One of the biggest challenges wholesale and distribution companies face is choosing the right pricing strategy. The decisions you make concerning pricing can make or break your business. Set the price of your goods too low, and you risk losing money or your business altogether. On the other hand, if you set it too high, you risk losing your customers to your competitors.
So how do you price a product for wholesale?
To avoid setting your business up for failure, here are four of the best wholesale pricing strategies you can use, including the advantages and disadvantages of each one.
1. Absorption Pricing
Absorption pricing is a pricing method where the product’s price takes into account all variable costs associated with a product as well as the proportion of the fixed costs when determining its price. It is also called “absorption” because all costs are absorbed in the product’s final price. This is a variation on the full cost price pricing concept.
To use the absorption method in calculating your product’s final price, these are the steps you need to take.
- Calculate the variable cost per unit of your product.
- Calculate your overhead expenses. These are your ongoing operational costs which can include (but are not limited to) utilities, maintenance, storage, and employee salaries.
Total Overhead Expenses = sum of all operational costs
= utility expenses + maintenance + storage fees + employee salaries
- Calculate the administrative expense you expect to incur during the manufacturing of this product.
- Find out the profit margin you wish to earn from selling your product.
- Once you have found all the variables above, use this formula to calculate your absorption pricing:
Absorption Pricing Formula = (Variable cost+((Total Overhead+ Administrative Expenses/ Number Of Units Produced)* targeted profit margin
Pros Of Using Absorption Pricing
- This method is easy to use because as shown in the examples above, it does not require complex calculations.
- As long as you can account for all the expenses you incurred in your product’s manufacturing process and make correct calculations, you are assured a profit.
Cons Of Using Absorption Pricing
- This method does not consider your competition and their pricing. You could end up charging much lower or much higher than your competitors.
- This method also does not consider what price your buyers would be willing to pay for your products. Your price could be too high that your customers end up buying from other sources.
Use this method only if you are selling a product that is new in the market and you do not have any competitors yet. Since absorption pricing does not factor in your competitor’s pricing, using it in a competitive market will likely result in missed profit opportunities.
2. Demand pricing
Demand pricing, also called customer-based pricing, is a strategy that leverages the current consumer demand for a product to determine its sale price. In this method, consumer demand refers to how your customers perceive the value of your product.
There are various ways you can use demand pricing:
A. Price Skimming
This is a strategy where your business would set a high price for your product in the beginning and then steadily lowering it over time.
This strategy is practiced widely in the electronics industry. Gadgets like high-end smartphones are introduced at prices so high that only a select few can afford them. Prices are lowered gradually over the course of a few months when other brands introduce competing smartphones.
B. Psychological pricing
This practice relies on setting prices lower than a certain number because companies believe that it has a psychological impact on consumers.
You are a wholesaler of various frozen food products. You set the price of a particular product at $9.95 instead of an even $10.00. You position the product in the $9 range and not the $10 range. Your customers would then perceive that the product is cheaper than it is and be more willing to purchase it.
C. Bundle pricing
This means offering and grouping several products into a bundle and charging a lower price than if the products are sold individually. Wholesalers often used this approach when they want to clear their inventory for specific products.
You are a distributor of perishable products, product A and product B. Product A costs $15 and product B costs $10. You still have ample supplies of product B, so instead of waiting for them to expire, you decide to sell them together with product A for a discounted bundle price of $20.
D. Penetration Pricing
You will offer a product at a price lower than the current market price in an effort to entice new customers and dissuade them from buying from your competitors.
You are a player in a competitive wholesale coffee bean market, and you want to gain new customers and lure them away from your competitors. You decide to sell your coffee beans at a significantly lower price of $5 per pound, whereas your competition sells their beans at an average of $10 per pound.
Pros Of Using Demand Pricing
- If used correctly, this strategy can increase your customers’ loyalty to your brand. They buy from you because they place a high value on your products, which results in repeat business.
- Repeat business from your customers translates into a long-term increase in profits.
Cons Of Using Demand Pricing
- Since there is no set formula you can use to calculate for value, measuring the value of your products is often a difficult task.
- Another challenge with this strategy is that it means relying on your customer’s perceptions, which can differ sustainably. Two customers may have very different views about the same product. If you misinterpret your customer's perception, your pricing strategy will fail.
When calculating for demand pricing, remember that consumer demand is not the only thing to consider. You still need to take into account other factors such as the quality of the product, its production costs, its price in the market, and various other factors when setting the final price of your product.
