Choosing the best wholesale pricing strategy for your business plays a significant role in how well your business does. Set it too low and you reduce the perceived value of your brand and earn less for your products. Set it too high and retailers aren't going to want to resell your products and you won't be competitive enough in the marketplace.
When it comes to choosing your wholesale pricing strategy, you have four options from which to pick from.
1. Absorption Pricing
Absorption pricing requires you to take into account all of the variable costs and part of the fixed costs associated with a product. This gives it the name of 'absorption' as all of the costs associated are included within the wholesale price.
The main positive of using absorption pricing is that it is easy to calculate, while cons include not being able to consider your competitors' pricing and the price retailers would be happy to pay to purchase your product to resell.
2. Demand Pricing
Demand pricing is when you use the demand by customers for a product to set the sale price (which includes production and market costs). If your product is in demand, the wholesale price will be higher, less demand and it will be lower. Price skimming (setting a high price and reducing it over time), psychological pricing (setting the price lower that a specific number due to the psychological impact seeing that number has on a person, such as $9.95 instead of $10), bundle pricing (where you group products together and charge a lower price than if you sold them individually) and penetration pricing (setting a lower price than the current market price to try to get retailers to purchase your product instead of that of your competitors).
The pros of demand pricing include increased brand loyalty and repeat purchases, with the con being that it can be challenging to identify what value your customers perceive of your products and brand
3. Competitive Pricing
Competitive pricing refers to setting your wholesale price based upon what your competitors are charging for one similar. This can happen in three different ways by 1) loss leader, where your price is lower than your competitors and you recover the lost cost in the sale of additional products, 2) price matching, where your price is the same as your competitors and 3) premium pricing, where you price your products higher than your competitors, therefore giving your products a higher perceived value.
The positive of using competitive pricing is you can lure customers away from your competition getting a bigger market share, with the negatives being that you could face having a loss in profits.
4. Geographical Pricing
Geographical pricing is when the price is set based upon where the buyers themselves are located. This may include point of production pricing (the product price is set where it is made and the retailers pay the shipping to get it to them), uniform delivery pricing (you charge the same shipping rate for all wholesale customers), zone pricing (the product price rises the further away the retailer is from you) and freight absorption pricing (the price incorporates the cost of freight to the buyer).
Pros of using geographical pricing vary depending on how you use it, but basically is that your profit remains the same. The cons can include wholesale customers choosing to buy local to save on shipping, and if you don't include enough shipping costs in the price, you can loose money there.
Our article How to Set Your Wholesale Pricing for Handmade Products goes into further details on setting product prices and is well worth a read too.
Posted: Wednesday 3 November 2021