Over my years selling gift products, one particular area critical to wholesaling that producers often misunderstand the importance of product pricing analysis. Finding an appropriate pricing schedule for the wholesale market needs to start with a detailed analysis.
First, Start with Pricing Analysis
As a “manufacturer” or producer, you should aim to retain around a 40% “gross” margin on the wholesale price. (Of course, more is always better, if the market will absorb the spread.) That may vary somewhat by individual product or product category, but this is a good average for most gift and gourmet markets.
What this means, is if your wholesale price is $5 (for a product you think the retailer can move at $9.95 to his or her customers), you would want your direct costs per unit to be under $3 (60%). This leaves you $2 (or 40%) per unit. You can then apply that $2 toward your marketing expenses (e.g. sales reps, trade shows, websites), income and property taxes, administrative or “OVERHEAD” costs, and hopefully, profits.
Overhead expenses refer to items that cannot be directly tied to the making of an individual product. For example, your building rent (the portion allocated to your business or shop), office equipment, business insurance, utilities, part of the merchant account credit card fees, and business internet connection. You pay the same amount for these whether you make and sell one unit or 1000 units.
Again, that $3 direct cost, from this example, includes the cost of materials and labor based on when you reach critical mass. Until you get to that point, you will likely end up with higher costs, and less than $2 per unit to put in your pocket. Of course, if you are selling 48 units, on average, to a store, you will make nearly $100 per order (actually $96 in this example = 48 x $2), once you reach critical mass. And, if you are making the product yourself, you also take home the full amount you allocated to labor. At least for now.
With your direct costs per unit in mind ($3 in our example), you need to develop a wholesale pricing schedule based on either MARKET or COST PLUS as detailed below:
‘Cost Plus’ Pricing Analysis
Go through the “direct cost” pricing analysis in the previous section. Let’s say, for example, you came up with $2.70 as the unit cost for your products once you reach critical mass. (And again, a spreadsheet is very helpful to find this price point.)
Now, divide by .6 (same as 60%). What we are doing, is determining the wholesale price you should sell for, to allow you a 40% gross margin at the point where materials and direct labor are at a reasonable and sustainable level.
You divide the direct manufacturing cost by .6 because you want to show that this cost represents 60% of the desired wholesale price, thereby leaving you .4 (40%) as YOUR margin. As you know, 60% + 40% = 100%.
So when you divide by .6, the number you get is your target wholesale price point per unit.
In this case, then, you get a wholesale price of $4.50 ($2.70 divided by .6). So, $2.70 represents the 60% direct cost per unit, while the remaining $1.80 ($4.50 – 2.70), is the 40% gross amount you make on each unit, towards profits and towards non-manufacturing expenses NOT directly tied to making the product (e.g. overhead).
Based on our Cost Plus analysis, we know our target wholesale price for this product is $4.50, and most gift stores that purchase at that price will likely sell it for an average of around $8.95 to $9.95.
More on Product Pricing Analysis next week.
In the meantime, if you want more information, check our my mini eguide: How to Price Your Products
If you are looking for 1-on-1 help with your pricing, check out my Pricing Your Products Coaching Program