3. Competitive Pricing
This method is the setting of prices based on how much competitors are charging for the same type of products. Three pricing approaches fall under competitive pricing.
A. Loss Leader
For this strategy, you would price your products below the price offered by your competitors. While you might make losses on certain products, your losses can be offset by your customer's additional purchases on profitable goods.
You could be a wholesale company selling inkjet printers. You can set the price of your inkjet printers low to incentivize customers to purchase from you. However, inkjet printers are dependent on inkjet cartridge to function. You can then set the prices of inkjet cartridges higher to recover the loss of selling the inkjet printers at a low price.
B. Price Matching
For this strategy, you would price your products the same as your competitors.
You could be a wholesale company selling fresh fruits. When you see a competitor increasing or decreasing their price for a similar product, you will change your price accordingly to match your prices to your competitors.
C. Premium Pricing
For this strategy, you would price your products much higher than that of your competitors.
One company that has adopted this method successfully is Apple through the selling of their electronic products, namely the iPhone. At their level of specifications, iPhones are easily the most expensive smartphones on the market today. However, millions of customers around the world still purchase iPhones because they believe it to be a high-quality product.
Pros Of Using Competitive Pricing
- You can gain a bigger market share by luring customers away from your competitors, thereby controlling the competition.
Cons Of Using Competitive Pricing
- Using competitive pricing strategies like the loss leader approach can result in losses instead of profits, especially when products are sold at prices that are below cost.
- Using this strategy requires a huge amount of data gathering because you have to possess extensive knowledge about your competitors and anticipate when they plan on changing their prices.
If you’re selling a product in an already saturated market, then you might want to consider using this strategy. But if you are selling something more unique and you do not have too many competitors, it might not benefit your business from following these pricing schemes.
4. Geographical Pricing
Geographical pricing is the adjustment of the price of a product based on the buyer’s location. There are several types of geographical pricing. Some examples are:
A. Point of production pricing
This is also known as Free on Board (FOB) origin pricing. This method involves setting your product’s price at its point of production. This method is commonly used when you do not pay any freight or transportation cost when selling to your customers. Instead, your wholesale customers will choose their mode of transportation for your products and shoulder the transport costs.
B. Uniform delivery pricing
You charge the same price for a product regardless of your buyers' locations. This method is also called postage stamp pricing because it is akin to how mail services price their services.
C. Zone pricing
This involves increasing a product’s price as the distance to a buyer increases. In this method, buyers who are farther away from you pay more for the same product than those who are near you.
D. Freight-absorption pricing
In contrast to point of production pricing, using the freight-absorption pricing means absorbing all costs associated with transporting your product to your buyer.
Pros Of Using Geographical Pricing
- Using the FOB origin method means that you get equal profits for the same product regardless of where your buyer is, simply because they take care of shipping.
- Using the uniform delivery method, you provide the same level of service to your customers. It is important to treat all your customers the same as this helps to foster trust and loyalty.
- Using the zone pricing method, you don’t lose money because you raise the prices depending on how far your customer is.
- Using the freight-absorption method is advisable if you want to tap into other markets and expand your reach.
Cons of Using Geographical Pricing
- Under uniform delivery pricing, you risk losing money selling to customers who are far away.
- Under the zone pricing method, customers who are beyond your borders are charged more. You may lose their business if they are able to find a seller nearer to their location.
- Under the freight-absorption method, you may lose money in the long run if you keep on paying for transportation costs.
When choosing what type of geographical pricing strategy to implement, it’s important that you don’t engage in predatory pricing (charging far away customers much more than necessary). However, you still need to ensure that you don’t end up losing money by paying for expensive shipping costs to your customers that are far away from you.
No matter which pricing approach you decide your business should take, it is important to understand the cost involved in making products. This is to ensure that you know how low to price your products and prevent your pricing to result in losses.
If your company sells more than one type of product, formulating different wholesale pricing strategies can be difficult. It can be a highly tedious process to manage all your pricing for different products and customers.
Need help with managing your products' prices or customizable customer pricing list? Sweet is an inventory and order management software that can help you automate and make it easier to manage your customer’s pricing. You can help your business save time by seamlessly managing customer-specific pricing easily with our robust pricing engine.
To find out how Sweet can help streamline your wholesale or distribution business, request a free demo today.