Calculating Wholesale and Distributor Pricing

[J]

My company has generated serious interest from some major natural food chains and I'm in the thick of trying to determine wholesale and distributor pricing. Thus far we haven't used any distributors for our products, but the time has come to go that route as we're being asked by retailers to work with specific distributors in order to carry our products (specialty dry baking mixes). We had previously set our wholesale pricing at roughly 75% of retail (or retail minus 25%). Frankly, that was really just a shot in the dark, and rather than continue to guess, we want to be sure our pricing is competitive (and attractive) to both distributors and retailers, without selling ourselves short in the process. Here's an example of pricing we've come up with on one product:

Retail Price: $5.99
Wholesale Price: $4.49 (retail minus 25%)
Distributor Price: $3.59 (wholesale minus 20%)

Based on this, our margin is about 17% of retail.

I would love to get some feedback and/or examples of how other companies price their products for distribution and retail, and if our figures are in line (or out of line) from what retailers and distributors expect. Any help would be greatly appreciated. Thanks in advance!

[IMKENOBI]

Hi,

Okay, I'll bite.

Generally:

Price to Distributor: $1.00
Price to Retailer = distributor price plus 25% - 30% MARGIN (divide the $1.00 by 75 or 70)
Price to Consumer = retailor price plus 40% to 50% MARGIN (divide the retailer price by 60 or 50)

Does this help?

Cheers,

Steve

[J]

Hi Steve,

Thanks for your response. I appreciate your taking the time.

So if I apply that pricing to my example (working backward from consumer retail), I get something like:

Consumer Retail Price: $5.99 (based on comparable competing products)
Wholesale Price: $3.59 (retail minus 40%)
Distributor Price: $2.70 (wholesale minus 25%)

Our ingredient & material cost for this item is $1.93 (not counting transport/delivery cost to the distributor). This puts our gross profit margin at $0.77 or about 28% of distributor price. Am I understanding this properly? Let me know if this looks about right and if it seems reasonable...

[RMontague]

Steve's formula is exactly how I would have lined things up as well. One thing that plays great importance into the equation, of course, is your COGS (Cost of Goods Sold). You can do a combination of Steve's formula along with working up from your COGS to make sure you are making enough on it as well, factoring in other things like your SGA expenses, etc.

As for pricing in general and what you should sell your product for, Steve coins one of my favorite sayings "whatever the market will bear" (unless you are going to lose your shirt on the deal).

Best of luck,

Ryan Montague

[Shantell George]

I'm a new member and I'm very glad to find this information. Very helpful as we are in a similar situation with a different product.

[Scott Sapire]

In Specialty Food (Gourmet, Whole Foods, etc) the stores expect to earn about 40% and the distributors between 20-30%. Brokers, which I recommend if you expect to sell in regions of the country in which you aren't able to market the product, take 5%.

We calculate our pricing as follows:

MSRP * retailer % * distributor %

We then ensure that we are making between 2-3x after the broker fee.

[IMKENOBI]

Hello J,

Let's define our terms:

Retail Price is the price to the consumer.
Wholesale Price is the price to the retailer.
Distributor Price is the price to the distributor.

To get to the Retail Price:

Your exwarehouse price plus your profit margin (17%). Formula: Exwarehouse price divided by 0.83 = Distributor Price (price to the distributor).

Distributor Price divided by distributor margin (20-30% - we will use 25%). Formula: Distributor Price divided by 0.75 = Wholesale Price. (Price to the retailer).

Retail Price divided by retailer margin (40-50% - we will use 40%). Formula: Wholesale Price divided by 0.60 = Retail Price. (Price to the consumer.)

Strongly recommend you prepare two, separate, price lists. One for the distributor and one for the retailer. Otherwise, if you offer the distributor a "percent off retail price," you will face an unending effort on the distributor's part to get the most percent off.

Does this help?

Best wishes for great profits!

Steve

[Robert Carkin]

Steve,
I'm not exactly sure exwharehouse price means. I'm fairly new to this website and am in the works of developing a manufacturing company. I always understood cost in the form of food cost for retail being 30%. I was wondering if you would provide insight on this. I am trying to determine my selling price to Sysco being the distributor and in doing so I am trying to understand the above formula. Please help.
Thank you,
Robert

[IMKENOBI]

First off, good luck Robert.

Exwarehouse cost is a standard term that describes the cost of sales plus normal profit. That is your 'base cost" to which you would freight, insurance, and any profit margin (or mark up in other industries). Ownership is transferred from seller to buyer at exit of seller's warehouse. Shipping and insurance from the seller's warehouse are the responsibility of and at charge of the buyer.
As a rule of thumb, the Cost of Goods Sold (beginning inventory, less ending inventory, plus labor) figure runs in the range of 30%.

Does this help? (More help is in my book)

Steve

[Robert Carkin]

Thank you this does help, I figured that is what exwarehouse meant. Also I am going to go get your book for further questions I have along the way.
Robert