If we were asked to rank the main factors relevant to a business’ success from “a” to “z”, “a” being the most pertinent, the pricing of any product or service would definitely make the podium with a capital “A” ranking (or at least a strong “B”, right behind having an amazing product to begin with). Pricing is a cornerstone for the success of any business, and establishing the right price is a subtle art. Whether you are operating at the retail level, where you are selling your product directly to consumers, at the wholesale level, where you are working with established retailers who sell your product to their own customers, or you are navigating both realms, the right pricing strategy will help you swim or make you sink. We’ve come up with an “a” to “z” guide to highlight the A-B-C’s to pricing your product adequately for wholesale.
We’re going to start by letting you know that it is so important for you to make sure to price your product at the retail level with some leeway right from the onset. Having some flexibility here will allow you to avoid finding yourself in the less than desirable position of realizing that your existing margin might be tighter than you thought and having to develop a strategy to work within its boundaries. Say you’ve already been selling your product at a retail level (direct-to-consumer or DTC) and you’ve established that your goal is to keep a smaller margin in order to offer your product at a lower price point (your total cost of production + the profit margin you are looking to make on the sale of this product = the retail price your customers will pay to purchase said product). But now that you are some ways down the road, you’ve made the decision to expand the scope of your business towards wholesale, yet hadn’t thought ahead when pricing your goods for retail and now, your margin really isn’t super forgiving. Leaving some room to play within your margin when pricing for retail doesn’t mean that you are being greedy AT ALL (though it can sometimes feel that way), it simply means that you are being long-sighted when it comes to the growth of your business, especially, if you think you might want to maybe, one day, who knows, dabble in a little bit of wholesale fun. We are here to help you figure out how to properly price your product no matter the position you are currently in. And yes, this post will involve some equations and formulas that you will need to know and tweak for your own needs, but most of it isn’t as technical as you might think. We promise ;).
Before diving head first into these math-infested waters, we want to draw your attention to three aspects of your business that you should consider having down pat.
1. Brand Positioning & Value
Know. Your. Competitors. Identify who they are, know what edge you may have over them (or what edge they may have over you) and know what their pricing is. Becoming familiar with your competitive matrix (competitors) will help you better understand your brand’s place in the midst of all others available out there. Branding and positioning yourself within the market will be a battle half-won once you understand your target customers behaviour and preferences when purchasing a product comparable to yours.
Winning the second half will be reliant on your ability to research and analyze trends, perceived market tendencies, to run or to read up on different surveys relevant to your industry and product, etc. Though these are all variables which will forever be dynamic within any sector, checking in with your business’ surroundings is always a good idea. Remembering to compare apples with apples is also critical; you may become overwhelmed with the amount of information that is available to you once you start digging, but remembering to stick to what is directly relevant to your brand and to your business right now will greatly help you make sense of it all.
For example, start by sticking to brands that you truly consider competitors, rather than investigating brands that inspire you, or look at wholesale start-ups with a steady growth curve, rather than focusing on long-time established companies.
Not only will this type of exercise help you position your brand, but it will also help you identify your brand value. Are you a values-driven brand, an ethical or a socially-minded brand, or a brand with a cause, from which your consumers make purchasing decisions based on their own values? Are you a luxury brand, are you a budget friendly brand, are you a revolutionary brand? The possibilities are endless. The key is to not be a commodity-based brand, because here, your product will lose value; your pricing shouldn’t be merely based on the product’s function itself, but what it can bring to consumers beyond that. Your brand value should also reflect your brand’s philosophy and even your company’s culture. What makes your product a must-have, or valuable to consumers? → THAT is your brand value.
2. Non-negotiables
Here, at April 47, we often have the privilege of working with the insights into our clients’ wish-list when planning their brand launch and production. We catch a long hard glimpse into everything they’ve ever wanted their brand to be and to not be and we help them determine which wish is absolutely non-negotiable. “I will strictly work with local manufacturers”. “I want my product to be luxurious and sustainable, solely sourced from the most amazing materials, while remaining affordable from my customers.” These are a couple of examples of wishes that we come across regularly; they are absolutely fantastic and, most times, feasible. But, not always without the sacrifice of being profitable. Defining what your brand will always stand for, no matter what, means casting your non-negotiables in stone. And, though these non-negotiables are well and swell, remembering that they will play a massive role in your pricing strategy will often help you reflect on your non-negotiables and recognize what can, in fact, be negotiable. The reason why these non-negotiables are so important is that they can significantly impact your cost of production and, ultimately, your pricing. We’d recommend founding your brand on approximately three non-negotiable aspects which define its essence and DNA, and which will always be recognizable in your product itself.
