Quick 5-Step Guide in Finding The Right Price For Retail Products

How to price your product for retail is one of the first big decisions a wholesale brand makes. You need to know how far you can raise your margin and still make a fair profit. Push too far and you lose your shot at the market, because your competitors are waiting on the sideline.

The good news is that a few easy steps will organize your retail pricing goals. They lead you to a manufacturer’s suggested retail price (MSRP). You then hand that suggested retail price to the retailers who will sell your product. This gives you a markup percentage that works for you and for your retailers. Without it, how else would you close the deal? Pricing sits in the middle of how products get on store shelves, between the cost to make them and the price a shopper pays.

Before we get into the details of retail product pricing, we need to answer the most pressing question wholesalers ask.

How Much Should I Pay Retailers For Selling My Product?

Payments to retailers usually work on consignment. So you don’t need to worry about how you will pay them. It’s only a matter of time.

When you do business with retail stores, be strategic about how you split the revenue. Take your costs seriously before you grant a final split percentage.

Several factors sit inside your product costs, such as procurement, manufacturing, and pricing. Then you have to watch the demand for your product.

The two parties negotiate. In some cases revenue is split 60/40. Sixty percent goes to the retail store and 40 percent goes to you. You can have an initial agreement. But sometimes you have to reopen talks on products that are gaining real momentum in sales. Mind you, those products are hard to come by. As the wholesaler, you have the advantage in setting the right price for that specific retail product.

This is where retail product pricing becomes critical. Position your product costs and your wholesale price with the market in mind. Then you can raise your profit margin and keep your retailers happy. So, here’s how you do it.

Understanding the Importance of Strategic Pricing in Retail

Pricing decisions have a direct effect on a retailer’s profit and competitiveness. That makes pricing one of the most important calls a manager makes. Yet many businesses underrate the role of strategic pricing in growth. The 2019 Global Pricing Study by Simon Kucher & Partners found that only 12% of businesses named price as the biggest driver of future profit growth. And only about half of businesses have a pricing strategy in place, according to a survey by the Institute for International Research and Zilliant.

• Why is strategic pricing important?

Simply put, strategic pricing can make or break a business. Set prices too high and you shut yourself out against other retailers. Set them too low and you can’t cover production and the other costs that come with it.

• What is the current state of strategic pricing?

Many businesses still don’t take advantage of strategic pricing. Only about half have a solid pricing strategy in place.

• What are the barriers to strategic pricing?

Retailers have been put off building and using strong retail pricing policies for a few reasons.

• A laissez-faire attitude inherited from the 1990s
• Price-optimizing research can take a lot of time
• Existing price research is complex

The Power of Retail Price Formulas

Let’s start with the retail price. The retail price is what a consumer pays for an item in a given marketplace. You find it by adding a markup to your cost of goods sold. The most common retail price formula is the single-factor cost-plus model. You estimate your cost of goods and add your target markup.

Other retail price formulas can add more nuance to your pricing decisions. They include break-even analysis, contribution margin, cost of goods sold, gross margin, and many others.

Markup and margin Are Not the Same Number

Markup and margin are both percentages. Both describe the gap between what something costs and what it sells for. But they are measured against different numbers. That last part is why you can’t compare them. It is also the most common expensive mistake a brand makes in a pricing conversation.

Markup is the amount you add to your cost, as a percentage of the cost. You start at the bottom and work up. Margin is the amount you keep out of the selling price, as a percentage of that selling price. You start at the top and work down. Same dollars in the middle, different denominator, different percentage. A thirty percent markup and a thirty percent margin are not the same thing. They never will be.

	Markup	Margin
What it measures	The amount added to your cost	The amount kept out of the selling price
Measured against	Your cost	Your selling price
The formula	(Selling price minus cost) divided by cost	(Selling price minus cost) divided by selling price
You move	Up from cost to price	Down from price to cost
Who talks this way	Manufacturers and makers	Retailers and buyers
At the same dollar gap	Always the larger percentage	Always the smaller percentage

You can see the effect in the example worked later in this article. The wholesale price of $9 sits above a target cost of goods of $4.5. The article calls that a 50 percent wholesale margin, because the gap is measured against the $9 selling price. Describe that same gap as a markup and you get a larger percentage. It is now measured against the smaller number, the $4.5 cost. Nothing about the product changed. Only the denominator did. In the same way, the 50 percent markup applied to the $10 wholesale price and the 55 percent retail margin in the example are not the same kind of percentage. Putting them side by side tells you nothing.

One practical rule follows. Retailers almost always talk in margin, because margin is what shows up on their profit and loss statement. Manufacturers often think in markup, because they start from what the thing cost to make. A buyer says they need a certain percentage. The vendor hears the other kind of percentage. Both sides leave the room believing they agreed. Months later the brand finds that the price it accepted does not fund the business. Before you agree to any number, ask which one they mean.

