Anatomy of a Wholesale Price

Part I of a Four Part Pricing Series (Part II, Part III, Part IV)

One side note before we dive in: even if pricing decisions don’t fall under your jurisdiction at the company you rep, the basics are well worth wrapping your head around for the confidence you will gain in your product and how it is positioned within the overall market. And confidence is what it all boils down to in sales.

Imagine a woodworker who wholesales her handmade cutting boards. And let’s say she makes an income statement for the sale of a single cutting board to a cheese shop. It might look something like this:

What’s cool about this is that if she were to break down her wholesale price into its components, it would look exactly the same — “Sales” would simply refer to her sell price to retailers, a.k.a. her wholesale price, and “Net Income” would refer to her net profit on the sale of one cutting board. Of course, income statements are considerably more complex when created for a real life, multifaceted business, but if her entire business consisted of making and wholesaling this one style of cutting board, then her wholesale price, broken down into its components, would essentially be a mini version of her income statement.

When you think of pricing like that, you realize just how important it is, and why it should never be guessed at. In effect, pricing is the DNA for your entire wholesale business, so the consequences of setting your prices too low or too high could be disastrous. Furthermore, pricing is not something you can “set and forget.” It must be revisited frequently as your business and the market evolve.

As a small wholesale producer, your wholesale price for a given product is dependent upon three main factors:

1. Your cost per unit.
2. Your required profit margin.
3. Your desired shelf price.

In the above example, how did our woodworker arrive at her wholesale price of $25? By finding the sweet spot between these three factors. So let’s consider each in turn, along with the associated accounting terminology. Bear in mind that this exercise is for one unit of one given product. Each product in your catalog should be subjected to the same rigorous analysis, as should each unit of sale. (A unit of sale simply refers to the format in which you sell your product. If you sell it individually, then one product is your unit of sale. If you sell it in boxes of three, then the box is your unit of sale. If you sell it both individually and in a box, then you have two types of selling units, and you’ll need to work out your costs for each).

If you’re not a numbers guru yourself, consult your accountant, since it can so easily make or break your business.

Over the next three posts, we’ll cover cost, profit, and shelf price. Stay tuned.

Up Next: Part II of IV