I have a new small patio furniture company. I sell a mix of retail and wholesale. I know the overhead + materials + hours + profit formula, but I am looking to price in the marketplace as well. How do you figure out what the market will bear for your product?
What is your business gaining by having two pricing structures? If it's volume, is that volume lowering your material costs for all products? If it's volume, is that volume lowering your labor costs for all products? Are your wholesalers advertising and/or stocking your product, resulting in savings in advertising and inventory? Finally, if it's volume that is providing you with these benefits, maybe your pricing should reward volume buying rather than using a straight wholesale/retail scenario.
1) Distributor pricing - To be a distributor, you must take a minimum quantity of product, inventory and reorder in quantities. A typical distributor buys in lots of 25 units. His price is almost 25% less than a wholesaler.
2) Wholesale pricing - The individual or company who is purchasing with the intent to resell. They typically don't buy more than 2-3 items at a time.
3) Retail - I don't sell retail unless it's to a friend or acquaintance, but I do have a manufacturer's suggested retail price. Sales reps get 15% of wholesale. For example:
You can see where the incentive to be a distributor increases your profit margin tremendously. That's why Lowe's is low.
I sell wholesale because I want to capture some local market share. I still make decent profit, particularly if I get orders for multiples of 4 pieces or more. I structure my marketing efforts to sell part wholesale, and part retail, knowing that to grow the business, I will need both. Wholesale gets more of my products into consumers' hands, and retail gets more profit into my hands.
I save a small amount on retail, and in picking up the lumber. I save a considerable labor by building multiples of products, typical of wholesale orders, and retailers that I wholesale to provide market exposure, advertising, and inventory that I could not do on my own.
First, retailers in most industries need to make "keystone", that is a 100% markup between what they pay and manufacturer's suggested retail price. That allows them to discount as needed and theirs is an overhead intensive situation.
Second, when times are busy and you must choose between making a retail product for a large profit or keep a retailer happy with a large order, you will be up nights trying to decide which to do first.
Third, you can never undercut your retailers by discounting "factory direct"--you need them and they will leave a "cheat".
We all need to define the customer to properly set the level of service. This is very difficult with a dual mission.
I am talking about selling to seasonal specialty shops, here. If you wholesale on a national level, this is who you will be dealing with. If you are wholesaling on a more regional level, such as garden center or nursery, they generally mark up 30 to 40% or whatever you suggest to them. They listen and they are not furniture specialists.
You will find very few distributors willing to sell outdoor furniture. There are many reputable sales reps that work for around 10% of the wholesale price. If you add the 10% to your wholesale price to compensate for this, you will no longer be competitive. Don't rely on a rep to sell all your product, but they do come in handy for spreading word. Reps sell only to specialty shops while they are in mid-season and in limbo between trade shows, and they never sell to garden centers. Nor will you be able to sell to garden centers on a national level, since there is no organization connecting them.
Selling regionally can be very profitable and selling nationally can be very difficult.
My plan has been to market through garden centers and shows. For now, I'll stay with the garden centers I am positioned in, and keep my current wholesale pricing levels, which provide just under 40% markup for retailers. I have some volume discount for larger orders, but not much. As I look at my current operation, if I got much more volume, I'd be forced to expand before I want to, forcing capitalization (read: loans) before profits would justify the risk.
Seems to me that right-sizing from the start would be the way to go here.