This is a Quora question I was asked to answer. Here is my answer.
There are many different ways to set wholesale prices and anyone that does that will probably have their own nuances and rules of thumb they follow.
For most product categories, consumers will compare you to competitive offerings, as they need a point of reference to gauge the value to them. Assuming that, here is my process.
- Researching competitive offerings, both online and in retail, and segment by channel (specialty/high end channels vs mass/volume-base channels and everything in between).
- Document all quantitative factors including anchor price, sales prices, serving sizes, product sizes, etc.
- Document qualitative factors: in particular benefits – what value will my user / customer get out of using this; features – what part of my product lets the user / customer get that value; outcomes – what’s the end result the user wants to achieve with the product/service); pain/needs/desires satisfied.
- Identify the target customer/segments.
- Audit competitor advertising. What they say, how they say it, and their look and feel in websites, packaging and advertising, including where they advertise, communicates value, which is reflected in price.
- List out your benefits, features, outcomes, pain/need/desire satisfied in a table relative to competitors.
With all this data, you want to get a sense for where along the value spectrum you fall relative to competitors and what would be your top-most anchor price (your suggested retail price – SRP – that a consumer would pay for the product).
Next, develop a profit and loss statement based on your top-most anchor (SRP), with channel margin, then wholesale prices, cost of good sold (COGS), operating costs, then your net income (top to bottom flow). Everything flows to net income, so I set my target net income percentage that I want and then roll up from there.
You lay this out by channel – so each column is one channel, starting with your direct-to-consumer sales, then sales to specialty channel, drug, grocery, etc, etc. When you do it this way, you can see in one screen view all the important metrics to your pricing and your business. And you can see with much more clarity where things might break in your profit and loss statement.
If, for example, my net income drops below my threshold, it is because my COGS is too high, or my SRP is not high enough, but maybe I cannot charge a higher SRP because my benefits/features, etc do not allow me to do that. Or, maybe my pricing breaks in a specific channel based on the channel required margin, so I may need to go back to adjust my SRP. It is all a very iterative process.
I spend a lot of time on pricing and this model to get it right. But even then, I won’t know until I get into the marketplace. So, I always start selling online where I can much more easily adjust my pricing in my testing. I cannot do this if selling through resellers. I want my pricing to be set before I go to resellers.
A few other things to consider in setting price is whether your product can be considered a status symbol; if so, then a premium price may be justified. Is it a scare product? These all can be used to adjust pricing up.
I would no try to compete on price unless you can defend it successfully in the marketplace. Competing on price almost always means the largest competitor that can do the most volume and get economies of scale, will win. Unless that is you, better to position elsewhere.