How do we put a wholesale and retail price on our product?

[stubird]

We have developed a new and exciting product that a numbe rof Department stores have expresses interest in. At our next meeting, they want to know price points. So, is there a science to deciding what price to put on the product? We know what our costs are. How do w eknow how much to mark it up to develop the wholesale price? Do I need to establish a retial price as well or do we simply let the Department Store dictate that?

[akula]

sure...there's a quasi science
normally, you'd follow a formula with 4 variables

1) your costs (fixed+variable)
2) hurdle rate (how much profit you need to make)
3) what the competitors are charging (and your positioning)
4) what the customer is willing to pay (the quantitative benefit that you're providing)

so..you look at all those four things and arrive at your pricing

is this making sense?

[stubird]

Akula: I understand what you are saying. But do we need to take into account what the store wants to establish the Retial price at? I assume they work on a standard 50% mark up. So, if we think the retial product can be $80, we must assume that the store would be willing to buy the product from us for $35 to $40. Is that an accurate statement?

[akula]

yep, that's point 4. the retailers are your customers. they have needs - such as their need for margin (and this figure varies from place to place), or for a particular addition to their product range. e.g. if their premium range of products is lacking, it'll make sense for you to price your product at a premium (and vice versa for discount products)

[stubird]

Is it fair to say that stores look for a minimum of 50% mark-up? To me, it makes more sense to calculate the wholesale cost by trying to ascertain what they can sell it for. Back that down 50% and here you go. I mean, if it costs us $15 to have the garment made and we can sell it wholesale at around $35 or $40, maybe a 133% profit isn't too bad? who knows!!!

[akula]

Is it fair to say that stores look for a minimum of 50% mark-up? To me, it makes more sense to calculate the wholesale cost by trying to ascertain what they can sell it for. Back that down 50% and here you go. I mean, if it costs us $15 to have the garment made and we can sell it wholesale at around $35 or $40, maybe a 133% profit isn't too bad? who knows!!!

50% markup? no, no...that's too low. I'm pretty certain that the industry average for clothing retail is 200-400%..so normally, the retailer will buy stuff from me on consignment for $10 and sell to consumers for $30-50. it's very expensive to run a retail shop. 50% markup is not enough...as a retailer, I can't survive if my COGS per unit sold is 33% ($10/$30)...yikes, I get scared just thinking about that kind of a P&L statement..33% COGS if freaken frightening

likewise, as a manufacturer, if I'm selling to retailers for $10 per unit, my variable cost of production has to be maximum at $1-3 per unit. in clothing manufacturing, it's hard to survive on a 30% variable cost ($3/$10), let alone 38% ($15/$40)

the point: if you wanna sell stuff to retailers for $40, the retailer will need to sell it to consumers at over $120 to make any kind of profit....likewise, if you want retailers to buy stuff from you at $40 (and make a profit), you'll need to keep your COGS at <10 bucks per unit...and if your COGS is $15, you'll need to charge retailers more than $50 to keep your venture afloat.

[stubird]

Akula:

I need to clarify a couple things please. My wife has simply designed this garment and found a mnaufacturer who can develop the finished product for $12. We do not have a store and will not have one. We are simply going to the Department Store and if they want the product, we will have made and dropped ship directly to them for distribution, etc. We really have no overhead to speak of. So, in your scenario, I would do the folowing:

$12 - COGS
$50 - Wholesale (316&#37; profit)
$150 - Retail (200% profit)

is that correct?

[akula]

Akula:

I need to clarify a couple things please. My wife has simply designed this garment and found a mnaufacturer who can develop the finished product for $12. We do not have a store and will not have one. We are simply going to the Department Store and if they want the product, we will have made and dropped ship directly to them for distribution, etc. We really have no overhead to speak of. So, in your scenario, I would do the folowing:

$12 - COGS
$50 - Wholesale (316% profit)
$150 - Retail (200% profit)

is that correct?

yep..that's about right
you're misusing the word "profit"...but yes, this is the typical markup structure in retail e.g. nike polo tops

$2 - COGS
$8 - wholesale
$49.95 retail

[BusinessAdviser]

In my experience, retailers are rather transparent about their expectations. When you go in, first arrive with the retailer at a price point that they can sell to their customers. You need to be in agreement on that first before you can back it out together. Once you have your retail price, simply ask them what their typical markup is. Then you have a starting point for negotiation.

[Craig OL]

sure...there's a quasi science
normally, you'd follow a formula with 4 variables

1) your costs (fixed+variable)
2) hurdle rate (how much profit you need to make)
3) what the competitors are charging (and your positioning)
4) what the customer is willing to pay (the quantitative benefit that you're providing)

so..you look at all those four things and arrive at your pricing

is this making sense?

Your cost variables are right on in my experience as a Landscape Architect and Design-Build Firm. Very to-the-point description.

Could I use this for a portion of a lecture being developed on "Cost Estimating for Gardeners" at Berkshire Botanical Garden in Stockbridge, MA?