Wholesale Product Pricing Strategies
Hi everyone it's Donny Lowy from www.closeoutexplosion.com, hope you're doing well. The next time you come to New York you are welcome to visit my warehouse. Hope you're doing great. Today I'd like to discuss with you something very important that pertains to the selling of wholesale products and that is determining your actual cost for those products.
Now I have covered different factors such as your shipping costs, your storage cost. If you have an employee, the cost of paying those employees and factoring in various cost into the actual price that you pay to me you could pay 10 for a blouse, you could pay 20 for a brand new dress but if you have other variable and fixed costs that increase the cost of a product by another 50% then you have to realize that you start paying 10 for the blouse, you actually pay 15 or close to 15 for the blouse or the 20 dress actually cost you 30.
Now those are I would say external costs right, those are costs that your business has and that increases when you've actually laid out the money that you've laid out for the inventory that you have right, because you've laid out the price, you've laid out the money that you've paid the vendor, you're also a supplier but you've also laid out money to various other vendors to interact with whether the landlord, the shipping company, the advertising company, whether you use Facebook ads, Google ads, YouTube ads or whether you're paying someone to pack your orders, those are all costs right, that's money that you're laying out which has to be factored in to the cost of the merchandise.
Now I want to discuss with you something different and that is trying to determine what the actual cost of the items is when it comes to selling those products so we've already covered the variable and fixed costs and that should give you an idea how to do it and for example we're going to assume you're paying 15 for, I don't know, let's say a nice dress and your costs are 50% you know I want to make the math even simpler so you're paying 20 for a really nice brand new dress, your costs are 50% so now you're actually paying for that dress 30 your cost for that dress is 30, now you have fifty dresses and you're really excited you're going to sell them for 100 each and then when you start doing your sales and you want to know how much have you actually made on those dresses so you might say well, I'm selling the dresses for 100 so I've obviously made 70 a dress and now you are correct in, I would say like gross terms, in general terms yeah if you pay 20 your expense for that dress, your additional expenses adds another 10 to that dress, your unit cost is 30, you sold that dress for 100 you've made 70 on that dress but here's the thing what if you discover that throughout the course of running your business you actually only sell 90% of your products.
That means that the actual cost of your products now is 10% more than you thought it was and I’ll explain why. You have fifty dresses which costs you 20 each. You're not going to sell fifty dresses with this example, you're selling 90% of those dresses, in other words you’re selling forty five of the fifty dresses your five dresses and for whatever reason you're not selling; it's the size, the colour, the style or if you just have enough customers to sell forty five dresses as it may be throughout the course of running your business you're able to sell 90% of your merchandise right. Everyone of course is going to have different numbers, some people might sell everything, some people might sell a much smaller percentage of their merchandise but let's go for the example here we're going to go with the 90%.
So now you have, we said you spent 1000 for fifty dresses, so you spent 20 a dress but you're only selling 90% of those dresses, you're only selling forty five of those dresses so actually you need to divide the thousand dollars that you spent for those fifty dresses by not fifty, by forty five dresses. And that's going to approximately be about 22 and change per dress right, because you have a thousand dollars, if you multiply twenty times forty five that's nine hundred, another 2 a dress that's 990 so it's about your cost, it’s about, I would say about 22 and 20 cents per dress. So when you actually sell your dress, let's say it's 22 per dress now you haven't made 80 a dress and actually remember we’re adding another 50% but let's start out this way right, because we're adding 50% because if you add your costs then you haven't bother running your business but you're paying, now you've paid 20 a dress for your actual cost because you're only selling 90% of the dresses is 22 a dress so that means you're not making 80 gross you're making 78 gross and definitely there’s a calculator to verify my math and remember everyone is going to have different situations; some people will sell more, some people will sell less but here's the thing, in this situation here you know what a 2 dress, 2 extra cost per dress you know really isn't that substantial unless your profit margin because of your other expenses is very narrow then it does make a big difference let's say your complete net profit of running your business is 20% so if you actual cost is 10% or more now you've cut down your net profit by half.
And let's give you another example, let's say you buy, from my warehouse, you buy a box of five hundred pieces of jewelry, assorted fashion jewelry and you paid 200 for the five hundred pieces so you've actually paid 40 cents per piece. Now let's say out of the five hundred pieces, you're going to sell four hundred pieces so that means at 20% you haven’t been able to sell, so now each piece instead of costing you 40 cents, is going to cost you approximately 20% more because 20% that are left you haven’t been able to sell it so we have a little more than 20% but we’ll take 20% for now so instead of paying now 40 cents per piece you have actually have paid the same 200 but your cost per piece has increased instead of 40 cents, now you've actually paid 48 cents per piece. So the importance is that if you're planning to sell the jewelry for only 45 cents you would have to know that you need to raise your price so you'd sell that jewelry for a minimum of 50 cents, hopefully you want to sell for more because you want to make more money but what I'm trying to show you is that you need to make sure that you know what your actual cost per unit is when you set the price of your merchandise because whether it's a dress or the jewelry, if you're planning to only increase your prices, if you're able to say your price is over let's say 20% over your cost and you're not selling 20% of the merchandise then you're breaking even so in that case if you're not selling 20% of your merchandise you need to have a profit margin that's bigger, that's larger than twenty percent right so for instance if you bought a suit for 30, a woman's suit for 30 and you said you know what I'm happy making 20% on it so I'm going to sell that suit for 36 but you're not selling all of your suits and you're selling only 90% of those suit so instead of 30 now actually your cost per item is 33 so if you want to make twenty percent margin what you do is you have to multiply that thirty three by 20% and that's the amount that you would have and you know I encourage you to work on a higher margin.
I think if you're going to retail, if you have a nice boutique I think it's fair or you should try at least to work at 100% meaning 100% mark up or a 50% mark up. You know as a wholesaler I work in a very low mark up because I want to move my merchandise, I want to do volume and I want to allow retailers to make money.
Now some of my mark ups are higher, some are lower, sometimes they break even, sometimes I lose on certain items, sometimes I do pretty well on other items but as a retailer you do want to always aim high because while you do want to do volume but you also are going to be spending more time with the customers and you're going to be refocusing on selling up smaller quantities of items you need to make more per item as compared to wholesale who's got a larger volume. Now if you are a wholesaler or if you're selling on a wholesale basis then it's okay to make a very small amount per item, it is okay to make a very small mark up per item because you're doing a larger volume or at least you're aiming to sell a larger volume of merchandise.
So for example at my business www.closeoutexplosion.com, I'm okay with working with a relatively small margin because I am trying to do a lot of volume and that also enables my customers to have more space because if I buy a dress for 18 and I sell it for 20 you know what I might have only made let's say a small profit, I would say 12 or 13% mark up but my customer is getting an amazing deal they're getting about let's say a 200 dress for only 20 they could hopefully turn around and sell it for 80 or 100, 150 and maybe they could charge a full price at full 200 and my customer say wow I did so well in my store let me go back and buy more dresses from Donny Lowy so if you’re into wholesale I recommend working on a low mark ups you allow your customers or retailers or flea market vendors or online sellers to make more money and if you're a retailer then take your time don't rush to sell all of your merchandise quickly but instead focus on selling each item, focus on the customer relationship so you have a lifetime customer who is happy to buy the merchandise from you, give your customers a really good deal but they'll understand that you're putting a lot of effort into serving them, into giving them the best available merchandise that is in the market and for that effort and for your ability to supply the merchandise that they need you are entitled to work at a decent profit margin.
The next time you are in New York I would like to invite you to visit my warehouse. Thank you and have a great day.