What is wholesale price? Best strategies to price for profit
Calculating wholesale price is an important aspect that a business needs to consider to increase its bottom line. However, pricing at the wholesale level is not easy. If your price is too high, no one is going to buy from you. If your price is too low, you risk losing your profit and devaluing your products in the eyes of your buyers.
Don’t worry, you are not alone. Wholesale price can be difficult to determine due to many internal and external factors. If you are new to wholesaling, the thought of setting prices can even get more overwhelming. That’s why we are here to help.
In this guide, we will break down everything you need to know about wholesale pricing: from calculation formulas, common mistakes, to the best tips and strategies to maximize your profit.
Wholesale price: The core concept
Wholesale pricing is a fixed price established by wholesalers who sell goods in bulk to businesses or individuals for commercial purposes.
Depending on the supply chain structure, wholesale prices can carry different names. For example, when a business functions as both a wholesaler and a distributor, the price offered to retailers or resellers may be called a distributor price rather than a wholesale price.
Wholesale prices are generally lower than retail prices due to economies of scale, which refers to the cost advantages per item achieved by producing goods in larger quantities.
Since retailers often purchase inventory from wholesalers or distributors, wholesale pricing is crucial in influencing the final retail price of a product.
The difference between wholesale vs retail pricing
Wholesale price | Retail price | |
|---|---|---|
Purpose | To sell in large quantities at a lower price | To sell smaller quantities at a profit |
Target customers | Bulk buyers, retailers, resellers, businesses | Individual consumers (end-users) |
Purchase volume | Bulk quantities with a minimum order quantity | Single items or small quantities |
Profit margin | Smaller per unit, but overall profit relies on high volume sales | Higher per unit, overall profit relies on many transactions |
Traditionally, pricing at the wholesale level targets B2B businesses. That said, the transaction is often professional, focused on contracts, large logistics, and consistent supply.
But during times of economic uncertainty, many shoppers have started to think differently. They realize that by buying directly from suppliers, they can pay less per item and stock up for later, especially on nonperishable goods. That’s how warehouse clubs like Costco and Sam’s Club came to life, blurring the line between wholesale and retail trade.
The cost at which retailers procure goods from wholesalers or manufacturers also sets a baseline for retail prices. It’s really simple: If wholesalers hike their prices, retailers will do the same to maintain their profit margins. That’s why wholesale price changes are often a leading indicator of consumer inflation, called the Wholesale Price Index (WPI).
At the end of the day, both pricing methods have the same goal: making a profit. You need to sell your products for more than what they cost you. To do this right, you'll want to understand how markup and profit margin work together to help you price smart and keep your business profitable.
Distinction between markup and margin
Markup | Margin | |
|---|---|---|
Definition | The amount added to the product’s buying or production cost to determine its selling price. | The percentage of the selling price that represents profit. Used for measuring profitability |
Focus | Find out how much you add to your cost | Discover how many percentage of your selling price is profit |
Formula | (selling price – cost) ÷ cost × 100 | (Selling price – cost) ÷ selling price × 100 |
Example | If cost = $50 and selling price = $75 Markup will be ((75 - 50) / 50) × 100 = 50% | If cost = $50 and selling price = $75 Margin will be ((75 - 50) / 75) × 100 = 33.3% |
Both the profit margin and markup are two parts of the same transaction. That’s why it’s so easy to mix them up. And when that happens? You could end up pricing your products too high and losing customers, or too low and barely making any profit.
From the example above, if you mistake a 33.3% margin for a 33.3% markup, you have underpriced your own offerings by a significant 26.4%. In contrast, if you mistake the other way, you end up pricing your products so high that nobody wants to buy.
Factors to consider when calculating wholesale price
Before you start setting up your wholesale pricing, you need to have a clear understanding of all the things that influence your prices.
Below, we'll cover what you should do to determine factors that shape your pricing decisions:
Understand your customers and competitors
Start by researching what your target buyers value most. Different market segments will have varying price sensitivities. Bulk buyers may prioritize low prices, whereas retailers or businesses will focus more on product quality, reliability, or fast delivery.
This will help you understand your competitors and their pricing formulas. How are they pricing similar products? Do they offer bulk discounts, loyalty programs, or special terms for long-term clients?
Understanding the industry landscape gives you a clearer picture of what prices make sense. Once you know that, consider your production capacity to determine that sweet spot for your pricing strategy.
