How to Price Your Physical Products for Retail and Wholesale
Hours of thought, research, and planning goes into a good pricing strategy when you are running a physical products business. The perfect balance is a price that is attractive to customers but also provides you with a reasonable profit margin for company growth. There are two price points to consider when you are developing your product. One is the retail price that you would like your product to sell to the public. The second price is the wholesale price of the item to retail stores.
The final price of your product to customers should be on the forefront of your mind as you are developing the product. The first place to research to get an idea on the type of price point that you want for your final product are items currently on the market. Price research involves visiting stores or online shops and looking through their selection of products that will be direct competitors to your product. As you research, make a list of products, features and prices. Listing the features and overall quality of the products is important since there can be huge differences in prices between high-end and low-end items. This research will help you determine if your calculated costs are in line with the current marketplace.
Determining Your Cost to Produce Your Product
If you develop a product and have another company manufacture the items, you can ask for a final cost per unit from the manufacturing facility. You will need to add the cost of shipping the items from the manufacturer to your office into the final cost per unit. This final cost is the unit cost that you will use to develop your wholesale and retail prices.
If you manufacture or assemble your products, you can calculate your base unit price by adding the cost of each of the components of the products. Remember to include the cost of all items from main components to labels and ink to packaging. You can use a spreadsheet program to calculate your unit, wholesale and retail prices. Following is an example from one of our rock and mineral kits. This example does not include the time to assemble the kits. If it takes substantial time, you can (and should) add that line item to your estimate. To determine the time cost, divide the number of units that you can assemble per hour by your hourly salary and add that cost to each unit.
Wholesale and Retail Pricing Calculations
Pricing a product properly can mean the difference between items that sell and items that sit on shelves. Generally, the retail price of a product is five times the cost that it takes to manufacture the item. For example, if you are selling a shirt that costs $3 to make, the shirt would retail for $15.
$3.00 (shirt) * 5 (markup) = $15.00 (retail sale price)
The wholesale cost of an item is typically 50% of the retail cost. Retailers will double the wholesale price to determine their retail price to customers. This markup is known as “keystone.”
In our example of the $3 shirt, the wholesale price would be:
$15.00 (retail sale price) / 2 = $7.50 (wholesale price).
These are simply general guidelines. You can, however, adjust these pricing methods to suit your products. For example, if your projected wholesale and retail price are too high or low based on your market research, you can increase or decrease them accordingly.
Volume Pricing Your Products
As you design your sales program for wholesale products, you will make a greater profit if you sell in volume even if you lower the per unit cost. This may seem counter-intuitive but the following illustration will show how you can adjust the per unit price and find the sales volume that will help you find the greatest profit margin.
Note: These prices are shown as whole numbers for ease of example. You should use your actual manufacturing costs in this analysis.
In this example, the manufacturing cost of $7.00 per item stays constant while the wholesale price and the units sold change. You can see that the total profit per sale is maximized at a wholesale price of $11.00 and 100 units sold. By increasing your minimum order, you can lower your profit margin per item and increase your profit for the entire sale. Try this exercise with your own product pricing. You can use spreadsheet software to easily calculate your profit per sale at different price points and unit groups.
As you are putting together you price calculations, let us know if you need help. Leave a comment below or send us an email.