With the rise in competition among retailers, many retailers are switching from retail stores to wholesale businesses. If you are one such businessman, you too might face some problems, such as finding a supplier for your business, warehousing, and setting the prices and margins for your wholesale business. As the ex-retailers are new to the wholesale business, it can be a little tricky in the beginning, but after learning, you will be able to have deals just like the seasoned wholesalers. From the pricing to the profit margins, all differ in wholesale and retail businesses. Therefore, knowing the calculations can help you decide the wholesale prices and the profit margins.
Businesses are starting to earn profits through it, and the wholesale business is no exception. As there are many competitors in the market, customers can purchase from any store that provides them with the best price. Retailers are given a fixed price to sell at to avoid the problem that may arise due to the difference in prices in different stores. Therefore, retailers have no problem deciding the selling price. The profit margin of the retailers will have little fluctuation.
On the contrary, wholesale businesses have trouble deciding the price they will sell to the retailer while earning a profit too.
There are equations and formulas to calculate the wholesale price and the profit margin. Through the calculation, wholesalers can decide the selling price and know the profit margin they will receive.
Calculating wholesale prices and profit margins
Wholesalers purchase goods from the manufacturer or another wholesaler and sell them to another wholesaler or retailer. They do not own flashy stores like retailers to attract customers; instead, they own warehouses that can keep the goods safe until distribution.
Wholesalers buy goods in bulk and sell them in smaller quantities when selling. Depending on the buyer’s quantity, a wholesaler can sell the goods at different prices. Therefore, the price of the goods is different for all buyers, unlike in retail stores.
Even though the wholesalers can sell the goods at the price they fix, they must consider the product margin. If they sell at a reasonable price, they might have a nominal profit margin, while selling at a higher price can bring them more profits. But only profit is not considered here because the retailers will not purchase from you if the price is high and will go in search of a wholesaler with a lower price.
If the goods you sell have little competition, you can have a higher margin, as the retailers have to purchase from you whatever amount you sell them. But if they will be getting little to no profit by selling them, they will not be purchasing from you. Therefore, you should consider their demands too, or you will lose buyers to your competitors.
Keeping all the factors in mind, you have to choose your price accordingly, not to make a loss but a profit. We will now see the equations that let you decide on the wholesale price and show your profit margin;
Simple pricing method:
WHOLESALE PRICE + PROFIT MARGIN = TOTAL COST PRICE
This is the simplest equation to use to calculate the total cost of the product. You have to add the profit margin you want to the wholesale price of the product you purchased from the manufacturer or another wholesaler.
As here you do not consider other expenses that might incur, like rent for the warehouse, administrative costs, labor costs, etc., you will need to add all the expenses to the cost of the product and deduct from the profit you get to know your net profit.
TOTAL COST = COST OF THE PRODUCT + LABOR COST + OVERHEAD EXPENSES
Usually, manufacturers sell their products for half the recommended retail price (RRP), which they want the retailers to sell in their stores. Therefore, wholesalers can set the price anywhere in between. But remember, retailers will also want to earn through selling the products, and they too have expenses to cover; therefore, they will only purchase if the products’ price is within the RRP.
RECOMMENDED RETAIL PRICE = WHOLESALE PRICE X 2
The absorption pricing system has three stages: covering all expenses and revenues by calculating all the expenses and deducting them from the profit.
- TOTAL COST PRICE = VARIABLE COST OF THE PRODUCT + ((OVERHEAD EXPENSES + ADMINISTRATIVE COSTS) / NUMBER OF UNITS)
The variable cost of the product is the fluctuating price of the product that changes with the demand for the product. When the demand for the product has increased, the
The manufacturer will charge a higher price; when the demand has decreased, the manufacturer will reduce the price. Therefore, the price will vary on each purchase, changing the total cost every other time.
Overhead expenses include shipping, packaging, accounting, etc., which do not fall under administrative expenses.
Administrative costs are the expenses that are incurred in administering the products, such as labor costs, rent, insurance, etc.
After adding all the administrative and overhead expenses, you have to divide by the number of units you purchased. The answer is the total expense for one unit. When you add the answer to the product’s variable cost, you will get the total cost price, which is the amount you spend on one unit of the product you purchased.
- b) PROFIT MARGIN = NET PROFIT: REVENUE
Revenue is the total income you will receive by selling the products to retailers or other wholesalers. When you deduct the cost of the product from the revenue, you will get the net profit. Therefore, the ratio of net profit to revenue is the profit margin.
- c) WHOLESALE PRICE = TOTAL COST PRICE + PROFIT MARGIN
The final stage is to calculate the wholesale price of the product. So you add the answers you get from 1 and 2, that is, the total cost price and the profit margin. It is the price at which you can sell your goods while covering all your expenses and knowing your profit margin.
Absorbing pricing can be used in calculating your wholesale price; it does not include any complex equations or be difficult to understand. It is a simple equation to calculate the wholesale price of the product. With accurate information given, you can get an accurate answer.
If you want to calculate the profit margin with the wholesale price fixed, you can use the following equation:
PROFIT MARGIN = WHOLESALE PRICE – TOTAL COST PRICE
Here, you must deduct the total cost price calculated in number 1 from your determined wholesale price. You get the profit margin.
Though this method can provide you with accurate wholesale prices and profit margin data, you cannot analyze the competitors’ aspects. Hence, if the competitors are high in the business, this method can be a failure.
While wholesalers use absorption pricing, they may set the price level too high or too low. Both pricing strategies could be against the business, as high pricing can scurry customers to your competitors. Low pricing can make your buyers suspicious of your product.
The differentiated pricing method is a pricing system that depends on the demand for the product. You can increase the product’s price when the demand for the product is high and decrease the price when the demand for the product has subsided.
As we all know, depending on the product’s demand in different places, you can also try the same formula. To earn a higher profit margin using this method, you can follow two strategies:
- Higher price –
You can increase the product’s price to be higher than your competitors’, where the competition is minimal. As the buyer needs the product, they will have to purchase it from you for whatever price you sell it for.
But remember, they will only purchase if you sell the product within the Recommended Retail Price (RRP).
- Lower price –
When the competition is high, buyers can get the products from anyone they like, and they will always choose the one offered at the lowest price. Therefore, retailers will purchase from you when you start to sell your products for less than your competitors’ prices.
This strategy will increase your store’s sales, and you will be able to earn a higher profit in less time. Though try to keep your price near the cost you incurred, or it will be a loss for you.
The differentiated pricing system can be successful when dealing with small batches of products. You can also sell your buyers at different prices depending on the quantity of their purchasing stock. That is, if one of your customer’s purchases in bulk, you can offer him discounts or coupons. As you will be selling bulky products, you will be able to earn a profit soon, and the expenses on that particular product will decrease.
You can sell smaller quantities for a decent price to earn a profit.
You can use any of the above methods to calculate your wholesale price and profit margin. With different products, you can use different methods. Whatever method you choose, remember that customer satisfaction is important to the business; the wholesale business is no exception.
Considering the retailer’s profit and satisfaction, set the price that gives you a higher profit. Moreover, the wholesale business is more profitable than retailing.
Retail business is easier when compared with wholesale business. Retailers do not need to decide their product pricing because the manufacturers already do so. And the profit margin, most of the time, stays the same.
Retailers who are new to the wholesale business concept might need help calculating the wholesale price and the methods. Therefore, with the equations we discussed above, you will be able to calculate, and as they are easier, you will be able to get them on your system pretty soon.
As we now know the pros and cons of each pricing system, you can choose the one that best suits you.