Figuring Wholesale and Retail Pricing

To determine sustainable wholesale pricing, start by knowing your costs cold. May 24, 2010

We are just starting out, and have published pictures of a prototype design (a chair) in several high-end designer-oriented blogs. As a result, we've been receiving many emails from interested "potential" buyers.

In addition to deciding whether or not to manufacture in-house, materials sourcing, etc., the larger question is pricing. Does anyone have experience designing and manufacturing a product and selling it wholesale to a retailer? What are typical retailer margins? How do you determine your pricing? Do you negotiate with a buyer? Do you double manufacturing and labor cost?

Forum Responses
(Business and Management Forum)
From contributor J:
Business model. Get friendly with Excel.

First, you need to establish a bottom-end, break-even price. Make the best guesses you can about all your expenses - machinery, maintenance, workspace, utilities, insurance, materials, taxes, licenses, a living wage for whoever is doing all this work, cost of replacing the occasional defective product, etc. Some of these costs will be relatively stable regardless of how many units you actually sell (up to a point), e.g. machinery, rent/mortgage, insurance. Other costs, like labor and materials, will be closely tied to the number of units sold. Model a break-even price at several different levels of production, i.e. how much do I need to charge to avoid losing money if I can sell only one chair a week? How much would I have to charge if I sold 5 a week? Having done all of that, you'll have a vague idea of what it takes to break even. If you can't sell the chairs for that much, you don't have a viable business.

Next, you need to get a sense of where the market is, which is to say you need to know what your competitors are charging for products which are either materially similar or which satisfy a similar need. Look at the products these designers and consumers can buy instead of your product. The cost of those products will give you a rough idea of the upper end of the range of what you can hope to eventually charge. Compare this number to the expenses you already guesstimated. Is there any room between them? Is there any hope for profit?

Obviously, you want the price to be as close to the upper number as possible, but you won't be able to demand top dollar of your first customer unless your first customer is stupid. Just like on eBay, the price paid by the buyer is just a hair more than the top bid of the second-highest bidder. Until you have multiple buyers willing to put money on the table (i.e., willing to raise their price in order to win the privilege of buying from you), you'll have no negotiating power and will, at best, barely scrape by.

From the original questioner:
Can't argue with that. Very sensible. Good thing I have some Excel skills. I guess the next step is figuring out the baseline costs - so far haven't even found a manufacturer willing to build the thing. What is this insurance you mention?

From contributor C:
My response to what are they gonna charge has always been, "I don't care." You need to charge whatever it is your company needs to make money.

From contributor T:
Many years ago I wanted to create a line of furniture. One of my clients at the time was just retiring from a business he'd run for 25 years. His company occupied 16000 SF of showroom in a place called The Design Center in Seattle. He represented a lot of lines of furniture and furnishings. He brokered to interior designers who in turn represented end-user customers.

This man was very gracious with his time and spent a day with us explaining how the industry worked. The stores at that time worked off something called a keystone markup. They mark up everything 100% over costs. A mission style chair that some manufacturer produces for $900 sells for $990 after the manufacturer's rep gets his commission. If freight adds $100, then the landed cost to the store is $1099 and price to the consumer is $2180. You can work the math backwards.

He also said that if the furniture maker wanted to stay in business he had to be profitable at a price point equal to 25% of retail. This means that if the chair retails for $2180 you have to look good at $545, otherwise you will eventually meet your demise.

Those were the numbers that furniture manufacturers needed to be able to defend themselves from their competition. If you dipped below those margins something would come along and torpedo you eventually. You might have great success for a while but it would not be long before others noticed that success.

Needless to say that was a very sobering and profitable meeting. We decided then to give up furniture aspirations and become the best kitchen guy you could buy from. The internet has possibly changed all of that. Furniture is on the radar for us again as well but if we do this, it will also be direct to the end user.

From contributor A:
Standard furniture discounts are 50/10/5 off of list depending on the volume, so a $100 item sells at $42.75. Retailers as a rule of thumb will keystone (double) the wholesale price. We all know how rules of thumb work.

From contributor K:
To sell wholesale is to beat your head against the wall for very little profit. To sell retail is the way to make some money.

From contributor H:
We used to have a line of computer furniture that we sold wholesale to furniture stores from Seattle to San Diego. Almost all of our dealers did a 1.8 markup, rarely a 2.0 markup. If a dealer wants to do volume sales and has lower overhead they could dip down to a 1.6 or 1.7. Their sales would really move at the lower markups. Often these dealers did very well and made money selling much more furniture than the greedy ones. This markup is the number you multiply by the dealer's cost to buy your product.

Or like this: you have a china hutch that you want $1000 for. The dealer multiplies 1000 x 1.8 and comes up with $1800 for a retail price.

Some add on the freight, some don't. The minute they see your product they know what it could sell for, so the numbers don't really matter much - they get what they can, and balance volume sales versus higher prices and lower sales.

We have been out of furniture (wholesale at least) since about 1997. We are getting back into it, selling directly through a new website. We found a product that has a good market and it's a product that people want but can't find in stores. We tried to sell our computer furniture with our old website around 1996, and we did do some sales. The idea was sound but the internet was too slow and people didn't shop much online until now. Now is the time to get a web based business going again; everyone shops online now, so you don't need furniture dealers to sell.

From contributor M:
I sell cabinetry, mostly kitchen and closet systems, wholesale... and only wholesale. This means I have no sales people, no marketing expense, no estimators, no designers, no collectors, no installers and no showroom. My dealers use the same software as I do and all ordering and pricing is seamless and automatic. I only have one person in the office and her job is to place the material orders and follow up on the production schedule with the dealers.

My pricing is not based on the retail price. I do not think any wholesale manufacturer in the world does that. Except cabinetmakers!

Like one of the first responses stated, you have to 1.set a target for gross sales, 2. figure your fixed overhead (expenses that do not change like insurance and rent), 3. figure your variable overhead (expenses that increase with production like electricity and tooling), 4. figure your labor costs (treat as a fixed number that can go up but not down and includes your salary), 5. figure out your desired margins/income.

Then you can find the price you can sell your product for. If you try to start at the retail price and go backward, you are not going to honestly be able to find your pricing. It is natural to attempt to bend and fudge the numbers until it works out. In the end you will struggle to meet the numbers if you squeeze too hard.

I have a price that I sell to my suppliers and I really do not care what they charge their customers. I know my biggest dealer routinely gets 60 to 80 percent markup on my work! In other words I sell to him for 20,000 he sells it to the client for 38,000! But I don't care. It does not mean I am underpricing my cabinets. I am making very good money.

It is not true that you have to sell retail to make money. I used to spend more than half my time selling and marketing and less than 30% of my time in the shop. I am pretty good at sales and design, but so are a lot of other people out there. What I have that most others don't is very good skills in the shop and a lot of training in efficient manufacturing. So if I stay in the shop, I make more money. The only way to make that happen was to go wholesale.

Do not base pricing on materials at all. Work out the rates you need to charge for various products and processes. I have no markup for materials. I am not selling materials, I sell cabinets. Actually, I sell the service of turning materials into cabinets, if you want to get technical. It is very hard to find this pricing but it works. Once you get it worked out you can distribute catalogs that include materials or exclude them. This allows my dealers to specify different materials and know the costing immediately.

The point is, do not look at others' prices and try to make yours match. Find your prices first, then check to see if the market will support them. If your prices are too high you need a different business model.