Our Expert Breakdown of Wholesale Costs
Wholesale and retail pricing[a] are essential to your business’s profitability.
Wholesale costs represent the baseline price of the products you’ll be selling, and retail prices are the prices you charge customers for those products. In order to master retail pricing, you need to thoroughly understand the first link in the chain.
In this Upscribe guide, we’ll share some insights into the wholesale costs and pricing process to help you optimize your pricing strategy. We’ll cover topics like how wholesalers calculate costs, how to create the optimal retail pricing structure, and how to monitor prices over time.
Let’s get started.
What Are Wholesale Costs?
Wholesale costs refer to the price a retailer pays to a wholesaler (i.e., a manufacturer or distributor) to purchase products. They include a range of factors, like:
- Production costs
- Transportation costs
- Warehousing costs
The wholesaler also adds a markup to these baseline costs to turn a profit.
Wholesale costs are usually structured in a way that encourages large bulk orders. Minimum order quantities (MOQs) and volume-based discounts are common. This means that the more items a retailer orders, the lower their cost per item will be.
Since retailers absorb these wholesale costs upfront, they need to carefully monitor demand, inventory, and pricing to maximize their profitability. That’s why major retailers have dedicated teams of buyers responsible for sourcing products in the right volumes and at the right prices.
Example of Wholesale Cost
The example below is a water bottle listing found on the popular wholesaler marketplace Alibaba.
As you can see, there is an MOQ of 50 water bottles, meaning it’s impossible for consumers to order directly from this supplier. The wholesale cost per unit drops from $3.20 to $1.99 each when you raise your order from 50 bottles to 30,000+.
This cost is determined by the materials and processes that go into making the bottle (plus the manufacturer’s profit margin).
The same bottles are being sold to consumers on Amazon for $9.81—this is the retail cost.
Why Does Understanding Wholesale Costs Matter?
Effective Pricing
When determining the pricing of your products, understanding the wholesale costs is crucial.
Having a clear grasp of the wholesale costs empowers you to establish retail prices that are enticing to potential customers and enable you to generate a healthy profit margin. By setting appropriate pricing, you can ensure that your products maintain a competitive edge in the market, thus maximizing your chances of success.
Profitability
Wholesale costs play a crucial role in determining a business’s overall profitability and sustainability. When wholesale costs are excessively high, generating profit to cover expenses and maintain healthy profit margins becomes challenging.
But low wholesale prices can be an issue, too—or at least be a symptom of a larger problem. Low-quality goods can lead to dissatisfied customers, damage the brand’s reputation, and, in the worst-case scenario—drive away business.
By doing your due diligence to understand wholesale costs and how they affect pricing, you can safeguard against such risks and ensure your business runs smoothly and successfully.
Increased Customer Satisfaction
Pricing can also affect customer satisfaction.
If your retail prices are too high, customers may choose to purchase from competitors offering lower prices. On the other hand, if your prices are too low, customers may perceive your products as low quality.
By having a proper pricing strategy in place, you can ensure that your customers are satisfied with the prices they pay for your products—and the wholesale costs you incur are a key determining factor.
Competitive Analysis
Understanding the wholesale costs of your products grants you valuable insights into your competitors’ pricing strategies and empowers you to position your offerings in the market strategically.
You can start to see where competitors accept lower margins to drum up sales volume and are boosting margins to offset lower prices. This means you don’t need to be reactive with your pricing—you can start to anticipate your competitors’ pricing strategies and adjust your own accordingly.
An In-depth Breakdown of Wholesale Costs
Cost of Goods Manufactured (COGM)
Cost of goods manufactured (COGM) represents the total expenses incurred in manufacturing products during a specific reporting period. It encompasses the manufacturing costs and work-in-progress (WIP) inventory.
COGM is crucial in calculating the cost of goods sold (COGS), which in turn impacts the gross profit of a manufacturing entity. COGM directly influences the wholesale costs of goods, as the manufacturer cannot charge less than the costs incurred to manufacture a product.
COGM is calculated using the following formula:
Where:
- Beginning WIP inventory is the amount of finished goods inventory in stock at the start of a reporting period.
- Ending WIP inventory is the amount of finished goods inventory at the end of a reporting period.
- Total manufacturing costs are the sum of all direct and indirect costs incurred while manufacturing the products—think labor, materials, overhead, etc.
Packing Costs
Packing costs also play a significant role in determining the wholesale price.
For starters, packaging requires labor and overhead. Manufacturers often manage huge packing facilities to ensure that products are safely and securely handled before being shipped. Automated packing can cut costs but not eliminate them entirely.