Calculate production costs
There are three costs you should take into consideration when calculating your production costs:
Costs of goods manufactured (COGM): The total cost of turning the goods into ready-to-sell inventory.
Costs of goods sold (COGS): The total cost of all finished goods that were sold to customers, including the COGM.
Overhead cost: All the indirect expenses of running a business that are not directly tied to the production process.
To keep track of your expenses, keep all your receipts and invoices organized from day one. You can use accounting software to log everything as it happens. Make sure to review your numbers at least once a month so you can spot any anomalies or errors.
Find your profitability
When it comes to profitability, profit margin and cost markup are your best friends. Your profit margin shows what percentage of each sale is profit, and markup is how much to add on top of the costs.
Markup helps set prices or negotiate with B2B buyers. In fact, retailers and businesses that buy your wholesale products will likely add their markup, too. So you also need to keep their markup in mind when setting your wholesale prices.
On the other hand, profit margin tells you what portion of every dollar that comes in stays with you. A healthy profit margin means you've got more room to breathe if costs go up or sales dip. You can use Shopify’s wholesale price calculator to determine your own profit margin.
Pricing strategies also have an impact on your desired profitability. For example, a cost-based pricing takes all your costs and adds a standard markup on top. However, it doesn't take into account what customers are willing to pay. Value-based pricing, in contrast, allows you to capitalize on the perceived value of your products and set higher price points.
Strategies to set your wholesale price for profit
Cost-based pricing
Also called absorption pricing, cost-based pricing includes the costs of making your product, plus profit margins. The name "absorption pricing" comes from the idea that your wholesale price will “absorb” all the associated costs. The formula is simple: Wholesale Price = Cost Price + Profit Margin
This approach makes sure that all your expenses are included. It's often a good starting point if you're new to wholesale. However, it does not take into consideration the perceived value, market conditions, or competition.
Guesswork pricing
Guesswork pricing, also known as market-based pricing, is a strategy that determines the price based on information from the market. Compared to cost-based pricing, guesswork pricing offers more flexibility. You can adjust your price quickly if there are any changes or fluctuations.
That said, wholesalers using this approach use the Keystone pricing method, a method that involves taking the retail price of a product, dividing it by two to get the final wholesale price. The complete formula is: Wholesale Price = Retail Price / 2.
Value-based pricing
Value-based pricing, also called differentiated pricing or demand pricing, is all about what customers think your product is worth rather than just what it costs you to make. In other words, you're looking at how much people are willing to pay based on the value they see in the products you sell.
Firstly, you figure out what makes your product special in customers' eyes and price it accordingly. If customers see that value, they'll be willing to pay more for it. This approach works especially well if you've built up your brand name or if your products are in high demand. When people really want what you're selling, they're happy to pay a premium, which means bigger profits for you.
The tricky part with value-based pricing is figuring out what your target customers value. What you think is important to them might not match up with what they're really willing to pay for. As a result, it requires more research and market knowledge than simply adding costs and markups. On top of that, you need to make sure you have the resources to deliver on the value you're promising.
Tiered pricing
Tiered pricing is a smart way to encourage customers to buy more by offering better deals or discounts for larger orders. Instead of one flat price, you create different price levels based on how much someone buys. The more they purchase, the better the deals or discounts they will get.
After determining your cost, you add multiple markups that resonate with each price level. For example, if your cost per unit is $5, you might price your first tier at $12 (140% markup), your second tier at $10 (100% markup), and your third tier at $8.50 (70% markup).
Although your per-unit margin decreases at higher volumes, you're making it up in volume and moving more product in one go. One strategy you can use with tiered pricing is to use a Minimum Order Quantity (MOQ), the smallest quantity of products that your customers must purchase in one order. This makes sure even your entry-level orders are worth your time, while your tiered discounts still give buyers a reason to go bigger and order more.
Common mistakes when setting wholesale prices
Price your offers too low or too high
One of the most common mistakes new wholesalers often make is getting their price wrong, either too high or too low.
Sometimes it's a wholesale calculation error. You either leave out certain costs or you mix up margins and markups. Other times, it's about mindset. You might price too low because you're worried about losing sales. On the flip side, you might overestimate what your product is worth, assuming buyers will pay more just because you put a lot of work into it.
Both scenarios can seriously hurt your business, just in different ways. Overpricing pushes potential buyers straight to your competitors, while underpricing hurts profit margins to sustain or grow your business.
