers who buy products in large volumes.

The goal of wholesale pricing is to earn a profit by selling goods at a higher price than what they cost to make. For example, if it costs you $5 in labor and materials to make one product, you may set a wholesale price of $10, which gives you a $5 per unit gross profit. What is retail price?

The retail price is what retailers set as the final selling price for consumers.

Retail pricing is all about the customer. What would they be willing to pay for your product? A retailer will mark up the price on wholesale ecommerce goods to earn a profit, but it shouldn’t exceed what the customer will pay for it.

This is the tricky part of retail pricing, as the answer to this question is typically fluid.

Retail prices are first set with knowledge of ‘what will the customer pay for it.’ It starts there. For me, if this came out to a 50% margin, I’d see what increasing the price to $28 or $30 would do. Once it feels good, I would leave it there.

Say a retailer buys your product for $10 and wants a $10 gross profit, then they would charge $20 for the product in-store. This is also known as keystone pricing, or simply doubling the wholesale cost paid for a product. (If you are a wholesaler, you can recommend a suggested retail price (SRP) to retailers; they do not have to use it, but it’s helpful if they do. We’ll discuss more on this later.)

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Let’s look at how you can calculate a wholesale price for your products. 1. Research your market

Before you set any product prices, determine your market segment and where you fit in. For example, are you a discount brand, a contemporary brand, or a designer brand? This also determines how your audience perceives you, which ultimately affects your pricing.

If a lower price point is your competitive advantage, keep that in mind while doing your research. Be cognizant of your break-even point, and use the break-even point formula to calculate this number. If your target customers are more budget-conscious or looking for a high-quality, high-end product, consider these factors when conducting market research.2. Calculate your cost of goods manufactured

Cost of goods manufactured (COGM) is the total cost of making or purchasing a product, including materials, labor, and any additional costs necessary to get the goods into inventory and ready to sell, like shipping and handling.

A product’s COGM can be determined with the following calculation:Total Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods Manufactured3. Set your wholesale price

When setting your wholesale price, first multiply your cost of goods by two. This will ensure your wholesale profit margin is at least 50%.

Profit margin is the gross profit a retailer earns when an item is sold.

Apparel retail brands typically aim for a 30% to 50% wholesale profit margin, while direct-to-consumer retailers aim for a profit margin of 55% to 65%. (A margin is sometimes also referred to as “markup percentage.”)

Let’s say you sell swimsuits. If you buy each swimsuit for $25 and sell them for $50 each, your retail margin per suit is $25, or 50%.

Retail margin percentage can be determined with the following formula:Retail Price - Cost / Retail Price = Retail Margin %

In the case of the swimsuits: $50 (Retail Price) - $25 (Cost) / $50 (Retail Price) = 0.5, or 50% (Retail Margin)How to price wholesale: Pricing methods

There are many different wholesale pricing strategies available, but don’t fret—it’s not helpful to learn all of them if you’re new to selling wholesale.

Instead, let’s go over two simple and easy to use methods you can use today. Absorption pricing

Absorption pricing refers to factoring in all the costs associated, including fixed cost and profit margins, when determining your price. It’s called “absorption” because all the costs are consumed in the product’s final price.

The formula for absorption pricing is as follows:Wholesale Price = Cost Price + Profit Margin

Not sure how to calculate cost price? You’ll need to know your costs of goods sold (COGS) and your overhead costs. Here’s a little refresher:Calculate your cost of goods soldCalculate your overhead costsAdd the two costs together. Once you have those two numbers, combine them to create your cost price for the formulaAbsorption pricing method prosIt’s easy to use and doesn’t require any training or complicated formulasYour profits are almost guaranteed. If you can account for all expenses, you’ll likely turn a good profitAbsorption pricing method consPricing gaps are frequent, and it doesn’t take into consideration any competitor pricingThis method doesn’t account for value perception. You could charge too much, sending potential buyers to other providersDifferentiated pricing

Differentiated pricing is a wholesale pricing method used to optimize return on investment by calculating the demand for a product. In this case, different buyers in different situations pay different prices for the same product.

Also referred to as demand pricing or time-based pricing, this method is based on the idea that buyer acceptance determines the price on any given market condition.

For example, if you are selling bathing suits, you can sell at a higher price than the average market value during peak seasons. You’ll notice in retail stores the price of bathing suits can rise quickly at the beginning of summer season, then come back down after the demand drops off.

This also applies to areas where there is less competition and customers typically buy products at a higher price, such as a beach resort or an airport.

Using differentiated pricing, wholesalers can also offer products at a lower price. For example, if you have too much old stock on hand, you can run a flash sale last minute and walk away with some profit.

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Regardless, you need to set a price that buyers believe is fair for the product’s value and still earns them a healthy profit at the end of the day. Differentiated pricing method prosThis method can deliver maximum return on investment. It lets you take advantage of market scenarios in real time, keeps you competitive, and allows you to gain data on buyersWhen there is higher demand for a product, buyers are often willing to pay a premium, which means more profit for you. You can use differentiated pricing to sell trending products and other items that are hard to find or extremely popularDifferentiated pricing method consThere’s a fine line between maximizing profit and overcharging wholesale customers. If you are perceived as opportunistic, or people get the sense you are price gouging them, it’ll hurt your brand’s reputation. You don’t want to be associated with this kind of greed because buyers will not come back and purchase from you.