When it comes to pricing your products for Retail, this can make or break you. Price too high and you scare retailers away. Price too low and you eat into your margins. This post outlines the different things to take into consideration when pricing your products for retail. Generally, a bottom-up approach is used to estimate the costs of service usage whereas top-down pricing is more amenable to estimating the society level costs which are often intangible and where data is scarce.
1) Bottoms-Up Pricing: Bottoms-Up pricing is when you calculate all the costs that you incurred and then add your desired profit margin to the total cost to calculate the price. To do this effectively, start by taking your Cost of Goods Sold (COGS) and add in all your other expense line items (marketing, logistics, operations, duties, etc.) Once you have this number, add your desired profit you want to make on each sale. The number you are left with is your Wholesale Price. To get your Retail Price, add a 50% markup (most common keystone, but varies by distribution channel and product category) to the Wholesale price.
Some retailers might ask you for your ELC or FOB pricing, especially if your items are imported. ELC pricing stands for the estimated landed cost (Your wholesale cost with shipping to US included). FOB pricing is freight on board which is your wholesale cost assuming the retailer will take ownership of your inventory at the international shipping departure point. This usually happens with larger retailers as they usually have better shipping rates because of the volume they import).
As a good rule of thumb, you will want to run your price point against the next step which is “Top-Down Pricing”
2) Top-Down Pricing: Top-Down pricing is where you look at the market, compare similar products (features, bells and whistles) and try to guess what the price of your product should be. This is an estimation of what you think people will pay for your product regardless of your cost structure. Keep in mind that most retailers create 3 pricing tiers “Good|Better|Best” and you will want to occupy one of these tiers, preferably one that is currently unoccupied for that retailer. If there is a player in your tier already, then you want to make sure that your product is significantly differentiated from that other player in the similar tier. Whatever retail price point you estimate based on researching your competitive landscape, work backwards now and subtract the expected retailer margin to arrive at what will be your wholesale cost.
The next step is to compare your Bottoms-Up price points with your Top-Down price points. They should be around the same ball park figure. If not, it is very likely that you have an inflated COGS and need to work on reducing these costs. The other alternative is that you have tons of margin upside, but unfortunately that is rarely the case.
TIP: Again, we are generalizing tremendously here. Take the above explanations and suggestions with a grain of salt and do your own research. Everyone wants to deliver a great price to their customers, but recognize that if you don’t make enough money per unit sold you won’t be in business very long. You are a start-up and it does take time to efficiently deliver a quality product to market. You can’t short-cut this learning curve and reducing your own margin is one of the fastest ways to become non existent.