Wholesale Pricing Tips for Launching New Products
One of the biggest challenges facing small wholesale brands is how to properly set prices for new product launches. Pricing is an even more serious issue for startup wholesale brands, given that according to Marketwatch, 18% of startup failures are a result of problems with pricing and cost.
There are a number of strategies to consider when it comes to wholesale pricing, but no matter which one you choose, one thing is usually true: wholesale prices are usually about half retail prices. Here are some reasons why:
- Retailers need a reason to carry your products, and that reason is profit. Like you, retailers also have costs of doing business.
- Retailers provide a service for wholesale merchants. They take the pesky job of interacting with the public and all the associated expenses out of the equation and allow you to focus on creating great products.
- Retailers also order in large quantities, rather than small numbers like consumers, so it is much more convenient to sell through them rather than direct to consumer.
- Wholesalers sell to retailers for a lower price than to consumers, but have lower costs as a result.
Ideally, the relationship between wholesale and retail should work out favorably for both parties. Setting an appropriate price when you launch your product will ensure that it does.
Is Lowering Prices a Good Wholesale Pricing Strategy?
Some wholesalers believe that by setting a low price, they will be able to sell more product in the beginning and then raise prices later. More often than not, however, this strategy doesn’t work. In many cases, the wholesaler ends up losing money on the items they planned to sell on volume, and they are unable to raise prices because they have given customers an unrealistic expectation about the value of an item.
A better strategy is to look carefully at the market to establish the price range. What is the price range in which similar items are selling? You can then use that information to verify whether the price point you set will be attractive in the market. Your actual price, however, will not solely be based on other market prices, but also based on your own labor and materials cost (charging a markup of up to twice that amount).
Setting your price based on your costs will ensure that you are charging enough to make a profit. But you still need to consider the market price, because unless your product is very well differentiated, it should not be outside the range of what similar products cost at wholesale.
Wholesale Pricing Strategies
There are four typical strategies you can use to set prices for wholesale products. The biggest variation between theories on setting price have to do with whether you should price based on competition or demand and then back out your profits after subtracting costs, or build your pricing from the ground up by adding up your costs and tacking on a markup.
The four main pricing strategies are:
1. Demand Pricing:
Demand pricing involves figuring out what price will result in the desired volume of sales. This type of pricing strategy is commonly used to set prices for products which are sold through different sources at different prices. Demand pricing can be challenging, because it doesn’t always result in the best profit margins, so you should consider costs and markups separately to ensure that prices do not cut into margins.
2. Competitive Pricing:
This is frequently used in markets where pricing is already fairly well established, such as commodity markets. It involves looking at what your competitors are charging, and charging a similar price. This is a common pricing strategy in markets where there is little differentiation between products. For more unique wholesale products, you may want to consider what the competition charges, but your price need not be so closely tied.
3. Cost-Plus Pricing:
Many manufacturers use this method, which involves figuring all your costs to make an item – labor, materials and overhead – and adding a percentage for profit. This is a great strategy, because it ensures profit, but there are several challenges. First, make sure your profit markup is not too low after taking into account “what the market will bear.” It’s also important to be accurate about your costs, since if your cost estimates are too low, it can cut into your profits, limit your design options, and even impact quality and marketability of the product itself.
Your wholesale pricing strategy can also be thought of as a math equation:
Wholesale price = Costs (labor, materials, overhead) + Markup (profit) or Costs x 2
Retail Price = Wholesale Price + Costs (labor, overhead) + Markup (profit) or Costs x 2
An Approach to Wholesale Pricing
Wholesalers generally need to build their pricing from the ground up based on costs and include profit. However, they also need to “sanity check” their price against demand or competitive pricing to make sure that the price isn’t too low to be profitable, or so high that products are unmarketable.
Here is the approach we recommend for establishing your wholesale pricing strategy:
Familiarize yourself with your market: Look at retail prices for other similar products, as well as wholesale prices. What are the lowest and highest prices? How much volume is being sold at those prices? These give you a range to consider and will allow you to get a feel for demand at the price you have in mind.
Calculate your costs: Determine your material, labor and overhead costs. Don’t forget to account for fluctuations in material costs, variable and fixed expenses, and build in a little padding to account for the unexpected. Things happen.
Determine your markup: Identify the percentage you need to charge on top of your costs – how much money do you need to make to make this venture worthwhile? How much do you need to make on the product to justify producing it? You’re better off building in a bigger markup to start, so that you can adjust down if demand is too low, than trying to price low to feel out the market: it is easier to lower prices than it is to raise them.
Verify: You have established your price, but your job is not done. You still need to sanity check the price to ensure that it is neither too high nor too low.
Verify demand at your desired price: Once your product hits the market, you’ll know if demand is high enough or if you’ll need to lower the price to drive more demand. Remember it’s easier to lower the than it is to raise it.
The final piece of advice is to ensure you have clear differentiation between your product and the competition. Otherwise, you may find yourself in the position of having to price more competitively.
How do you approach pricing new product launches for wholesale? Tell us in the comments!