Finding The Right Price for Retail Products in 5 Quick Steps

1. Market Research

Your target market differs with every product. Markets divide into three price points: low, medium, and high. For example, high-end products belong in the high price point, where consumers sit in the middle to high classes.

Demand will be either high or low. You won’t know which until you see it in action. Either test it yourself, or study how well competitors with the same kind of product are doing in their current market.

The Same Product Priced for Three Different Channels

Most brands don’t sell through one channel. They sell to independent stores, into a chain through a distributor, and direct to consumers from their own site. Often all at once, with the same product and the same packaging. That only works if you treat the suggested retail price as a fixed point and let everything else flex underneath it. Start by choosing the right retailer for your product, because each channel pays you a different amount.

The suggested retail price is the number the shopper sees. Shoppers don’t know or care which channel they are standing in. Say your product sells at the suggested retail price on a shelf and for less on your own website. You have not run a promotion. You have told the retailer that their store is the expensive place to buy your product. Retailers check. Undercutting your own accounts online is the fastest way to lose the accounts you just spent a year winning.

Channel	Who you sell to	What flexes	What stays fixed
Independent store	The owner, often direct	Your wholesale margin and order size	The suggested retail price
Chain via distributor	A distributor, then a buyer (see retailer and distributor roles)	A further cut to the distributor	The suggested retail price
Direct to consumer	The shopper	Fulfillment and acquisition cost	The suggested retail price

The structural point: these three channels pay you different amounts for the same product. That is fine as long as the shelf price holds. Your job is to make sure the lowest-paying channel still funds the business. It is not to make every channel pay the same.

The distributor row is the one that trips brands up. A distributor buys from you and sells to the retailer. Their margin has to come from somewhere. It comes out of your wholesale price. So the number you receive is lower than the number you worked out for a direct account. If your wholesale margin is exactly what the business needs, a distributor channel will not fund itself. Brands usually find this out after they have committed to the volume.

The direct-to-consumer row looks like the best channel because the margin is highest. That is true and incomplete. That margin has to absorb payment processing, shipping, returns and whatever it costs to get the customer to your site in the first place. What it does not have to absorb is the retailer’s cut. That is why the gap looks so large before you count the rest.

The practical instruction is short. Set the shelf price once. Work backward to a wholesale price that survives every channel you plan to sell through, including the one that pays you least. Then hold the shelf price everywhere. On your own site too. During a sale too.

2. Calculate Cost of Goods

Be specific when you work out what each product costs. Count the material, the labor, and other overheads such as shipping and handling fees. The choice between outsourced and domestic manufacturing shapes this number. It will play a big role in setting your prices from wholesale to retail.

From this you can work out the retail markup without selling yourself short. You’ll also know how much you can afford to offer your retailers, so both sides win at the end of the day.

3. Wholesale Pricing

Next, set your profit margin. Most often it should be 30 percent at the very least. On in-demand products you can go up to 50 percent at most. Go higher and you leave your retailers very little room to work their own markup and profit over the long run.

Retailers will most likely set a profit margin of 55 to 65 percent. That is the usual ballpark for consumer goods. Each chain has its own expectations. If you plan to get your product into Ace Hardware, for example, check what that retailer looks for before you set your number. Now say you raise your own profit margin to 10 percent. It gets tight for retailers. They can’t push their markup past what consumers are willing to pay for the product. And retailers may not be ready to risk a profit margin of 45 percent at the very least.

What Comes Out of Your Wholesale Price After the Yes

Every calculation in this article assumes your wholesale price is the money you receive. In retail it is the money you invoice. That is not the same thing. A set of deductions and costs sits between the two. Most are invisible at pitch stage and unavoidable afterwards. This is why a brand can price correctly, get the purchase order, and still lose money on the account.

Freight. Somebody pays to get product from your dock to the retailer’s distribution center or store. The terms in the agreement decide who. Say you quoted a wholesale price that assumed the retailer collects, and the agreement says you deliver. The whole cost of shipping comes out of the margin you already calculated. If you ship from a third-party warehouse, know what 3PL fulfillment costs before you quote. Freight is settled during terms negotiation, usually after the buyer has said yes and while you feel too relieved to argue.

Marketing and co-op allowances. A percentage of your invoiced sales that the retailer keeps to fund its own advertising, circulars, in-store signage and digital placement. It is standard. It is written into the vendor agreement. It comes off the top, not out of your profit. Because it sits in the agreement, it is negotiable before you sign and fixed after.

