Product Pricing: Wholesale vs. Direct-to-Consumer

Syama Meagher is the CEO of Scaling Retail, where she helps brands launch and grow. Follow her on Instagram, YouTube, Twitter & Facebook @ScalingRetail. Check out her company’s video on “How to Price your Collection for Wholesale Buyers.”

Putting Price in Perspective

I turned a $50M business into $100M in 2 years. How? Through pricing, merchandising and marketing. Now I work with brands to help them price, launch and grow their own product lines. One of my new clients told me the other day, “I want to make $50,000 in sales this year.” She just launched her brand last year and was starting to plan for 2016. Before analyzing her marketing and sales strategies, we discussed price. 1. Are the products priced correctly? 2. Are there ways to lower production costs? 3. Do the prices exhibit enough variation?

What my client didn’t realize at the time was that pricing tells a much larger story than just how much something costs; it shapes your perceived value and it can determine the difference between a high customer lifetime value or a low one. Pricing also has practical effects on your business – it is the lifeline that can sustain growth or bleed you. However, don’t confuse pricing with profitability – there are many factors that affect a business’ profitability, and pricing is just one of them.

Pricing strategies differ between wholesale (e.g., selling to retail buyers) and direct-to-consumer (e.g., selling through your own e-commerce site) channels. Many brands aspire to exercise both channels, and others just one. The other confusing aspect of pricing concerns margins. Product margin is the markup on your product above cost and gross margin is the profit for the business as a whole, after considering cost of operations.

Here’s what I told my client on how to approach pricing in thinking of her company’s bottom line.

Wholesale Pricing for Buyers

Some will advocate a cut-and-dry formula: manufacturing costs + materials + profit + expenses = wholesale price. I say that to fully compete in the market today you must treat your business as two parts: (a) the product itself and (b) strategy for selling the product. If you resist the urge to merge the two, you can optimize your operations through scrappiness and scale faster.

Here are the factors I consider for wholesale pricing:

1. Competitive Matrix

If you are selling to retail buyers, your brand will be sitting on a shelf next to other brands. Understanding your competitors is very important. Make a detailed list of your competitors, including target customer, types of products, length of time in business, place of manufacture, distribution channels, brand value, and of course, retail prices. Create a column where you divide the competitors’ retail prices by 2.5 – in order to “guess-timate” their wholesale prices.

Even though you might think “my brand is so unique, no one else is doing this,” your customer always has a choice between your product or someone else’s. A competitive matrix will guide you throughout your pricing journey and assist you in developing marketing and sales outreach down the road.

2. Manufacturing Costs

Get on the phone and spend a solid amount of time researching and producing samples. The upfront costs of this will frustrate most brands but can save money down the road. Find out your manufacturers’ minimums, lead times, and price breaks firsthand.

3. Perceived Value

Does your branding add value to your product? What does your website look like? Most brands forget that perceived value plays a huge role in pricing. Take the example below (shopstyle.com), of 3 black t-shirts all priced differently, each catering to a different demographic and aesthetic. The Alexander Wang t-shirt may have cost less to produce than the Splendid one, but the customer might be willing to pay more for its perceived value.

4. Buffer

We know that retailers like discounts and can also be sticklers when it comes to shipping and logistical issues. Ever ship an order without the polybag when your contract clearly states you need to? In some cases, you’ll find an extra $0.20 per garment tacked on as a chargeback. If you can, build an additional 20 to 30 percent of cost into your price to assist with unexpected issues that might arise.

5. Labor

Most brands are eager to start paying themselves, but keep in mind that your business may not be profitable for the first few years. You should forgo a salary if you are struggling to sell your products. Reinvesting earnings into brand growth is important. You can build your salary into your financial plan once you have healthy product and gross margins. If you need to start paying yourself off the bat, keep your personal finances lean and consider seeking startup capital from friends and family.

Direct-to-Consumer Pricing

Pricing for your own online shop might seem like an easier task. You might think, “I’ll just double my wholesale price or multiply it by 2.5, and voila – create a retail price.” Direct-to-consumer pricing can actually be tricky, especially since you need to stay competitive and consider inventory liabilities, all while incurring a higher marketing spend.

Here are the factors I consider for direct-to-consumer pricing:

1. Markdowns

Most new brands forget to factor in sporadic sales and seasonal markdowns that contribute to generating sales. In the beginning, many assume that customers are willing to pay full price and minimize discounts accordingly. Think ahead: take a look at the whole year and determine in advance what discounts you will offer and when. Now account for those margin differences in your pricing scheme.

2. Shipping

Some brands build shipping into their final product price. This should only be done if the difference between your wholesale price and competitive price allows you to do so. Otherwise, take shipping costs as a separate hit on your financial plan. Shipping is technically its own line item that will affect your company’s overall gross margin, not your product margin.

3. Packaging

Like shipping, packaging typically factors into gross margin analysis, not product margin. It is accounted for as a line item under marketing costs. To keep costs low, opt for minimalist packaging. You don’t necessarily need to include tissue paper and ribbon, so choose to exclude these from your price.

4. MSRP

If you are selling through multiple channels, you pay have to price your product on your own site the same as the Manufacturer’s Suggested Retail Price (MSRP) that your retailers are selling at. Just as you want to be aware of markdowns on your retailer’s site, they want to know of your price adjustments as well. Ways of circumventing pricing standards include: product exclusives, early bird product launches, impromptu sales, and special codes.

5. Loss Leaders

As you analyze each product, you might be able to price some higher than others. There isn’t a one-size-fits-all approach to pricing. If you need to take a margin hit on a particular produce, a.k.a. a loss leader, try to make up for that price cut in higher volume. Your pricing strategy might include a range of low (20%), middle (60%), and high (20%) priced products. Maybe the bottom 20% consists of auxiliary items and the top 20%, of exclusives. This range will drive attention to the bulk of your collection at middle-range price points.

Final Thoughts

As a new business you have two goals: 1) Increase product margins 2) Increase profitability of your company overall. Most startups aren’t profitable until beyond their fifth year, even if they have high sales volumes. Why? Because of marketing costs, new hires, and growth stage reinvestments, among other expenses that sales won’t completely cover early on. Focus on the right product at the right price for the right customer. Don’t stop testing until you get it right.

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