3. Pricing for retail
Always price for retail. Although you may be looking to launch a wholesale business without even looking to sell directly to consumers yourself, your wholesale customers are looking to do just that. This means that you have to be conscious of the price of your product at a retail level. Logically, if your product does not sell at a retail level, you cannot sell it at a wholesale level. Most direct-to-consumer brands will think to themselves “Hey, why should I split my margin with a middle-man when I can simply sell my product directly to my consumers? If I do this, wouldn’t I be able to make my price point more appealing or affordable?” This approach can work wonders if you swear off wholesale forever. However, like we mentioned earlier, creating a tight margin for yourself is risky, since you might want to grow and grow and grow your brand and business in the future (naturally); a tight margin basically locks you into the world of direct-to-consumer sales for all eternity. We’re being dramatic, but unless you increase your retail price significantly, which, we would not recommend, upping your retail prices could ultimately cause you to lose money, since your loyal retail customers will probably not be too keen on paying so much more than what they are used to dishing out for your product.
[**something to think about**: this appealing price point is already close enough to the sum of your cost of production + possible overhead + any other expenses relative to your pricing structure. Would adding another sales channel, in this case a wholesaler (an added expense in terms of eating into your margin) make sense if it meant that you would now risk making little to no profit in your margin?].
Since so many DTC brands have successfully branched out into wholesale business models before, it would definitely be interesting for you to think about your business in terms of what their retail strategy looked like when they initially launched their brand.
TIP: In the event that you are a DTC brand and you’ve already established your retail pricing prior to deciding to try your hand at wholesale, we have a couple of strategies to suggest that could help you stay profitable even if working at a wholesale level. When making the move to sell your product on a greater scale, you should look into the benefits that come with choosing to work with a particular manufacturer over another. Which is the better supplier for the materials you need, or which are the bigger, faster, better-established manufacturers? Opting for a supplier that will help increase the quality of your product will be beneficial overall. Namely, when the time comes to increase your retail pricing; making some changes to your product will serve to justify your new retail price and help your customers understand that your product now has better value. Should you not want to increase your pricing at all, having a higher demand for your product can help you negotiate the cost of production with your suppliers so that you can not only maintain your current retail price, but also still make an interesting profit within your margin (whew!).
In sum, if you can build your retail pricing right off the bat, regardless of your current business model, you absolutely should. You’ll thank yourself down the line; plus, you’ll avoid many issues caused by your wholesale customers having to work out their own retail prices. The price for a specific product within a brand should be consistently universal, the same product should not cost more in so-and-so’s online store and less in so-and-so’s boutique. That’s just bad for business.
So what’s the best way to go about establishing a truly sustainable and profitable retail price for your product? What are the core components to take into account? Let’s find out…
A. Direct Cost
This part is straightforward. We’re sure that you’ll have done this homework before starting production, that you’ve determined which raw materials you need to make your product and how much each costs. In other words, the direct cost is the cost in raw materials per unit produced.
Example:
with $100 of raw material, you were able to produce 10 units.
Formula:
raw materials ÷ units produced = direct cost
$100 ÷ 10 units = $10
B. Overhead
Overhead costs are additional recurrent costs (usually calculated on a monthly basis) that are not directly derived from the actual production of your goods. These costs can include transportation costs, website hosting fees for your online store, packaging and labelling costs, rent for an office space, employee salaries, marketing costs, etc. Basically, any cost that contributes to the production and sale of your product counts here. While each company will have its own collection of overhead costs, each and every one of these costs must be accounted for in one’s wholesale price first, as it will be reflected in the retail price later. Of course, to simplify your pricing strategy equation, you will want to group these multiple components into one overarching figure that will allow you to see what the total damage is each month for the production of X number of units.
Example:
your total overhead cost each month is $150, while you are producing 30 units within that month.
