Use Cost to Set Retail & Wholesale Prices
Have you ever been puzzled trying to figure out how to price your products for retail sale? Pricing questions come up a lot for all businesses and we certainly get asked about it, especially from those new to the beauty industry. The first step in setting your pricing is to understand the different terms associated with pricing.
“Retail (or SRP)”, “Wholesale” or “Cost”?
John Landforce, president of Essential, and I were having a confusing pricing conversation the other day and I realized the reason I was confused was because he and I were using different terms. I was talking from the customer point of view and John was talking from a manufacturer’s point of view. I was using the term “cost” for the customer’s cost and John was using terms “cost” for the manufacturer’s cost; two dissimilar things.
We are all in business to make money and in order to do that you must turn a profit. The beauty business is a beast of its own and you really can’t look at pricing structures from other industries to figure out how to lay yours out. However, all industries use the same terms and if you want to sell to brokers, distributors, or even direct, you need to be using the same terms to avoid confusion like I had with John. Hopefully, this will help you figure out pricing, too.
The total expense for you to produce a single product is ‘cost’. Your cost includes raw materials, packaging, and overhead (labor, shipping, etc). Let me state here that the cost of your raw materials must also include landed cost, which is the incoming shipped fees associated with getting that raw material to you. If you are producing your own products, please remember that your time is valuable and you are worth something for every hour of work. Just like you’d pay an employee a certain hourly wage, make sure you calculate that you have an hourly wage too; even if you don’t yet pay yourself, this is an expense you need to capture. Product costs are highly proprietary; you should never share your cost information.
To Summarize: Cost = raw materials plus packaging plus overhead
Establishing your Retail Price (Suggested Retail Price [SRP])
Your retail price is the price paid by the end user. A healthy retail price in the US natural and organic skin care and body care market is five to six times your cost, leaving you with an 80% or more profit margin. We understand all pricing is dependent on the market, but If this five to six times cost basis doesn’t work out for the market niche you’re selling into, consider ways to reduce your costs to keep your margins up. Lowering your retail price may not be the right thing to do. Oft times we feel that if we are the lowest, we will sell better than our competitor, but I can tell you that you should never price your products below three times your cost. One thing I learned when I had my own spa is that a business owner must never be tempted to offer lower prices than what one can truly afford. So finding ways to reduce cost becomes paramount.
For example, if you can’t afford the minimums required to get a better price on a raw ingredient purchase, consider splitting purchases with someone else. When EWL was in its infancy, it used to share purchasing of a pallet of ingredients with another small raw ingredient distributor. One thing I didn’t talk about inside the Cost section is that you will find yourself giving away more product than you planned and also that you will find one day that you want or need to spend more on marketing to improve your website ranking in the search engines, or that you realize you need to pay an artist to create marketing materials for you like Point of Purchase displays and you will need that buffer in your margin to do just that. Another consideration is that every time raw materials increase in price, you really don’t want to be changing your Retail price. Costs will fluctuate, and sometimes they can fluctuate weekly. So give yourself enough buffer to not have that happen to your retail price, otherwise soon your customers won’t want to purchase from you.
To Summarize: Retail Price = Cost times five to six.
When selling through a distribution channel, such as a local store who will then sell to the end user, you need to have wholesale pricing. The standard is 50 percent of the retail pricing. So if you sell an item for $20 retail, then you would sell your item to the store for $10 wholesale. This way you would still yield a healthy return of about 60% margin if you had had sent your retail price at five times cost.
To Summarize: Wholesale = Retail price divided by two
I mentioned that I would tell you about the different pricing terms and that hopefully would help you figure out pricing, too. I have subsequently mentioned “margin” and perhaps you weren’t sure what I was talking about. Well, if you want to make a profit and stay in business, you need to know. Ask yourself this: “What is the dollar return I make on each sale?” Let’s take my earlier example in Wholesale Price. You sold an item for $20, this means that it cost you $4 (read Retail Price section and notice this is a “times five” pricing choice). Your dollar return was $16. Your profit dollar and profit margin are the measurements of financial success in your business. To look at it in profit margin terms and not profit dollar terms, take your profit made in dollars and divide by the sales price. Then multiply by 100 to get a %. So your profit margin formula would be ($16/$20)*100 which would equate to 80% Profit Margin.
Profit Margin = (sales price – cost) / sales price
Final Thoughts and Pricing Tips
When you set your prices, understanding your product costs and your market are the key factors to consider. Priced too low, consumers will not value the product and may not believe your what your label claims. It just ‘feels’ wrong. Too high and you won’t move enough product. As you set your pricing it’s important to thoroughly understand how your competitors are pricing similar– or apparently similar, products. It’s also important to know how the distribution channels are positioned. High-end boutique or family-friendly salons. Both of those outlets have a price-point profile and your products’ pricing should be consistent with your distribution channels’ pricing profile.
Do you have any pricing advice to share? What challenges have you dealt when setting pricing?
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