In order to turn a profit in a competitive market, trading businesses have to carefully evaluate and optimize quality, quantity, distribution channels, costs of goods, and the price of the product(s) they are selling. Out of these factors, setting a competitive price is perhaps the most important because the decision regarding at what price to sell the product takes into consideration, amongst other things, the quantity of the product being sold, its quality, its cost of production/acquisition, and the distribution channel being used. If a business is able to get its prices right, it has a higher chance of selling more, having a positive bottomline, and consequently, scaling and expanding.
How a trading business approaches pricing of goods depends on its operational selling model. As it currently stands, pricing goods is much easier for a business operating on a wholesale model than it is for one using a retail model. In fact, setting wholesale prices effectively yields higher profit margins than retail prices.
In this article, we will walk you through the steps you need to take in order to set a competitive wholesale price and will introduce you to some wholesale pricing strategies that can be adopted if you have a wholesale business.
Product Pricing – Steps for Setting a Wholesale Price
Before jumping into the recommended steps, wholesale businesses must be clear on what objectives they want to achieve through their wholesale pricing strategy. At the very least, your goods’ prices have to be competitive enough to provide your business a competitive advantage, optimize quantity sold, allow you to realize and sustain healthy profit margins, and open doors to product scalability.
Here are the steps you should take to establish your wholesale pricing strategy:
Step 1: Carry out a competitor analysis
Before determining the price of your goods, you need to conduct a thorough competitor analysis to get an idea on how various companies are pricing their product offerings. After gathering data on competitor prices, conduct a deep dive into different factors that may be impacting the pricing decisions of your competitors. Look into their distribution channels and their production process, estimate their cost of goods, take a look at their logistics, etc. to understand where you stand across these different price influencers and how low your price point should be in order to gain a competitive advantage.
Step 2: Research your target market
The second step for setting your wholesale pricing strategy is about deciding on the target customer segments for your business, gathering data, and trying to understand their buying behavior, their challenges, and their needs. For wholesale businesses, retail stores are the broader target market. A few questions to ask yourself while conducting market research are:
- Is my target market price-conscious?
- Does my target market prefer quality over price?
- Are my target buyers looking for high-end products?
- Who will my target buyers retail these products to?
Step 3: Calculate cost of goods sold
After gaining a better understanding of your target market and of the competitor landscape, focus on calculating your cost of goods sold. How much cost do you incur on one product unit you produce? This includes costs of material, labor, inventory storage, direct logistics costs, and other additional variable costs. Your cost of goods sold is your starting point for setting a price.
Step 4: Finalizing profit margins and setting a distributor pricing strategy
Gross profit margin is the percentage of sales that will remain as gross profit after cost of goods sold is incurred. Net profit margin is the percentage of sales remaining after all business expenses (overheads, finance expenses, taxes, etc.) are incurred. Your gross margin has to be positive right from the get-go. Market data shows that most wholesalers set a price that allows them to realize a 50% gross margin at the very least. For example, if your cost of goods sold is AED 50 per unit, in order to realize a 50% gross margin, you will set a price of AED 100 per unit.
Net profit margins are inconsequential in the beginning but become increasingly important as you start to grow and sell more. A business can initially tolerate negative net profit margins. However, in the long run, businesses expect to achieve economies of scale – lowering per unit overheads as more and more are produced and sold – and once they do, they expect to turn a positive net profit. It is, therefore, prudent to have an ideal net profit margin in mind in combination with the quantity needed to be produced and sold to achieve that margin.
Wholesale Pricing with WeMENA
Approaching your wholesale pricing strategy the right way and effectively setting a competitive price can easily become a massive undertaking. If a wholesaler follows the steps outlined above, they must dedicate time to conducting extensive market research, gathering competitor data, and putting resources towards analyzing that data. Even with consistent efforts, it is highly unlikely that manual research will yield the best results.
This is why WeMENA is committed to creating an ecosystem where sellers on the platform can access and leverage the vast amounts of data available to set the right prices for their products. Pro Sellers at WeMENA are better equipped to develop their wholesale pricing strategy as a result of the following features:
- The WeMENA research team is always ready to provide any assistance and advice required to make pricing decisions.
- Access to data analytics and price comparison tools that allow WeMENA Pro Sellers to gain visibility into competitor prices, not only on WeMENA, but also on other platforms, enabling them to carry out a competitor analysis much quicker.
- WeMENA can take a look at seller costs and use its extensive market expertise, knowledge, and experience to suggest the best wholesale prices while also taking into account market conditions and the market segment being targeted.
As a result, wholesalers on WeMENA don’t have to spend a lot of time and energy worrying about their wholesale pricing strategy and can use that time to focus on building their relationships with their customers, expanding their product line and mix, taking care of shipments and payments, and growing their business. Click here to become a WeMENA Pro Seller and unlock the tools and insights need for an effective wholesale product pricing strategy.