Promotional and ad funding. Separate from the allowance above. This is what you contribute to specific events: a feature in a flyer, an end cap, a temporary price cut, a sponsored search placement on the retailer’s site. It usually arrives as an opportunity rather than an obligation. But turning it down again and again affects how much support your product gets. This one shows up once you are on shelf and continues for as long as you are.

Chargebacks. Deductions taken when a shipment misses the retailer’s routing, labeling, packaging or paperwork rules. A wrong carton label, a missing advance ship notice, the wrong pallet setup, a delivery outside its window. They arrive as a cut against an invoice you have already counted as revenue, often with a reference number and no explanation. Every one of these is avoidable. Brands new to retail incur them because nobody told them the rules existed.

Returns and damage allowances. Product that comes back because it was damaged, did not sell, or was returned by a shopper. Depending on the agreement, this is handled case by case or settled as a flat allowance taken from every invoice. It appears once product is moving. That is exactly when a brand has stopped watching for new deductions.

Payment terms. Not a deduction, but a real cost. You pay your manufacturer to produce the order. You pay to ship it. Then you wait for the retailer’s payment cycle to come around. In that gap you are funding the retailer’s inventory out of your own cash. The bigger the order, the bigger the gap. This is the one that puts profitable brands out of business. A company can be growing, profitable on paper, and unable to pay for the next production run.

The size of each of these depends on the retailer, the category and the agreement you sign. There is no standard number. Any article that quotes you one is guessing. What you can do is ask. Before you agree to terms, ask what allowances apply, what the chargeback schedule looks like, who pays freight, and what the payment terms are. Then rerun your pricing with those numbers in it. A buyer will answer all four questions. They are not secrets. They are just not volunteered.

4. Establish a Suggested Retail Price (SRP)

A suggested retail price helps make sure your retailers sell at the same rate as your other retail partners.

Let’s say a product’s initial wholesale price is $10, with a 50 percent markup.

First, calculate the retail price:
Wholesale Price / (1 minus Markup Percentage) = Retail Price
$10 / (1 minus .50) = $20

Then, check the wholesale price:
Retail Price x (1 minus Retail Margin) = Wholesale Price
$20 x (1 minus .55) = $9

Lastly, calculate the target cost price:
Wholesale Price x (1 minus Wholesale Margin) = Target Cost Price
$9 x (1 minus .50) = $4.5

So, to hold a $20 suggested retail price, you need to target a $4.5 cost of goods (COG) and sell at a $9 wholesale price. That gives you a 50 percent profit margin and your retailers a 55 percent profit margin.

5. Calculate Your Direct-to-Consumer Profit Margin

Aside from your retail profit, it’s also wise to set a direct-to-consumer profit margin.

From the example above, your wholesale margin is:

(Wholesale Price minus COG) / Wholesale Price = Wholesale Margin
($9 minus $4.5) / $9 = 50%

When retailers use your SRP, your retail margin is:
(Retail Price minus Wholesale Price) / Retail Price = Retail Margin
($20 minus $9) / $20 = 55%

But if you sell straight from your own store, your direct-to-consumer margin is:
(Retail Price minus COG) / Retail Price = D2C
($20 minus $4.5) / $20 = 78%

You can still profit from consumers who buy direct from your store, even while you target retail stores. You raise your profit margin while shoppers pay the same market price.

The Worked Example in One Table

Here is the whole example from the five steps above, laid out as one chain. You can see a single product travel from what it costs to make to what a shopper pays, with all three margins visible at once.

Line	Figure	Where it comes from
Target cost of goods (COG)	$4.5	What the product has to cost to make for the rest of the chain to work
Wholesale price	$9	What you invoice the retailer: $20 x (1 minus .55)
Suggested retail price (SRP)	$20	What the shopper pays: $10 / (1 minus .50)
Your wholesale margin	50%	($9 minus $4.5) / $9
The retailer’s margin	55%	($20 minus $9) / $20
Your direct-to-consumer margin	78%	($20 minus $4.5) / $20

Now replace the cost of goods with your own and work the chain in the same order. Start with the retail price your shopper will actually pay. Take out the margin the retailer needs. What is left is your wholesale price. Take your cost of goods out of that, and what remains is what the business runs on.

Say the target cost of goods that falls out of this is lower than anything your manufacturer can quote. Do not adjust the method. The method is telling you something true. Either the product costs too much to make for the shelf price you have in mind, or the channel is wrong for it, or the shelf price is higher than you have been willing to test. Those are three different problems. All three have solutions. Squeezing the percentages until the spreadsheet agrees with you is not one of them.

Summary

A successful product launch depends on smart retail product pricing. Do your market research on a retail price you can reach, and you set realistic profit for both wholesalers and retailers. You’ll save yourself a lot of trouble wondering how much you should pay your retailers for selling your product. And if you stick to your retail pricing goals, you’ll compete in the market with a much greater advantage.

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