Editor’s Note
This article explains the fundamentals of wholesale pricing, a model where products are sold in bulk to retailers at a price lower than retail, leveraging economies of scale to generate profit.
Wholesale pricing is what you charge retailers who buy products in large volumes. Product prices are cheaper than retail because wholesalers rely on economies of scale to make money.
The goal of wholesale pricing is to earn a profit by selling goods at a higher price than what they cost to make. For example, if it costs you $5 in labor and materials to make one product, you may set a wholesale price of $10, which gives you a $5 per unit gross profit.
Wholesale and retail are two fundamentally different processes. Wholesale involves moving goods from manufacturing to distribution, and retail involves acquiring and selling goods to customers.
Producers or distributors charge retailers wholesale prices. Then, the retailer charges consumers for that same product at a higher price—the retail price.
In retail, profit margins are typically higher, though it usually takes more work and money to make a sale. Comparatively, wholesale might have smaller profit margins, but you’re selling bulk quantities—so it’s less effort to sell 100 units wholesale than to sell 100 units direct-to-consumer. But it’s also less profitable.
Before you set any product prices, determine your market segment and where you fit in. For example, are you a discount brand, a contemporary brand, or a designer brand? This also determines how your audience perceives you.
Similarly, if your target customers are more budget-conscious or looking for a high-quality, high-end product, consider these factors when conducting market research. Most customers expect to pay a premium for higher-quality products.
If a lower price point is your competitive advantage against other wholesalers, keep that in mind while researching. Be cognizant of your break-even point. Use the break-even point formula to calculate this number.
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, like 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
Your target profit margin will help you determine how to price your product objectively. If you’re unsure how to do this, you can use Shopify’s wholesale price calculator. Play around with the numbers to see different scenarios.
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. Aim for between 15% and 50% profit margin for each product to ensure you make money after accounting for expenses.
While you might make $2 profit per item, it might cost you more than $2 in overhead to sell that item—in which case you’ll need to adjust your wholesale pricing to make more profit.
To factor these additional costs into your wholesale price calculation, you’ll need to know your costs of goods sold (COGS) and your overhead costs. These include rent, customer acquisition costs (CAC), utilities, and fees to run your online store.
Calculate your cost of goods sold and the sum of any overhead costs. Once you have those two numbers, combine them to create your cost price for the wholesale price formula.
Profit margin is a retailer’s gross profit when an item is sold. The higher this is, the better—but wholesalers have a shorter ceiling to add profit. They make their money by selling cheaper products in bulk.
When setting your wholesale price, first multiply your cost of goods by two. This will ensure your wholesale profit margin is at least 50%.
B2B customers that buy your wholesale products will add their markup when selling them through retail. Apparel retail brands, for example, typically aim for a 30% to 50% wholesale profit margin, while direct-to-consumer retailers aim for a profit margin of 55% to 65%.
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