NOTE: The following is an updated version of one of my most popular articles:
A few years back the candle maker I was representing in my business retired and I was looking for a new company to replace her. Several different candle companies contacted me, so the prospects looked good. But when I asked each of these candle makers to send me a wholesale/retail price sheet, I was shocked by what I received.
One gal made beautiful candles, I would like to have repped for her, but her wholesale price was 80% of her retail price! And this was not the only example of poor price structure. Eventually, I did finally find a producer whose pricing structure would work, but it took a long time …
As a general rule of thumb, your wholesale price should be 50% (or less) of your retail price. If it is more, you will have a difficult time selling your products wholesale. Often, it will take some work to make sure there are adequate margins for you both and the gift retailer.
Here is a formula to use when determining pricing for your products.
The first step is determining your cost per unit. Costs include the following:
- Ingredients or raw materials
- Processing or assembly of raw materials (labor)
- Packaging and labeling
- Shipping of raw materials to your place of business
From there, you can use this simple formula to develop your wholesale/retail pricing:
Cost of Goods (as listed above) x 2 = Wholesale Price
Wholesale Price x 2 to 2.5 = Retail Price
Another way to check your pricing is to determine the retail or selling price of your item to the consumer. Using a competitor’s selling price is a starting point to ensure you are in the same price range. From the selling price, you work backward to arrive at the wholesale price you should charge.
From the retail or selling price, subtract the retail and distributor or sales rep margins. Most retailers in the gourmet foods industry use a margin of 40%, whereas gift retailers use a 50% margin. Distributor margins are generally 25-35%, and broker or sales rep commissions are general 15%. Even if you currently do not use distributors, brokers or sales reps, these margins should be included in your pricing. As you grow and add these services, you want to have your pricing in place.
As a manufacturer, you should aim to retain a 40% gross margin. This gross margin must be large enough to cover overhead, administrative costs and marketing expenses.