5 Tips For Effective Wholesale Pricing
As a maker, crafter, or really any kind of creative entrepreneur with a product to sell, the holy grail of sales is definitely wholesaling. Being able to focus on just making tons of what you love and letting retailers take care of the granular sales is a relief — and can be a really great way to ensure your revenue stream. Unfortunately, a lot of people with something to sell don’t necessarily do a great job setting prices that work, which can make selling both stressful and financially impossible.
“Effective pricing is going to be the foundation of your wholesale business,” says jeweler, designer, and small business consultant Megan Auman. “If you don’t have your prices right — if you’re not profitable at the wholesale point — you can sell to stores all day long and you’re not going to make any money.”
Many crafters simply don’t know the most effective, profit-driven way to calculate their potential revenue — and, as a result, undercut themselves.
To avoid the struggle of ineffective pricing, here are five tips from Megan:
Your wholesale price is not half of your retail price. “That is the wrong way to think about pricing,” Megan says of this fairly common practice. Keystone pricing, which is effectively just setting your retail price at twice the wholesale price, is kind of an industry standard — however, it might not work for you if, say, you have to ship your products far away, or if your overhead is especially high. Instead, what you need to do is mark up from the wholesale price to ensure you’re actually profitable. Begin there — set your wholesale price, even if you’re not doing any wholesaling — and then move up toward a profit.
Know your industry, know your sellers. Depending on your area or what kinds of stores you’re going to be selling your goods in, you might be able to charge more than that keystore (read: 2x) rate. Do some investigation about the typical wholesale and retail prices of similar products in your market. If you’re selling online, look into what other people and companies are charging.
“My San Francisco stores are going to mark up 2.5,” Megan explains, “that’s fine. I’m not going to jump to that level — I’m going to price it at 2.2.”
Factors in pricing include the location of the stores, the kind of stores (luxury goods outlets tend to mark up as much as 3x) you’re selling in, and even what kinds of products you make. And the best way to find out? Scope out the competition.
Understand both cost-plus and value-based pricing. Both of these two kinds of price-setting have their pros and cons, which is why for a lot of makers and crafters, it’s important to crunch the numbers both ways. Cost-plus pricing is critical, because it gives you a very firm example of how much you need to charge to make a profit. However, says Megan, “it leaves money on the table.” Value-based is “fuzzier,” and can “go horribly wrong” if you’re in the wrong market, but it’s also a lot more likely to result in higher profit margins. Here’s an example from Megan’s actual business:
“Honestly, at $185, this necklace is still a really good deal,” says Megan. “As we all know, as makers, as business owners, there’s a lot of time we spend that we can’t really account for with cost-plus. But more importantly than that, I know that my customers are going to pay that because I know how awesome this necklace is. I know how fantastic this is going to make my customers feel. So $185 seems like a really reasonable price, and that’s what value-based pricing is really about.”
The market is not a good reason to lower your prices. If you need to drop prices to a level that is no longer profitable, you’re not selling in the right place or the right way, says Megan.
“You don’t want to reduce your price to get it into the market,” she explains. “Any time you’re selling at a lower price than you really want to be, you’re testing the wrong market.” Instead of getting locked into low prices that you can’t sustain, instead, try shopping your good around to somewhere that sells closer to the pricepoint you’ve determined is right for you.
Your math doesn’t need to be fancy, but it does need to be done. Megan says she doesn’t really use Excel spreadsheets, because she prefers to do the numbers by hand. The best way to start is to pick one product — any one will do, though your best-seller is probably a good place to start — and just crunch the numbers. Add up materials, labor, and overhead, then add in your desired profit for each unit. That is your wholesale price.
A lot of makers, says Megan, skip the inclusion of overhead and even profit, which can basically ensure that your pricing is not going to leave enough room for growth for your business. Try to avoid that pitfall, because “we want you to not only be covering your costs at the wholesale price, we want you to be making a profit.”
Once you’ve got your wholesale price, you can mark it up to create a suggested retail price for the carriers of your products, like brick-and-mortar stores and online outlets.
Doing this math before you even begin to shop your products around is the best way to ensure that you’re not only going to be giving retailers a comprehensive idea of how much they can expect to make, but also, that you’ll be able to keep the lights on.
Pricing can be a little scary, but it’s also extremely necessary for your business. Get it right the first time, and you’ll be set up for success moving forward.
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