Knowing what a wholesale price is and how to calculate it is a crucial part of running a wholesale and distribution business. Set prices too high, and you risk losing customers. Set them too low, and you compromise profitability. It's about finding a balance that works for you and the market.
In this guide, we'll look at different wholesale pricing methods and how to calculate wholesale prices.
What is a wholesale price?
A wholesale price is the amount a retailer or other business pays for an item purchased from a wholesaler. The wholesale price reflects the cost of producing the item, overheads, business expenses and the wholesaler's profit margin. While wholesalers sell items in bulk, these are then on-sold by retailers at a higher price point, adding their own profit margin.
Why is wholesale pricing important?
Wholesale pricing is important for both retailers and wholesalers. By buying at a wholesale price and selling at a higher retail price, retailers can achieve a decent profit margin. Likewise wholesalers uphold their own profit margins by selling in bulk and achieving economies of scale. They can lower their costs by distributing their items to the market in large quantities.
What are the different wholesale pricing methods?
Wholesale pricing methods include absorption, keystone and differentiated pricing.
Absorption pricing
Absorption pricing, also called full costing, is a method of wholesale pricing that considers the full cost of producing an item. You calculate all direct costs – like materials and labour – and indirect costs – including rent, salaries and other overheads – and come up with the cost of producing each unit of a particular item. The absorption pricing calculation looks like this:
Absorption price = Direct labour costs + material costs + overheads / number of units produced
Once you know your absorption price, you can set a profit margin percentage and use that to calculate the wholesale cost of a given item. Absorption pricing is often used in financial reporting and end-of-year statements to show the full cost of goods sold.
Tiered pricing
Tiered wholesale prices for larger order volumes help you incentivise customers to buy from you in higher volumes. This approach sets multiple tiers for buyers, each with a different per-unit price. For example, a small business that purchases 500 pairs of socks might pay $2 per unit, while a larger business that purchases 5000 pairs might pay just $1.50 per pair.
Setting different pricing levels is simple if you use MYOB to manage inventory in your business.
Differentiated pricing
Differentiated pricing – also called variable pricing or time-based pricing – is a strategy that involves setting prices based on demand rather than just the cost of production. Depending on the type of goods you sell, you could set prices based on customer type, season or time of purchase.
For example, the price of items like swimming gear and sun hats may be higher in the lead-up to summer and then lower at off-peak times. You may charge customers more when they make a purchase at the last minute, charge less if they order well ahead of time, or charge a higher price for items in a trending or hard-to-find category.
Differentiated pricing helps you maximise the profitability of each item sold by responding to changes in demand and market fluctuations. On the other hand, it lets you drop prices to stay competitive as needed.
How do you calculate wholesale price?
Calculate the wholesale price of an item by working out the cost of production, adding other overheads like fixed and variable costs, and including a profit margin.
Calculate your cost of goods sold
To calculate your cost of goods sold (COGS) you need to add up all the direct costs of producing an item. COGS includes the cost of inventory, raw materials and labour used to manufacture a product but not indirect expenses like distribution costs, marketing, insurance or salaries for non-manufacturing staff.
Account for any additional costs and overheads
Additional costs and overheads should be added next. Overhead costs include any expenses not directly related to production – rent, salaries for managers and office workers, utility costs, insurance and shipping.
Understand your fixed and variable costs
Fixed and variable costs are two expense categories that correlate to COGS and overheads. Fixed expenses, like operating costs, stay the same regardless of the volume of items you produce.
Examples of fixed expenses include rent, salaries and insurance. Variable costs, on the other hand, fluctuate based on your rate of production. Raw materials, inventory and manufacturing staff wages or overtime pay all fall into this category.
Calculate your profit margin at volume
Your profit margin at volume is the percentage of sales revenue that becomes profit. In wholesale, profit margins vary, depending on COGS, other costs, how your competitors price their items, and the perceived value of your product or brand. Your industry also has a major impact – for example, food wholesale margins are generally under 15%, while clothing and accessories tend to be higher, at 40-50%.
Because different factors can influence your potential profit, setting a profit margin for your wholesale distribution business involves competitor research and a good understanding of your fixed and variable costs.
Once you have a preferred profit margin, you can use it to calculate the wholesale price for each item in your range. This is where you add a markup to each item price – here’s what you need to know about markup vs margin.
Formulate your wholesale price
Formulating your wholesale price means combining COGS and overheads and then calculating the markup needed to reach your desired profit margin.
For example, say you manufacture glass vases, which cost $15 to produce, plus $10 in overheads per unit. You've set a profit margin of 20%.
Here's how to calculate your wholesale price:
Convert 20% to its decimal format, or 0.2
Subtract 0.2 from 1 to get 0.8
$25 (cost of producing item) / 0.8 = $31.50
The result is a wholesale price of $31.50 per unit. Of course, this is just a starting point to help you understand costs vs profitability – you could go on to tweak prices based on customer, sales volume or other factors.
Examples of wholesale pricing
Here’s an example of wholesale pricing:
Your wholesale business buys 1000 pairs of sunglasses from the manufacturer for $5000, which means each pair costs $5. You choose to sell the glasses to retailers in batches of 50, with each batch priced at $500. This makes the price $10 per pair for the retailer, representing a profit of $5 per unit or $5000 for the entire shipment of sunglasses for your business.
What is the difference between wholesale and retail pricing?
The difference between wholesale and retail pricing lies in the volume of items each business sells. Because wholesalers distribute in bulk, they charge a much lower per-unit price. Retailers, who sell to the end-user or consumer, generally sell fewer items per transaction, so they charge a higher price.
Wholesale price FAQs
What are the challenges of wholesale pricing?
The challenges of wholesale pricing include striking a balance between too-high prices, which can alienate retailers and make you lose customers, or too-low prices, which impact your profit margin.
What is a good wholesale profit margin?
A good wholesale profit margin can be anywhere from 15% to 50%, depending on the item category, customer demand, competitor pricing and other factors.
What is an example of a wholesale discount?
An example of a wholesale discount is a small-scale clothing manufacturer selling to both individual consumers and retailers. In this case, the manufacturer would charge a higher per-unit price to individual customers buying one or two items and a lower price to retailers who buy in bulk. For example, a sweatshirt might cost $80 for one-off purchases and $30 for retailers that purchase 50 or more units.
Getting your head around wholesale pricing
For wholesale distribution businesses, pricing means weighing your costs against market forces, competition and the eventual retail price of your product. It's a complex calculation that can significantly impact your profitability, so it's crucial that you get it right.
Naturally, it's easier to get pricing right if you start with accurate data and visibility across your business. MYOB Acumatica delivers comprehensive financial tracking and reporting, along with purpose-built modules for inventory management and wholesale distribution.
With all your business details at your fingertips, you can pull out costs and operating expenses, break down past sales and inventory levels, and find a pricing strategy to maximise your profit margin.
Sort your wholesale pricing strategy with MYOB Acumatica. Get in touch to book a demo.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.