So you’re a hardware startup and just returned from exhibiting at a trade show and wondering about product pricing. A couple of the most popular questions you’ve received from distributors and retailers is most likely “What is your wholesale price?” and “What is your MSRP?”. Distributors often ask these questions because they’re confirming that your product will fit into markup requirements across the distribution chain. They’re also calculating how big of pie they can take – i.e. how much money can they make off your product, provided that they believe your product can scale in retail. After all, these guys are not in the game for small orders. They often purchase at container load levels.
Having worked with global buyers who represent international big-box retailers and hardware startups worldwide at my capacity in Global Sources for nearly a decade, I’ve learned that when it comes to pricing, it isn’t a mystery that some startups make it out to be. Of course there are exceptions where buyers claim to have super reach and are non-accommodating with unrealistic markup requirements, but let’s go with the formula most buyers work with.
Calculating Your Wholesale Price
It all begins with how you calculate your wholesale price. Most buyers refer to this as F.O.B. price which means free on board, an INCO term that generally means that as soon as your product gets on the ship/plane, the ownership of the product is now passed onto the buyer. It also means that you need to price your wholesale/F.O.B. price to include delivering products to the port. However, the larger chunks of your wholesale price will need to include your bill of materials, labor, overhead and profit. Once you have this all calculated, you have your wholesale price, let’s call it $10 per unit for simplicity sake.
A lot of articles online will tell you to take your wholesale price and multiply it by two, to get a retail price of $20. This formula is pretty standard, but what they don’t tell you is why you need to do this. Well, distributors that buy at F.O.B. prices will have markup requirements of anywhere between 25 and 40 percent to cover their overhead and profit. This means that at $10 per unit, distributors will sell your product to retailers at prices between $12.25 and $14.00 per unit. You might ask why are distributors still around as middlemen and why can’t you work directly with the retailers. For one, distributors have years of experience honing their relationships with retailers. Getting your foot in the retailer door directly as a startup is still extremely difficult. Secondly, retailers still prefer to work with a handful of distributors rather than hundreds or even thousands of brand manufacturers. Plus, distributors that have good reputations with retailers tend to offer retailers ease of mind by handling all the product quality, supply chain, compliance and delivery issues.
Where Do Retailers Fit In All This?
Now on to the retailer. Retailers tend to have a larger range when it comes to markups. Depending on which retailer you’re accessing, markups can be anywhere between 40 to 70 percent. Yes, it’s high and yes, they have the leverage relative to the distributors and brand manufacturers – unless you turn your brand into a household brand such as Apple who can select their retailers and control markups due to their scale. If retailers are buying from distributors at say $13 per unit, retailers will sell your product at 60 percent markups. This will bring your retail price to $20.80, which is pretty darn close to the suggested formula of taking your wholesale price and multiplying it by two.
Of course it’s not always as simple as just multiplying by two to get your retail price. Yes, your product fits markup requirements, but another process is actually to work the numbers backward. There is a reason why buyers ask for your MSRP, because they are comparing your retail price to similar products in the market and deciding if your price is competitive or not. To see where you stand, simply take a competing products retail price, divide it by two and ask yourself if you can cover all your costs while also profiting at that number.
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