There are various complexities in the manufacturing industry. Every production process, maintenance task, and stock item must be monitored and accounted for to ensure operations run optimally and profitably. Inefficiencies in processes, traceability, and your supply chain inevitably add to the cost of production – and the higher your costs, the lower your profit.
So, how do you price your product competitively and profitably while accounting for unforeseen expenses? With a wholesale pricing strategy.
This article explains what wholesale pricing is, how to calculate it, and how enterprise resource planning using a cloud business management solution is an invaluable asset to growing your business.
There are two types of pricing: wholesale and direct-to-customer sales, and the former is more intricate than the latter.
What does wholesale pricing mean?
The wholesale price is the cost of bulk goods sold to larger groups or distributors and is significantly lower than consumer pricing.
Why? Because with consumer prices, there’s a mark-up on smaller purchases so that the retailer can cover its expenses and make a profit. With bulk purchases, the volume of goods sold allows for a much lower mark-up since the seller doesn’t need to worry about things like distribution and storage costs.
For example, Pick n Pay buys sugar in bulk from the manufacturer. In distributing the sugar to its retail stores, Pick n Pay incurs processing, customer service, and logistics costs, which it needs to account for when setting the retail price, which can be significantly higher than the wholesale price.
Wholesale pricing is an attractive model for distributors and retailers because they can purchase goods at lower prices and make higher profits from their mark-ups.
How do you calculate wholesale prices?
Every company’s capacity and goals differ, making wholesale pricing subjective to the products your business manufactures, what your profit margin is, and the type of customers you’re targeting.
Finding the balance takes meticulous calculation and strategising. If you set the price too high, you risk losing customers to more affordable competitors. If you set the price too low, you risk lessening the value of your goods and, therefore, your profits.
You’ll use this formula to calculate your wholesale pricing:
Wholesale price = Total cost price + Profit margin
But first, you need to know what each of these figures are.
Let’s break it down.
Step 1: Pricing market research
Market research should reveal who your customers are, how they’ve interacted with similar products in the past, who your competitors are, and pricing trends in the market. Doing market research is the best way to gain insight into what other wholesalers charge in your market and location.
Step 2: Strategise
Your wholesale pricing strategy will depend on the outcomes of your market research and your business goals. The two most popular strategies are absorption pricing (cost-based) and differentiated pricing (demand-based). If you’re unsure about which strategy to use, experiment with both and determine which would work best for your business.
If you opt for differentiated pricing, you can skip the entire calculation process and base your wholesale price solely on demand for your goods. This method is generally used to optimise a business’s return on investment (ROI) and considers what your customers are willing to pay and the different market scenarios.
The following steps apply to absorption pricing.
Step 3: Calculate your total cost price
Your total cost price accounts for the various costs involved in manufacturing the product. This includes overhead expenses, administrative costs, and variable costs, also known as the cost of goods manufactured and the cost of goods sold.
Calculate your cost of goods manufactured
In the absorption pricing model, the cost of goods manufactured (COGM) includes all the costs involved in making the product, such as material and production costs, process costs, and overheads.
Calculate your COGM using this formula:
COGM = Material cost + Total labour cost + Overheads
Calculate your cost of goods sold
To calculate your total cost price, you first need to work out your cost of goods sold (COGS), including the COGM, plus sales, administration, and overhead costs. These could include utility bills, insurance, rent, maintenance, and cloud business management solutions subscriptions.
Calculate your COGS using this formula:
COGS = COGM + Overheads
To calculate your total cost price, use this formula:
Total cost price = COGM + COGS
Step 4: Calculate your profit margin
Use this formula to calculate your net profit margin:
Net profit margin = (Net Income ÷ Revenue) X 100
Step 6: Calculate your wholesale price
Now that you know your total cost price and profit margin, you can calculate your wholesale price by adding the two together.
Is net pricing different to wholesale pricing?
Yes. The wholesale price is what you charge your customers before any discounts or promotions. The net price is what your customers pay once discounts or promotions are subtracted.
What are good profit margins for wholesale pricing?
The best way to determine a good profit margin is to evaluate your current business situation. Ideally, your profit margin should allow you to grow your business at a sustainable pace, minimise your losses, and gain customer loyalty.
Although a profit margin varies from company to company, a manufacturer should aim for a minimum profit margin between 15% and 20%.
However, a “good profit margin” can be anywhere between 25% and 35%. This includes your revenue and the cost of goods sold but excludes taxes, labour, and other expenses.
These figures look great on paper, but how do you track your profit margin? With production planning, maintenance, and equipment downtime on your list of priorities, how can you accurately monitor the efficacy and growth of your profits in real-time?
Enterprise resource planning in manufacturing
The best way to grow a business is to know what you’re doing right and fix what you’re doing wrong. Because manufacturing is a multifaceted operation, every department influences the other.
For example, equipment downtime leads to production delays, which influences turnaround time and impacts customer satisfaction. If your client needs an urgent order fulfilled, equipment downtime could put a buck in your competitor’s pocket.
When you’re in the wholesale business, you want everything under control to ensure you can deliver on expectations. This is where an enterprise resource planning (ERP) system can help.
Sage Business Cloud X3 is a cloud business management solution offering fast, simple, and more flexible enterprise management capabilities, including the ability to:
- Manage your financial, supply chain, and production management processes at a fraction of the cost and complexity of traditional ERP systems.
- Track, monitor, and control your wholesale pricing efficacy.
- Have complete, real-time visibility into your inventory and supply chain.
Sage X3 enables you to consistently deliver high-quality goods in the manufacturing industry. You can manage your entire manufacturing operation from a single platform, from procurement and scheduling to shop floor, inventory, sales, and financials. This improves strategic collaboration and operational efficiency by providing better insight into quality and costs.
It also makes calculating your wholesale price a lot simpler, faster, and more accurate.
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