Wholesale Price Formula – 8 Tips You Need For Effective Wholesale Pricing

In wholesale, pricing is everything. It determines almost everything for your business. Your wholesale prices will either attract customers, or it might deter them away from your business. So whether you are an established wholesale business or want to start a small wholesale business, the key to pricing is knowing the wholesale price formula.

So what is the wholesale price formula? That is what we are here to discuss. So let’s fully understand the wholesale formula, the types that you encounter in wholesale, and how best you can utilize your pricing for business success. 

Wholesale Price Formula: What Is It Really?

Wholesale price formula is the mathematical relationship for how you calculate wholesale price. I know speaking about mathematics is already causing a headache for some, so let’s break the formula down to speakeasy terms. In the simplest form, the formula has the things that go into determining the wholesale price that you set for your product so that each product sold generates revenue. The mathematical relationship just means what happens when one of those aspects increases or decreases to the wholesale price.

The wholesale price formula is relatively straightforward. The simplest price formula is taking the cost of goods sold (COGS) and adding a markup percentage. The COGS comes from the raw materials used to make the product, the labor needed to produce the product, and other direct costs associated with the product like rent and storage cost. The markup percentage in the formula is used to cover any other additional overhead costs and help make a profit for the business. This markup is how wholesalers develop their pricing strategy to make profit for their business. These profits then go on to help a wholesaler conduct inventory expansion to increase operations for future businesses.

Here is a simple example of looking at the wholesale price formula. Let’s say you buy 1000 quantities of plastic lids for jars at $1 per lid from a manufacturer. This covers all the overhead costs and the COGS. You then want to sell the product to generate 20% profit per lid. So, your wholesale price would be something like:

• Wholesale Price Formula (WPF) =  COGS + Markup%
• WPF = $1 + (20/100 * 1) = $1.20/lid

And there you go. As a wholesaler, you want to ensure you sell each lid at $1.20 to generate a 20% profit for your business. Again, this is the simplest example of wholesale pricing to give you an idea of what the formula looks like. In the next section, we will go over the more in-depth wholesale price formulas that wholesalers use to effectively price their products.

Wholesale Price Formula You Should Know About

1. Absorption Pricing

Absorption pricing takes into account all costs involved in the making and selling of a product. It is also known as full cost pricing, where all the necessary costs associated with the product is absorbed into the final selling price for it. It takes all direct and indirects costs so you have a practical yet simple pricing method to use for your wholesale prices. 

Components of COGS

The components of absorption pricing are very similar to the previous example mentioned above. It is just the COGS and the targeted profit margin added together. But let’s take a deeper dive into what these COGS actually entail for your business:

• Fixed Costs: Costs that do not change with level of production. These costs are usually things like the rent of the factory, factory space, salaries for staff, depreciation of equipment, utilities and many more. This is added to the overall COGS so you cover the basic cost for each product produced.

• Variable Costs: This the opposite of fixed costs as it is dependent on how much of the product is being produced. This might be electricity costs for running machineries, raw material cost per unit produced, amount of packaging materials used per unit produced, etc. 

• Overhead Costs: This is usually the smallest cost added to each unit produced but it is basically the extra administrative cost per unit produced. For example, the advertisement for the product sold or the legal paperwork needed to patent the products are all considered overhead costs. 

So COGS = (Variable Cost/Unit) + (Fixed Cost/Unit) + (Overhead Cost/Unit)

Percentage Markup

So the COGS covers all the costs associated for the product. Where wholesale businesses then make money is through the percentage markup to earn a profit on sales of products. The market up also helps cover other hidden or unforeseen costs related to the product so that you are covered on all bases. The markup is how wholesalers make their profits so it has to be carefully calculated to get the best pricing possible that is both affordable for customers and still profitable for your business.

