Pricing is one of the hardest things for a business to do. Here we break down how to price for e-commerce brands and wholesale buyers.
I turned a $50M business into $100M in 2 years. How? Pricing, merchandising and marketing. Now I work with brands to help them price, launch and grow their brands. One of my new clients the other day said: “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 starting to look at marketing and sales strategies we started to look at the price. 1. Are we priced correctly? 2. Can we lower production costs? 3. Do we have enough variation in price?
What my client did realize at the time was that pricing tells a much larger story than just how much something costs; it supports your perceived value, it can reinforce your brand values, and it can be the difference between a high customer lifetime value or a low one. Pricing also has practical implications on your bottom line- it is the lifeline that will sustain the growth in your business or bleed you. Pricing should not be confused with profitability. There are many factors that go into how profitable your business will be- price is just one.
The two major pricing discussions happen around wholesale (selling to retail buyers) and e-commerce (selling on your own site). Many of you have aspirations to exercise both channels, some only one. The other aspect of pricing that can get confusing has to do particularly with margins: product margins vs. the gross margins of your business. One is the markup on your product and the other the profit on the company. Below is the same information I gave my client on how to approach pricing and think about her companies bottom line.
How to Price your Wholesale Collection for Retail Buyers
Some say there is a cut and dry formula here: Manufacturing Costs + Materials + Profit + Expenses = Wholesale Price. But I say that to fully compete in the market today you must treat your business in two parts: the product and the business of selling the product. If you resist the urge to merge, you will be able to reach scale faster and optimize your operations buy getting scrappier.
Here is my approach:
- Competitive Matrix. Implicate in wholesale pricing is that your brand will be sitting next to other brands. This means you have competition. Understanding who those competitors are is very important. Make a list of your competitors and see where you fall on that list. Include types of items, retail pricing, how long it’s been in business, distribution, where it was manufactured, what makes it special to the customer and of course the customer demographic. Now some might say “my brand is so unique, no one else is doing this”. To that I say, your customer always has a choice, it’s either your product or someone else’s. This competitive matrix will guide you throughout your pricing journey and will assist you in developing your targets for sales outreach down the road. Once you have the list create a column where you divide the retail by 2.5- we will call this your guesstimate wholesale price.
- Manufacturing Costs. Get on the phone and spend a good amount of time researching and getting samples done. The upfront costs on this will frustrate most brands but it can save you money down the road. Find out what their minimums are, lead times, and price breaks.
- Perceived Value. What does your branding say about your product? What does your website look like? Most brands forget that your perceived value plays a huge part. Take the example below (shopstyle.com), 3 black t-shirts all priced differently, all catering to different demographics. Each of these vendors has built brands that cater to a particular aesthetic and price point. Who is to say that the Alexander Wang t-shirt didn’t cost less to produce that the Splendid one…. something to think about.
- 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? You’ll find an extra $0.20 per garment tacked on in some cases as a chargeback. If your manufacturing and branding allow it, build in an extra 20%-30% into your product, this will assist in other costs or charges that might arise.
- Your Labor. Most brands are eager to start paying themselves, but keep in mind that your business may not be profitable for 5 years +. You should plan to forgo a salary if you are struggling to sell your products. This can be built in later to your financial plan. If you can make the margins both product and total company then that’s a great time to start building in your salary. Reinvesting in your brand growth is very important. If you need to start paying yourself off the bat, then take a look at your personal finances and get lean. Also look into outside friends and family startup capital to help get you going.
How to Price your Collection for your own E-Commerce Site
Pricing for your own online shop might seem like an easier task. You might think, great- I’ll just double my wholesale price or times it by 2.5 and voila a price has been created. This is actually a little trickier than you think, especially since you need to stay competitive but have a higher marketing spend and need to consider inventory liabilities.
What to consider:
- Markdowns & POS. Most small brands don’t factor in the small sales or seasonal markdowns that go into generating sales. In the beginning, you may be trying to discount very little because you assume people will pay full price. Take a look at the whole year and determine in advance what sales you will be doing and when you will be marking down product. Now account for the margin difference in your pricing determination.
- Free Shipping. Some brands will build in shipping to their final product price. This should only be done if the difference between your wholesale price and competitive price allows you to. Otherwise, you should take that as a separate hit on your financial plan. Shipping is technically a different line item altogether. This will affect your gross margin on your company, not product margin.
- Packaging Costs. Again, like shipping, this is the gross margin analysis, not product margin. This is a different line item under marketing costs. Do you really need to put tissue paper, a ribbon in all boxes? Maybe not, so don’t include it in your final price.
- Are you pricing your collection the same as your retailers? Is there an MSRP (Manufacturers Suggested Retail Price)? Just as you want to be aware of any markdowns or price adjustments on your retailer’s site, they will want to know as well if you change your prices online. Ways of getting around pricing standards include product exclusives, early bird product launches, impromptu sales and special codes.
- Loss Leaders. As you go through and analyze each item you are pricing, some you might be able to price higher than others. There isn’t a one size fits all approach to pricing. If you need to take a margin hit on an item, a loss leader, make sure you will make up for it in volume. There will always be outliers to your pricing strategy: 20% (low), 60% (mid), 20% (hi). Maybe the 20% in lower prices are auxiliary items and the top 20% are in higher prices for exclusives. This will drive attention to the bulk of your collection in the mid price.
As a new business you have two goals: 1) Increase product margins 2) Increase the profitability of your company. Most startups aren’t getting profitable until year 5 and beyond, even if they have high sales. Why is that? You have marketing costs, new hires, and growth stage reinvestments amongst other costs. Focus on the right product at the right price for the right customer. Don’t stop testing until you get it right.
For more on pricing check out our video on “How to Price your Collection for Wholesale Buyers”.
Syama Meagher is the CEO of Scaling Retail, where she launches and grows fashion and retail brands. Follow her on Instagram, YouTube, Twitter & Facebook @ScalingRetail. For more about Scaling Retail visit www.ScalingRetail.com