Overlook sunk costs
There are other hidden costs beyond the numbers on the paper. Think about the money, time, and effort you spend on the products. These are called sunk costs, the money and effort you've already spent that you can't get back.
New merchants often ignore these costs entirely, and they don’t realize how much they’ve invested in getting their business off the ground. This makes their wholesale prices look good on paper, but in reality, they’re selling at little to no profit.
Be aware of these costs so you understand your true break-even point, and set your pricing with a realistic timeline of cost recovery in mind.
Ignore your retailers’ profit margin
In a wholesale setting, manufacturers or wholesalers often have an MSRP, which is short for merchants’ suggested retail pricing. This is the price you recommend your retailers charge their customers. The gap between your wholesale price and the MSRP is where retailers make their money. If that gap is too narrow, it's just not worth it for them to carry your product.
The fix is to do your homework on industry standards before you set your prices. Many industry works with 50% off suggested retail prices, though this varies by product types and regions.
Overcomplicate your pricing structure
You may be tempted to offer multiple pricing tiers and special discounts to cover every possible scenario. While you may see that as flexible, it actually confuses buyers and creates a ton of extra work for you.
When retailers have to dig through a complex wholesale price list, you risk losing your customers. They want to place an order quickly, not solve a puzzle. Not to mention the potential for errors on your end: miscalculations and a hassle to update.
Stick to one clear wholesale price or maybe two to three straightforward tiers based on order volume. Make sure your pricing is easy to understand at a glance and consistent across the board.
Set and forget about wholesale pricing
Pricing at the wholesale level requires constant updates. Especially during the time of economic uncertainty, costs and demand can shift quickly.
If you set your wholesale prices once and never look at them again, you're hoping nothing changes. But the reality is, everything changes, and an outdated price list will seriously hurt your bottom line.
Make it a habit to review your pricing regularly, at least once a quarter. Don't be afraid to adjust your prices when needed. Make sure to let your customers know about the change and clearly explain why.
Tips to get your wholesale prices up and running
Determine the right MSRP
💡Here’s the formula to calculate MSRP:
MSRP = Wholesale Price × (1 - Margin Percentage)
Let's say your wholesale price is $50, and retailers in your industry typically use a 30% margin. Therefore, their suggested retail price would be: 50 / (1 - 30%) = $71.43
Getting your MSRP right is crucial because it affects everyone in the sales chain. If the MSRP is too low, your retail partners will barely make any profit margins to cover their operating costs, making them less likely to carry your product. Conversely, if the MSRP is too high, consumers may find your product overpriced compared to other competitors.
Implement a hybrid pricing strategy
A hybrid pricing strategy is an approach that lets you create two different price lists:
Retail site: A site to showcase the product price for customers who want to buy single items or small quantities at regular retail prices.
Wholesale site: A separate site with discounted pricing for bulk buyers, retailers, and business customers.
By having two separate sites, you can easily set up your price and calculate the margin for each of the customer segmentations.
For example, if you manufacture tables and sell them through both wholesale and retail channels, you should calculate your margins for both the retail price and the wholesale price. In this case, you need to look at these numbers per item:
COGS: $15
Wholesale price: $30
SRP: $75
From that, you can calculate your margins:
Wholesale margin | (Wholesale price - COGS) / Wholesale price = ($30 - $15) / $30 = 50% |
Retailers’ margin | (Retail price - Wholesale price) / Retail price = ($75 - $30) / $75 = 60% |
D2C’s margin | (Retail price - COGS) / Retail price = ($75 - $15) / $75 = 80% |
Now let’s go set your wholesale price right!
You now have a solid understanding of what wholesale price is and how to calculate it for your business. From figuring out your costs to choosing the right strategies, you are ready to set up your wholesale price for success.
To help you implement your wholesale pricing structure, we've got the perfect tool to make it happen effortlessly on Shopify. Qikify Quantity Discount comes with a friendly interface and automated tiered pricing that does the work for you. Set up in minutes and start encouraging customers to buy more right away. No manual calculations at all!
FAQs
Harry Nguyen
Digital Marketing Specialist at Qikify
Hi, I’m Harry, your friendly neighborhood marketer at Qikify. I am all about providing E-commerce merchants like you with the best insights and industry tips to help you grow your online stores and drive more sales.
Out of office, I like working out at a gym and learning about all things E-commerce and Marketing.
Feel free to reach out to me on LinkedIn. I’m always up for a coffee chat with other marketing folks and store owners to exchange ideas and explore potential collaborations.
