When launching a new product in your retail store, the thought of setting a price might feel daunting. How do you set a price high enough to make a profit that isn’t so high that it scares your customers away?
There are a number of mathematical formulas used in determining a product’s price, margin, markup, markdown, profitability, and sales history. While there are dozens of formulas to comb through, there are only a few you need to know when pricing products for direct-to-consumer sales and wholesale.
Here, we’ll walk you through a few of those formulas and some steps you can take to create successful pricing strategies for your product whether you sell wholesale, retail, or both.
Step 1: Research Your Market
Before you set a price for any retail product, determine which segment of the market you’re trying to capture and where you fit in. For example, are you a discount brand, a contemporary brand, or a designer brand?
If a lower price point is your competitive advantage, keep that in mind while doing your research. If your target customers are more budget-conscious or looking for a high-quality, high-end product, these are also factors to keep in mind when conducting market research.
FURTHER READING: Learn the ins and outs of your target market with our guide to market research for your retail business.
Step 2: Calculate Your Cost of Goods Manufactured
Cost of goods manufactured (COGM) is the total cost of making or purchasing a product, including materials, labor, and any additional costs necessary to get the goods into inventory and ready to sell, such as shipping and handling.
A product’s COGM can be determined with the following calculation:
Total Material Cost + Total Labor Cost + Additional Costs and Overhead = Cost of Goods Manufactured
Step 3: Set Your Wholesale Price
A good place to start when setting your wholesale price is to multiply your cost of goods by two. This will ensure your wholesale profit margin is at least 50%.
What is Profit Margin?
Profit margin is the gross profit a retailer earns when an item is sold.
In the apparel segment of retail, brands typically aim for a 30-50% wholesale profit margin, while direct-to-consumer retailers aim for a profit margin of 55-65%. (A margin is sometimes also referred to as “markup percentage.”)
For example, let's say you sell swimsuits. If you pay $25 for each swimsuit you buy, and you sell them for $50 each, your retail margin per suit is $25, or 50%.
Retail margin percentage can be determined with the following formula:
Retail Price - Cost / Retail Price = Retail Margin %
In the case of the swimsuits:
$50 (Retail Price) - $25 (Cost) / $50 (Retail Price) = 0.5, or 50% (Retail Margin)
Step 4: Set Your Suggested Retail Price (SRP)
A suggested retail price (SRP) is the price a brand or manufacturer recommends retailers set for their product. It's important to make sure retailers follow your SRP so they’re not undercutting you or your other retail partners.
Retail price is calculated with the following formula:
Wholesale Price / (1 - Markup Percentage) = Retail Price
Here’s an example based on a wholesale price of $30 and a 60% markup percentage:
- Convert the markup percent into a decimal: 60% = .60
- Subtract it from 1 (to get the inverse): 1 - .60 = .40
- Divide the wholesale price by .40
- The answer is your retail price
$30 (Wholesale Price) / (1 - .60) = $75 (Retail Price)
Research your market to see how other comparable brands or retailers set their prices. Then you can work backward to see if your target retail price is feasible, based on the costs you incur to produce your products.
For example, if your target retail price is $60 and you want to give your wholesalers a 55% retail margin and yourself a 50% wholesale margin, you can use this formula to work backward and calculate the wholesale price:
- Convert the markup percent into a decimal: 55% = .55
- Subtract it from 1 (to get the inverse): 1 - .55 = .45
- Multiply .45 times the retail price
- The answer is your wholesale price
Retail Price x (1 - Retail Margin) = Wholesale Price
$60 (Retail Price) x (1 - .55) = $27 (Wholesale Price)
Calculate your target cost price (cost of goods) to maintain a 50% wholesale margin:
- Convert the markup percent into a decimal: 50% = .50
- Subtract it from 1 (to get the inverse): 1 - .50 = .50
- Multiply .50 times the wholesale
- The answer is your target cost price
Wholesale Price x (1 - Wholesale Margin) = Target Cost Price
$27 (Wholesale Price) x (1 - .50) = $13.50 (Target Cost Price)
5. Set Two Price Points
As demonstrated, if you wholesale your products to retail partners and sell direct-to-consumer through your website or pop-up shop, it's smart to create a dual pricing strategy to ensure you’ll still profit, regardless of whether you’re selling your products at wholesale or retail.
That means you’d create an external retail price for your products listed on your website that your direct customers see and a separate wholesale price you share with wholesale or potential wholesale accounts in the form of a line sheet.
When you sell wholesale, you're likely selling a higher quantity in each order, which allows you to sell the products at a lower price.
Here's where the formulas come in handy. You can do the math to determine your margins and set wholesale and suggested retail prices (SRP) for your products.
For example, if you design and manufacture swimsuits and sell them via wholesale and retail, you'll need to look at the following numbers:
Cost of Goods (COG): $15 to make one swimsuit
Wholesale Price: $30
Suggested Retail Price (SRP): $75
Your wholesale margin:
50% Wholesale Margin = $30 Wholesale - $15 COG / $30 Wholesale
The retailer’s margin when they use your SRP:
60% Retail Margin = $75 Retail - $30 Wholesale / $75 Retail
Your retail margin when you sell direct-to-consumer (D2C):
80% Retail Margin = $75 Retail - $15 COG / $75 Retail
With the above wholesale and retail pricing strategy, you’re making a gross profit margin of 50% on your wholesale orders and 80% on D2C orders.
Wrapping Up Product Pricing For Wholesale and Retail
Now that you have a better understanding of the formulas used to calculate product pricing, it's time to get started. You can create a spreadsheet that lists your products by style number and name and includes columns for the cost of goods, wholesale price, wholesale margin, retail price, and retail margin.
Use these formulas above to create a costing chart that you can plug numbers into each time you need to define pricing for a new product.