Retail, wholesale, cost. What do these terms mean?
If you’re serious about launching your own brand you need to understand the terminology. Buyers and distributors will expect you to be familiar with these terms otherwise not knowing them will put you at a disadvantage. Understanding the terms will also help you to calculate the correct price for your products.
This is the cost for you to produce a single product. Your cost includes raw materials, packaging, and everything it takes to have a product sitting on a Retailers shelf.
So that’s art work, labels, pots, lids or whatever its going into, gift cartons, outer cartons and the cost of the factory making and filling for you, plus the costs of delivering them needs to be included. (see Profit margins for more detail)
Always keep your product cost confidential, it is part of your Intellectual Property. It should never be disclosed to the retailers for example.
Retail Price (or Suggested Retail Price sometimes called RRP or Recommended Retail Price)
This is the price that the end consumer will pay for each product.
A retail price is an absolute minimum of 2 times but generally 5 times your cost. At this level you have margin to pay a wholesaler or pick and pack facility and possibly support your brand with offers and advertising that the majority of large retailers will ask you to do. You should then still have a reasonable profit margin. If the calculated retail price is too high for your market, consider ways to reduce your cost to keep your margins up. At the two times level you have no room for error however if you are testing the market it may make sense. For example, if you are going to start with a small run to test the market it will cost you more in that all elements of the cost will be higher due to the run size. Therefore, it might be worth compromising the margin you take from the product to be able to retail the product at the price that you believe the market will accept knowing that once volumes is achieved the economies of scale will bring up your margin to where it is acceptable.
This is the price that retailers will pay for your products.
Standard wholesale pricing is half of the retail price. When your products are priced appropriately for retail you will still gain a reasonable return on wholesale products. However, many of the larger retailers will expect a much higher margin whilst the smaller ones without the buying power will accept the 50%. When you quote a retailer you always quote exclusive of VAT
Ex VAT although it is charged on the Invoice
The profit margin is the return you make on each sale (or product). This figure is the measurement of profitability in your business.
Retailers often ask for a set return or POR (Profit on Return) and will sometimes dictate the margin they will accept and the payment terms that will apply. The larger and more powerful the Retailer, the more that they can insist on. This needs to be taken into account when agreeing to any terms.
Such things as timed deliveries, pallet height restrictions, limits on pallets to be used, settlement discounts, marketing contributions, shelf talkers, all take a chunk out of your profits and have to be accommodated if you are going to accept Purchase orders.
Many retailers also look for carriage paid details so you are going to need to work on these before you present.
At what number are you prepared to pay the delivery costs?
To answer this you will need to look at what that cost might be.
If a pallet costs a set amount but you know the pallet holds a set number of units then by dividing the one by the other you can get a unit cost and decide at what level you are prepared to accept this.
It is necessary to also look at putting these delivery costs on the prices you offer. This will show you have done the ground work.
Most carriers offer weighted prices up to 1kilo and from 1-10 kilos are usual so weigh your units and work out what the charges might be for a case quantity.
You can use these details on any price lists you might prepare
Be aware that cash flow can be a killer and offering credit to unknown companies can be quite a risk. You are able to offer Pro forma until a trading pattern is established.
Through a long career in the industry, Allingham Beck can use their experience to help you avoid costly pitfalls and easily made errors. From concept to market, contact us for help with your project today.