How to Create a Wholesale Pricing Structure for Your Small Business
Selling your products wholesale can be a great way for small businesses to scale and increase revenue. However, setting the right pricing structure is crucial to ensuring profitability while offering an attractive price point for retailers. A well-structured wholesale pricing strategy can help you maintain a healthy margin, build long-term relationships with retailers, and achieve sustainable growth.
In this blog post, we’ll guide you through the steps to create a solid wholesale pricing structure for your business. We’ll cover everything from calculating the cost of goods sold (COGS) to determining discounts for bulk orders.
Step 1: Calculate the Cost of Goods Sold (COGS)
The foundation of any pricing strategy is understanding the cost of goods sold (COGS). Your COGS includes all the direct costs associated with producing your product, and it’s critical to ensure that your wholesale price covers these expenses while leaving room for profit.
COGS Includes:
Materials: Raw materials or components needed to make your product.
Labor: The cost of labor involved in production, whether in-house or outsourced.
Packaging: The cost of packaging materials such as boxes, labels, and wrapping.
Shipping: If you ship raw materials or finished products to your warehouse, factor in shipping costs.
Overhead: Any additional costs, such as utility bills for production facilities, that directly contribute to product creation.
Example:
If your product costs $10 to manufacture, this includes:
$5 for raw materials
$3 for labor
$1 for packaging
$1 for shipping
Your total COGS would be $10.
By accurately calculating your COGS, you can ensure that your wholesale pricing will cover costs and allow for a sustainable profit margin.
Step 2: Determine Your Desired Profit Margin
After calculating your COGS, the next step is to determine how much profit you want to make on each unit sold at wholesale. The key is to find a balance between keeping your prices attractive for retailers and maintaining a profitable business model.
Profit Margin Basics:
A common approach for wholesale pricing is to add a 50-100% markup to your COGS.
The markup percentage depends on your industry, competition, and production volume.
Step 3: Establish the Retail Price
Wholesale pricing is typically lower than retail pricing to allow retailers to mark up the product and earn their profit. A common retail pricing strategy is the keystone markup, where the retail price is double the wholesale price.
Retailers will generally expect a substantial margin so they can cover their operational costs and still make a profit. Ensuring that your wholesale price allows retailers to mark up the product and remain competitive in the market is key to a successful pricing strategy.
Step 4: Offer Volume Discounts
Wholesale buyers often expect discounts for purchasing in bulk. Volume discounts can incentivize retailers to place larger orders, which benefits your business by increasing sales volume and reducing per-unit production costs over time.
Volume Discount Example: Here’s how you might structure volume discounts:
1-50 units: $16 per unit (no discount)
51-100 units: $15 per unit (5% discount)
101-200 units: $14 per unit (10% discount)
Offering discounts based on order quantity not only encourages larger purchases but also allows you to develop long-term relationships with retailers who may increase their order sizes as demand grows.
Step 5: Set Minimum Order Quantities (MOQ)
Minimum order quantities (MOQs) ensure that you are covering your costs and making the transaction worthwhile. When setting your MOQ, consider your production capacity and shipping logistics to ensure that the minimum order size is both profitable and manageable for your business.
Factors to Consider for MOQ:
Production efficiency: Higher MOQs help offset production costs, making each unit cheaper to produce.
Shipping efficiency: Set MOQs based on what makes sense logistically. For example, you may need to ship in quantities that fill a pallet or a truckload to maximize efficiency.
Profit margins: Ensure that even the minimum order meets your desired profit margin.
Example MOQ Structure:
MOQ for Retailers: 50 units
Order increments: Orders must be placed in multiples of 50 units.
Step 6: Account for Transaction Fees
If you use third-party platforms or payment processors, such as Shopify, Stripe, or PayPal, you will likely incur transaction fees on each sale. Be sure to factor these fees into your wholesale pricing structure so that they don’t erode your profit margins.
Typical Transaction Fees:
Payment processors often charge around 2-3% of each transaction.
Additional platform fees may apply if you sell through wholesale marketplaces.
Step 7: Reevaluate Pricing Regularly
Markets change, and so do your costs. Regularly review and adjust your pricing to account for fluctuations in raw material costs, labor rates, or shipping fees. This also applies to industry trends—keep an eye on what your competitors are doing and adjust your pricing to stay competitive without sacrificing profitability.
When to Reevaluate:
Annually: Review pricing at least once a year.
After significant cost changes: If your costs rise significantly, adjust your wholesale and retail prices accordingly.
When entering new markets: Pricing may need to be adapted based on market demand and competition in new regions.
Example Wholesale Pricing Structure
Let’s recap with an example of a wholesale pricing structure:
COGS: $10
Desired Profit Margin: 60%
Wholesale Price: $16
Retail Price (keystone markup): $32
Volume Discounts:
1-50 units: $16 per unit
51-100 units: $15 per unit (5% discount)
101-200 units: $14 per unit (10% discount)
Minimum Order Quantity: 50 units
Transaction Fees: Factored into pricing to account for a 2-3% payment processing fee.
Conclusion
Creating a wholesale pricing structure requires careful consideration of your COGS, desired profit margins, and the expectations of your retail partners. By following the steps outlined above, you can develop a pricing strategy that ensures profitability while remaining competitive in the wholesale market.
Regularly review your pricing to ensure it aligns with changes in costs and market trends. With the right wholesale pricing structure, your small business can expand its reach, secure long-term partnerships, and increase revenue.