Formula:
total monthly overhead cost ÷ number of units produced within that month = overhead cost per unit $150 ÷ 30 units = $5/unit
C. Time & Skills
The magic ingredient here is: Do Not Sell Yourself Short. It’s so easy to forget how much work and talent goes into designing or creating something when looking in the mirror. We totally understand that rating yourself and putting a value on your work can be uncomfortable at times, especially when starting a new business venture, but please remember to give credit where credit is due. And yes, even when it comes to you. Just as you would expect to be paid by an employer for your work, you should be adequately compensated for your work. Because, let’s face it, we’re all our own toughest critic, but tough does not mean unfair. So, what is a fair wage for you for the work you are putting into your business? How much would you expect to be paid for a designer, managerial, executive or creative job elsewhere? What does your work week really look like? Kindly remind yourself of all the wonderful (and vital!) things that you do to keep your machine oiled and running.
Chances are that your average to-do list does looks something like this:
TO DO:
product design
sourcing and purchasing of raw materials
prototype development and sampling
aspects of manufacturing
branding
packaging and labelling design
aspects of photography
copywriting
sales
web design
marketing including social media, email and print medias
accounting
procurement and inventory management
Your list could very well go on for miles and miles, all depending on whether you have a dream team by your side or you are a fierce lone wolf. Whichever the case may be, refer to your to-do list when you have trouble justifying your own wage, we promise it’ll serve you well as a swift reality check ✔!
Now that you’ve acknowledged the fact that you wear so many different hats, how can you translate all of this work into a simple monetary figure?
Part 1. 8 steps to calculate your hourly wage:
Step 1: take your total gross sales from last month
Example: $2000
Step 2: take the number of units sold to generate this $2000
Example: 30 units
Step 3: work out the total direct cost of making these 30 units
Example: direct cost per unit (refer above to paragraph A. Direct Cost if you need to refresh your memory on how to reach this number) X number of units produced = total direct cost.
Formula: $10 X 30 units = $300
Step 4: take you total monthly overhead costs
Example: $150
Step 5: add up steps 3 and 4
Example: direct cost + total monthly overhead costs
Formula: $300 + $150 = $450
Step 6: subtract step 1 from step 5
Example: your total gross sales – production and overhead costs = the money you’ve made once all of your expenses are paid
Formula: $2000 - $450 = $1550
Step 7: figure out how many hours of work you put in a month
Example: 60 hours
Step 8: divide the result of the formula from step 6 by the number of hours you’ve worked
Formula: $1550 ÷ 60 hours = $25,83
Voilà! This figure is the actual hourly wage you are currently making. This figure may surprise you, in a good way or not-so-good way. But, we’re not done yet.
Part 2. Let’s do this exercise backwards and calculate how much you could make per unit sold. What would you like your hourly wage to be?
Step 1: Based on your workload, how much would you realistically like to make per hour?
Example: $40/hour
Step 2: determine the number of hours it will take to produce the number of units you want to sell in a month (while making sure to encompass ALL of the tasks on your to-do list).
Example: 60 hours
Step 3: determine your labor cost by multiplying the above figures from steps 1 and 2
Formula: $40 X 60 hours = $2400
Step 4: now, divide this result by the number of units you are producing within that month.
Formula: $2400 ÷ 30 units = $80
Looks like you’d be making $80 for every unit sold, while all of your expenses have already been taken care of. As broken down in the 8 steps to calculate your hourly wage, you’ve already taken your direct cost and overhead into account as well as the $40 an hour you’d like to pay yourself.
Whatever remuneration model suits you and your business best is what you should work with; just promise yourself you’ll remember to be fair. You deserve it!
D. Profit
Your Holy Grail! Building profit into your retail pricing is crucial, because profit is what allows your business to grow. The last A-B-C’s we talked about were about building you price around your cost, although, that seems kind of dry to us. Wouldn’t you agree? Let’s add some of that sweet profit opportunity into the mix to make sure that your business keeps on growing. Now that’s more interesting.