So Markup% = (COGS * Desired Profit Margin%)

Formula for Absorption Pricing

So now let’s combine the two formulas above: 

Wholesale Price = (Variable Cost/Unit) + (Fixed Cost/Unit) + (Overhead Cost/Unit) + (COGS * Desired Profit Margin%) 

Then, if we simplify, we get

Wholesale Price = COGS + Markup%

Example

Consider a company that manufactures custom t-shirts. Here’s a breakdown of their costs:

• Fixed Costs: $8 per t-shirt (includes rent and worker salaries).
• Variable Costs: $2 per t-shirt (additional materials and temporary labor).
• Overhead Costs: $1 per t-shirt (advertisement and other costs)
• Desired Profit Margin: 20% or 0.2 or 20/100

So, COGS = Fixed Costs + Variable Costs + Overhead Costs = $8 + $2 + $1 = $11

Then Markup% = COGS * Desired Profit Margin = $11 * 0.2 = $2.2 

Plugging these prices into the wholesale price formula,

Wholesale Price = COGS + Markup% = $11 + $2.2 = $13.2

Therefore, to obtain a 20% profit margin, each t-shirt needs to be sold at a wholesale price of $13.2

Benefits of Absorption Pricing

1. 1. Comprehensive Cost Coverage: Since you cover all the costs associated with the product, you are effectively covering all the necessary costs so you are never working at a loss.
   2. Profit Margin Assurance: With the markup, you are also able to cover your desired profit margin to get the most out of your product when it is sold.

• Price Stability: Absorption pricing allows you to have good pricing stability that customers will appreciate in the wholesale market.

• Simplified Financial Planning: Absorption pricing helps simplify complicated financial planning because you have a clear pricing structure for your business to set realistic business goals and track performance easier.

Drawbacks

Despite its advantages, absorption pricing has some limitations. The biggest one is that all the pricing considerations are internal. External factors of market conditions are not taken into account which can affect your sales since customer considerations are excluded from the calculation.

2. Differentiated Pricing

If absorption pricing is all about internal costs and considerations, then differentiated pricing is the complete opposite. Differentiated pricing, differential pricing, segmented pricing; whatever you may end up calling it, pricing is done from the perspective of the customer. 

Components of Differentiated Pricing

Unlike the streamlined pricing formula for absorption pricing, differentiated pricing does not necessarily have a set formula. You can use the same formula used for as above to get a baseline price for your product, but the overall pricing will be different based on: 

• Customer Segmentation: Customer segmentation strategies are key to differentiated pricing. You divide the market into distinct groups of buyers like demographics, purchasing power, business size, etc. to set the price. Each customer will have a different price they will pay for the product.

• Geographical Location: The location is key to differential pricing. For example, if you are selling in the US and in India, you will need to price your products accordingly. You need to take into account the local market conditions as a result. 

• Market Conditions: Even different locations in the same country can have different pricing based on this. The prices are adjusted to the current market demand and other market dynamics, like competitor prices and market regulations.

• Volume Discounts: Another big departure from absorption pricing is giving out discounts based on quantity bought. With differentiated pricing’s flexibility, you can offer larger discounts for more quantity items bought to help increase sales figures.

Benefits of Differentiated Pricing

• Increased Revenue Streams: As you cater to a wider range of customers, you have increased revenue streams for your business. Your business is less likely to lose out on business due to having more customers.
• Market Penetration: More customers also mean you have more market penetration. A varied customer base allows your business to attract more businesses who are looking to you for their wholesale solutions.
• Flexibility and Personalization: As mentioned previously, you have increased flexibility with the pricing. On top of that, you can offer personalized pricing for customers as a result.
• Customer Loyalty: With personalization, customers are more inclined to be loyal to your business because they can get preferential pricing from your business over other wholesalers. 

Drawbacks

While differentiated pricing has many advantages, it also comes with challenges. It requires thorough market research and data analysis to set appropriate prices for different segments. But the biggest drawback has to be the logistic side of things. Absorption pricing is easier to implement because you can input a ready-made formula for all your wholesale customers. Since differentiated pricing has different pricing based on the factors mentioned above, sales figures and pricing calculations have to be inputted manually. 

8 Tips After You Set Your Wholesale Prices

Tip#1 Understand Your Costs Thoroughly

A good news for wholesalers: you don’t have to calculate the COGS of the product. As a wholesaler, you are buying the product in bulk from manufacturers and then reselling it to other businesses. The manufacturers are calculating the COGS for you so your business does and lumping it with their selling price. 

