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Wholesale Pricing Formula
To arrive at a wholesale pricing formula, there is first a need to compute the break even price of the product. This is the total amount of the per production cost. This can be done by summing up all the expenses incurred in the manufacturing process which include the cost of raw materials, labor expenses and overhead costs. Then the total expenses should be divided by the total number of manufactured products.
Formula in determining break even price:
cost of raw materials + labor cost + overhead expenses divided by the number of output products
$10 (materials) + $10 (labor) + $10 (overhead) divided by 5 (output)
= $6 (break even price)
Once the break even price has been determined, it will be easy now to calculate the wholesale price of the product through different formulas.
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In the profit-based formula, the wholesale price can be computed by adding all the manufacturing costs plus the desired profit. It is the most common approach since the entrepreneur would have already made a decision as to how much he wanted to earn from his venture.
$10 (materials) + $10 (labor) + $10 (overhead) + $10 (desired profit) divided by 5 (output) = $8 (wholesale price)
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It is also ideal to look into the competitor's price in setting the right price with product pricing formulas. If the price of an entrepreneur is way higher than his competitors, chances are he will lose his customers who prefer much cheaper products. Some entrepreneurs compute the wholesale pricing formula by doubling the break even price and subtracting an amount equal to a certain percentage that is within the competitor's price.
break even price X 2 minus the ideal profit margin that is within your competitor's price = wholesale price
$6 (break even price) X 2 = $12 ; $12 minus $3 (25% of $12)
= $9 (wholesale price)
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Retail-Based Pricing Formula
Another way of determining the wholesale price is by conducting research on the average cost of the product when it comes to retail pricing. Some businessmen calculate the retail price through this method:
materials + labor + overhead + profit X 2 = retail price
$10 + $10 + $10 + ($10 X 2) = $50
Given the example, if the prevailing retail price is $50 and the break even price is $6, it means that the retailers are charging their customers more than eight times than the product's original amount. Theoretically, it is possible to charge retailers or set the wholesale price between $9 or $10. But it also depends on competitors' prices. It is important to never go beyond the market trend or set the price higher than the competing businesses. After all, if the product's quality is the same with the competitors, customers will usually go for the lowest wholesale price. So if you want to keep the customer's interest, set a price lower than your competitors.
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Methods to Price Your Products. (n.d.). Agriculture and Rural Development: Ropin' The Web. Retrieved July 12, 2010, from http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agdex1133
Pricing, CDFS-1326-95. Ohioline. Retrieved July 12, 2010, from http://ohioline.osu.edu/cd-fact/1326.html