If you haven’t had a chance to look at part 1 yet, I recommend that you have a look at that post first. You can find it here.
In this second part I will talk about your cost price, what is important and what retailers expect, VAT and the difference between the UK and US markets.
After you reviewed your RRP and make sure it’s right for your business it’s time to get super clear on all your costs. If you handmake your products or you design them in-house you need to add your time into the labour cost.
There are a number of different ways you can do this, the simplest way is to take your overheads out of the equation, for now, this is as the overall cost of running your business and it should be allocated against all your sales not exclusively against your wholesale.
I would include the following into your cost price and your margin calculations:
All the costs of your materials, including your product packaging – if you outsource the manufacturing then just factor in your cost price.
If you outsource your manufacturing, you need to remember to add any shipping costs and duties and the same for any supplies and materials you buy-in.
Packing and dispatch cost – it’s up to you if you want to take this into account at this stage, if you outsource your fulfilment you may include this now. Alternatively, I like to allocate this against your whole order value so I often don’t add this at this stage unless I am doing a price calculation for a large retailer that may have extra requirements.
Shipping – it’s likely you will charge the retailer this up to a certain order value and then swallow this cost up so again, I often don’t include this at this stage.
Your time – this is your labour cost, you will need to decide what your hourly rate is for producing/designing your product and divide this in how long it will take you to make something. If you outsource the design make sure you add this too.
Remember if you’re wholesaling you can often batch make things so it’s good to review this every now and then. Equally, if you start to buy in your products or supplies in larger quantities you may get a better cost price from your suppliers so make sure you allocate time every now and then to review your prices.
When you have your cost price you need to compare it to your retail price and your wholesale price. To determine your wholesale price you need to know what retailers expect so this is what we will look at next.
What retailers expect
In the UK most retailers expect a mark-up between 2.2-2.7 with the average being 2.4-2.5. This means that if your retail price is £10 a retailer would expect to pay between £4 and £4.16 for that product. You would get this by dividing your RRP/2.4 or 2.5 depending on what mark-up you are keen on offering.
There are a few different ways of saying this, the most common is to talk about your mark-up or wholesale factor which is what I mentioned above.
The other way, is to talk about discount for wholesale or margin, a 2.4 mark-up = a 50% discount/margin on the ex VAT RRP for a retailer and 2.5 = a 60% discount/margin on the RRP incl VAT. This can get confusing which is why it’s very common to stick to speaking about your mark-up/wholesale factor.
You might be thinking, I’m not VAT registered, or my product is not subject to VAT so why do I need to consider this? It’s a great question and if you’re selling to the US or outside of Europe you don’t need to consider the VAT and I will talk about this a little bit later but for UK sales you do need to factor this in.
It’s very likely that your retailers will be VAT registered and therefore they will have to charge their customers VAT and pay this to HMRC so the money they get from a sale will be less than you (as a non-VAT registered company) would get if you sold to the same customer.
You get the ex-vat retail price by dividing your RRP in 1.2, so for example, on a £10 sale the retailer will get to keep £8.33, take away your cost price of say £4.16 above and you have the retailers margin, in this case £4.16 = 50% or a mark-up of 2.4.
Now that you’ve seen what retailers expect you might feel, how can I make this worth it for me? Is it actually worth my time?
Of course, only you can answer this but remember that wholesale doesn’t replace your retail sales but you’re creating an additional revenue stream, another way for customers to discover you and your brand and unless you want to create a wholesale only brand you will still be retailing our products direct to the consumer so even if you are giving up some of your margins you won’t be making less profit as this is on top of your current sales.
Wholesaling can be a great way to reach a wider customer base and take advantage of your stockist's already established customer who already knows, like and trust them. This can help you build your brand quicker than if you had to do it all on your own and also build a business that is not as reliant on having great Christmas sales.
I just wanted to touch on this very quickly, when selling to the US you don’t have to take into account the VAT as you won’t be charging it. Of course, you may prefer to have one pricing strategy for all territories you sell to but you could offer US stockists less which gives you a little bit more wiggle room for exchange rate fluctuations.
US retailers do generally expect a 2-2.5 mark-up, if a product retail at $20 (always round up when you do your conversions) they would expect to pay $10. Sometimes less but it’s a good starting point for the US so you may want to create a separate US price list in dollar. Just make sure you review the actual exchange rate regularly.
Need more help
If you want to feel confident in your pricing, let's work together, get in touch and let's chat.
If you want some help and prefer to do it yourself at your own pace you can have a look at my online courses I’ve created with Catherine Erdly from Future Retail here.