Understanding that profit isn’t just money left over for you to (deservingly) roll in once you’ve diligently taken care of all of your expenses is key; having some of that extra cash to re-invest into your business will help your baby grow exponentially. You can invest some of it here, some of it there, some of it towards buying new equipment, renting a better workspace, accessing higher quality materials, working with better factories, hiring or rewarding employees, you can invest some of your profit towards some marketing tools like public relations and social media specialists, or to make your mark at a trade show with a great stand, and for so much more. Profit not only allows you to work on perfecting you brand, but also allows you to work on perfecting your working conditions (salary, hours, etc.) because as you become more profitable, your possibilities become endless.
But how do you know exactly how much to factor into your retail price to actually be profitable?
Generally, this figure should derive from your cost price. To illustrate this, we’re going to add up the figures we came up with earlier, for a total of 95$:
Example: Direct cost per item + Overhead per item + Time and labor cost per unit = your cost price
Formula: $10 + $5 + $80 = $95
Let’s imagine that you’ve decide that you’d like to make a profit equal to 50% of the cost price. You’ll need to multiply your cost price by your desired profit percentage.
Example: your cost price X the percentage of profit you’re aiming to make = the profit you should factor into your retail price
Formula: $95 X 50% = $47,50
You’ve determined that your profit per unit sold in terms of dollars would be 47,50$.
Now, this part is a breeze. Simply add up the figures you came up with direct cost per unit + overhead per unit + time and labor per unit + profit per unit, and there you have it, ladies and gents, your wholesale price!
Formula: 10$ + 5$ + 80$ + 47,50$ = 142,50$
YOU DID IT! You’ve conjured up, by the power of simple math, the necessary figures to build your wholesale price. And in turn, your retail price. As the French would say, “Ce n’est pas sorcier!”
While we are still treading these wholesale waters, we’d like to draw your attention to a small but monumentally important sidebar: The truth of the matter is that if your wholesale price is too low, your business will inevitably struggle, no matter the number of stockist you work with (a stockist, in case you are unfamiliar with the term, is a retailer that stocks your goods, or in other words, sells your product). Same goes for a wholesale price that is too high; your business will struggle because you’ll have a hard time finding stockists to work with. Nailing the right wholesale price on the head is essential for your business to thrive, but it’s not easy. Figuring out your direct cost, your overhead and your labor cost is logical, but essentially choosing your profit based on what you’d ideally like to make isn’t. Try making your choice after researching the current retail price of products comparable to yours and experimenting with the formulas provided above to see what kind of profit can realistically be made.
E. Retail price
Remember, way up at the top of this post, where we implored you to always price for retail, no matter what? Well, we’ve made it down to the end of the road here, and we’re ready to show you how to do it! (Finally! We know…) We’ll use our knowledge of the world of fashion to help us explain.
In the fashion industry, the rule of thumb for pricing from wholesale to retail or vice-versa is that you generally work with mark-ups of 2 times or 2,2 times the wholesale price or with a 52% to 55% discount off of the suggested retail price. Working with a “mark-up” means working from a wholesale price which is multiplied by 2 or 2,2 to determine the retail price. Working with “discounts” means that you are working from a retail price from which a percentage of 52% or 55% is removed to uncover the wholesale price. Let’s use the wholesale price of $142,50 that we came up with earlier as an example:
Example: wholesale price X mark-up = retail price
Formula: $142,50 X 2,2 = $313,30
As we suggested earlier, it’s a good idea to experiment with the different variables that influence your price. Exploring and analyzing different factors before committing and going to market with your retail prices is fundamental.
Your retail price could come out of this formula lower than expected for reasons such as paying lower prices for your raw materials, underpaying yourself for your time and labor, or there’s something up with your wholesale price. On the other hand, your retail price could come out higher than you expected because you’re using expensive packaging, it takes you a long time to produce your goods, or again, maybe something’s off with the wholesale price. There can be many reasons for your retail price to not be perfect on the first try, so take your time, go over your math again and again if you have to, do some more market research and analyze comparable products already on the market. In the end, you’ll be glad you did, and you’ll feel confident in your pricing.
Establishing the perfect pricing strategy is definitely not easy as A-B-C (D, E) or following Steps 1-2-3 (4, 5, 6, 7, 8). But, we hope that you can profit from some of what we’ve learned along our way and that we’ve encouraged you to price your products with confidence.
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Feel free to reach out to us if you have any questions. We’d love to see how our company can help you start, launch, and grow your business. Email us today!