Additionally, there will also be packaging costs that will vary based on quality, design, and size. For example, presenting a product in a thick, high-quality box with custom printing will add more to the cost of goods sold than a generic box.
Customer Acquisition Costs
Customer acquisition cost (CAC) is a crucial factor significantly impacting wholesale costs.
CAC represents the total expenditure incurred in acquiring new customers, encompassing marketing and advertising expenses, sales team costs, and other related onboarding costs.
If a wholesaler exists in a crowded market, they may need to spend more to stand out and capture new customers. This will, in turn, increase the COGS. More niche markets will usually result in lower CACs.
Transportation and Logistics Costs
Transportation and logistics costs are a major part of wholesale costs.
This includes the cost of warehousing, shipping, and any other associated logistics needed to get products from point A to point B. These can be especially high if you’re dealing with international orders or orders that require special handling.
One way to lower the impact of this cost is by looking for local manufacturers (if they exist in your area). By reducing the physical distance between the manufacturer and the customer, you can drastically reduce the transportation and logistics costs (and, ultimately, the wholesale cost).
Import Duties and Taxes
Import duties and taxes play a significant role in influencing wholesale costs. These fees are imposed by governments on imported goods and can vary greatly based on the product type, country of origin, and import regulations of the destination country.
High import duties and taxes increase acquisition costs for overseas products, leading to higher wholesale costs for your retail business.
When determining wholesale prices, it’s important for companies to consider import duties and taxes, prioritize ethical sourcing standards, and comply with relevant trade laws and regulations.
Warehousing & Storage Costs
Some wholesalers will allow you to store purchased products in their warehouse, but this typically comes at a fee. Depending on the material you’re storing, you may need to invest in additional storage infrastructure, such as pallet racks and shelving systems.
In order to avoid excessive warehousing fees, it is important to have an effective inventory management system that allows you to keep track of product amounts and expiration dates. This kind of system can also help you identify any potential hazards or problems with the product, such as spoilage, contamination, or damage.
Profit Margin
The final factor is profit margin—the amount the wholesaler marks up the price of their goods to make a profit. This is an important consideration when deciding which wholesaler to work with, as you want to ensure you’re getting a competitive rate. Make sure to compare prices between different wholesalers and look for any special discounts or offers they may be offering.
With an understanding of what goes into wholesale costs and some info on the wholesaler’s facilities, you can roughly work out the amount of profit margin they’re taking.
Best Practices for Working with Wholesalers
Working with a wholesaler can be an important part of your business strategy. Still, it’s also important to do your due diligence when selecting the right one.
Here are some best practices for working with wholesalers:
Browse Multiple Wholesale Marketplaces
Casting a wide net is the best way to find a wholesaler that meets your needs. There are many different marketplaces where you can browse thousands of products from various vendors.
Popular options include:
- Handshake: A wholesale marketplace operated by Shopify.
- Alibaba: A large network of wholesalers and suppliers.
- AliExpress: An online marketplace for Chinese goods.
- Faire: A UK-based wholesale marketplace.
- Ceoate: A wholesale marketplace designed for SMBs.
Make sure you check out a few to lower your wholesale costs.
Consider Lead Time
Manufacturing doesn’t happen overnight, so take the time to factor in lead times when you are ordering from a wholesaler. Lead times can often be longer than expected, and unplanned delays can wreak havoc on your planning process.
If you need inventory fast, look for suppliers with pre-built inventory or stock that can be shipped quickly. Alternatively, many suppliers offer shorter lead times for larger orders, and some can do rush orders—for a fee, of course.
Always Request Product Samples
Don’t dive in head-first with a massive order—always kick off your discussions with a sample request.
Even though many modern wholesale marketplaces feature reviews and supplier verification, you’re the best judge of what constitutes a quality product (or at least one that fits in with your catalog). So, don’t rely on other people’s opinions—make sure that you take the time to inspect and make up your own mind.
This doesn’t need to break the bank, either. Most suppliers offer product samples in quantities of 1 to 50 at slightly higher wholesale prices.
Pay Attention to Shipping Costs
We all know that shipping charges can add up quickly, so it’s important to keep a close eye on them.
If you plan on ordering large quantities of products from a wholesaler, then you need to look into bulk shipping options and negotiate for the best rates available. Some wholesalers have flat-rate shipping fees, while others offer variable rates. Make sure to find out which one is best for you and your business.
Conclusion
Effectively managing wholesale costs involves careful consideration of profit margins, in-depth market research, understanding customer perception, and regular reviews of pricing strategies. These fundamental steps are pivotal in maintaining competitive pricing and ensuring business sustainability.
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