But it is important for you to understand your costs thoroughly. With it, you can add value as a wholesale business for your partners. Knowing these costs and running your calculations, you can help make changes or find ways to help your partners streamline their business to make more profits. 

Tip#2 Determine an Appropriate Markup

The key to the wholesale price formula is determining the right markup for your wholesale products. The markup has to be just enough to generate the right amount of profit for your business while also not being high enough to deter customers to your competitors. It also has to be just enough to cover additional costs like shipping delay or returned products. So make sure you analyze the market and competitors properly to determine the right markup percentage for your wholesale products.

Tip#3 Regularly Review and Adjust Prices

The COGS of your wholesale products will change over time. They might increase or decrease, but there are many factors that will determine the price fluctuations. While you might not have a direct hand in the changes in the costs for producing the product, you need to be proactive in reviewing and adjusting the prices. If costs creep up, then you are running your business at a loss. So be sure to respond to changes and help maintain your profit margins.

Tip#4 Segment Your Customers

If you are doing differentiated pricing, then you have to segment your customers accordingly as different customers have different price sensitivities. So be sure to gather as much data as possible to know what effective pricing you need to implement for your customers. As a result, you will maximize your revenue by capturing a larger portion of the market and have more loyal customers because you can tailor your pricing to your customers’ needs.

Tip#5 Make Clear Pricing Policies

You need to pair up your prices with clear pricing policies. That means you need to define terms such as minimum order quantities, payment terms, discount eligibility, product return procedure, and more. With this, you can maintain consistency with your customers and prevent misunderstanding of your store’s terms and services. In return, customers know what they will be getting into when doing business with you and you can foster a better relationship with them.

Tip#6 Take Advantage Of Seasonal Variations

Seasonal changes bring in new opportunities for your business. Summer and winter are times when people are spending the most, as are the holiday seasons. To help you increase your sales, you need to take advantage of the seasonal variations. It is a great time to add new products or put out of season products on discounts to help clear your inventory. Adjust your prices accordingly to maximize sales during peak seasons and stay competitive during slower periods, optimizing your overall revenue throughout the year.

Tip#7 Collect And Evaluate Customer Feedback

In A B2B market like that in wholesale, you have an advantage when you know what your customers think about your product and services. That is why you need to be active in knowing what your customers think about doing business with you. The more you know about their thoughts, the better you can be as a business partner for them.

For example, if your customers complain that they have to buy complementary goods from other wholesalers because you don’t sell the product, you can meet their needs by providing those products for them. It not only helps make their business shopping easier, but you also open up your business to other retailers looking for that exact product. That is why feedback is key to making sure your business has room to grow.

Tip#8 Bolster E-commerce Shopping Experience Through Third Party Apps

It is not just about setting the price, you need to also show customers the value your store has over others. So if your business sells on an e-commerce site like Shopify, then you need to ensure your customers are having a good shopping experience to help you stand out. That is where third party apps can help elevate your store’s shopping experience. 

Take a look at this Shopify store using a bulk order app to make B2B bulk ordering much easier for their customers:

This is a bulk order app that allows your wholesale e-commerce store to make shopping much easier for your customers. Here, you can see all the different variants are showcased in one page where the customers can make their quantity selection in the custom variant display box. 

The customers get to choose which variants they want to buy and how much they want to buy. Once the customer is satisfied with their quantity selected, then they can add the product variants they selected with one click, helping streamline their shopping process. 

But before they can add the products to cart, you will notice a message at the bottom of the product page. This is the cart restriction applied to the store. Unless this restriction (here, the customer has to choose exactly 24 quantities) is fulfilled, the customer cannot add the product to cart. This is great as customers won’t order the wrong quantity and helps minimize mistakes as much as possible.

So with one app, the customer gets a more streamlined shopping experience, less mistakes on their order through cart restrictions, and also has all variants displayed where customers can choose the quantity they want. For B2B wholesale business, such an app is the perfect way to ensure your customers are satisfied with their shopping experience while also helping you gain more sales as a result.

Bottom Line

The wholesale price formula is one small part of your wholesale business. It is used to determine what pricing strategy you want to use. Whether it is absorption or differential pricing, you need to ensure that your customers are happy with the prices and their interaction with your store. With those, you can keep running a successful wholesale business.