Lauren writes about inventory for Sortly. Her favorite thing to organize? Her comically large collection of stuffed animals.Lauren
A wholesale distributor buys enormous quantities of product from a manufacturer, then sells those items to customers at wholesale price. And whether you’re new to wholesale distribution or a seasoned pro, revisiting how to calculate wholesale price is always wise. After all, if your costs of goods sold change significantly, your wholesale prices should change, too.
This article will reveal how to determine wholesale price in two ways: absorption pricing and differentiated pricing. We’ll also offer a few tips on updating your wholesale price list, a nerve-wracking but necessary task for any wholesale distributor.
Wholesale price is the price wholesale distributors charge customers who purchase products in large quantities, such as by the case or pallet. Wholesale price is determined by various factors, including the cost of goods sold.
Wholesale price isn’t the same as retail price—the price a consumer pays a dealer or shop for a product—is based on target profit margins, supply and demand, and competition.
While wholesale pricing is also about profit, it’s more about volume than the profit on a single sale. That’s because wholesalers need to sell off their inventory in bulk—inventory they’ve already purchased directly from a manufacturer.
The wholesale distributor needs to consider what they paid the manufacturer, then sell that product for more than that price.
Wondering how to price wholesale? It’s a multi-step process, but we’ve outlined some of the basics below.
The first step to wholesale pricing is gathering knowledge. You need to understand what competing wholesale distributors are charging their customers for products.
If you aren’t sure, talk to potential customers, or request price lists from competitors themselves. Your manufacturers might also have some insight into how wholesalers are pricing their products.
Once you have a solid understanding of your competition’s pricing structure, learning how to find wholesale price is much easier.
This step is crucial if you are both the manufacturer and distributor of products. How much does it really cost your business to produce a given product? You can’t price an item without this information.
Remember, this “cost of goods manufactured” (COGM) doesn’t just include materials. You’ll need to account for labor, overhead, shipping, and handling.
The official formula for COGM is:
total material cost + total labor cost + any additional costs and overhead
You’ve researched the competition and gotten a deep understanding of your COGM. Finally, it’s time to determine wholesale price. There are a couple of different ways to do this— we’ll touch on both of them in our next section.
There are many ways to calculate wholesale pricing, but the two most straightforward, most common methods are absorption pricing and differentiated pricing.
Absorption pricing accounts for all the different costs associated with the given wholesale product, specifically fixed cost and profit margin. This method “absorbs” the cost of goods and the cost of profit.
The official formula for absorption pricing is super simple: cost price + profit margin
To calculate your cost price, you’ll need to solve for your cost of goods sold plus your overhead costs.
Absorption pricing is simple and very effective—after all, you’re baking your guaranteed profits right into the wholesale price. If you need help calculating all of your costs, your accounting team can help you understand those expenses.
The main drawback? Absorption pricing prices your wholesale stock without any context. The formula doesn’t account for what your competitors pay or what the market can bear.
Next up is differentiated pricing, where different customers pay different wholesale prices—but for the same product.
Differentiated pricing helps wholesalers boost their profits by adjusting wholesale prices to match demand. After all, what customers are willing to pay depends on many factors, like the season, external demand, and extenuating circumstances.
There’s no set formula for differentiated pricing, so you’ll need to adjust your profit margin based on demand.
Our pro tip? Keep excellent records—your differentiated pricing will become more and more accurate over time.
Whether you choose absorption or differentiated pricing, you’ll need to let your customers know your prices have changed. While price changes do raise the risk of upsetting your customers, there are a few best practices for mitigating those risks and keeping your customers happy.
One of the best ways to gently transition to a new pricing structure is to sell off old inventory at old prices but price new inventory at new prices. That way, you can alert your customers ahead of time, giving them a few months to purchase wholesale products at old prices.
By the time they need to start ordering new inventory, they’ll have already adjusted their budget (and perhaps, their own retail prices) to cover the increased cost of your wholesale products.
Even if selling off old inventory at old prices isn’t an option for your business, being upfront with your customers about price changes can work wonders. After all, your customers are businesses, too—and they probably understand that the costs of doing business continues to increase.
Wondering how to break the news to your customers? While many businesses opt to notify their customers via email, it can help to make the communication more personal and more contextual. If possible, ask your account managers to call customers and let them know about the changes. You can chat with them about the different factors affecting your prices, such as inflation, supply chain issues, and even better wages and benefits for your employees.
Follow up with a price list via email once you’ve chatted with your customers about the changes.
Offering short-term legacy pricing can also help appease many of your worried customers. If you can swing it, extend old pricing to your customers for a short period of time, like a month or a quarter. That will give your loyal base time to adjust their own prices.
Sortly is a top-rated inventory management software solution that makes keeping track of inventory easy. And as a wholesale distributor, you buy inventory—and lots of it. With Sortly, you and your team can effortlessly manage products, even across multiple locations.
You can also use inventory management software to track how much you paid for inventory and how much you plan to sell it for. That way, calculating key formulas like absorption wholesale price is much easier.
Curious about Sortly? Why not get organized today with a free, two-week trial of Sortly!