Find your pricing sweet spot
Getting pricing right is one of the most important factors that will determine whether your wholesale business is profitable. Price too high and you could price yourself out of the market. Price too low and you will struggle to recoup the cost of goods sold (COGS).
The cost of materials, general market prices, and market demand are just a few of the factors that should be considered when deciding pricing. To make sure you don’t lose money on a product line, you’ll need to set prices that allow you to surpass your break-even point – the level at which sales revenue covers fixed and variable costs.
To calculate your break-even point in sales dollars, divide fixed cost by contribution margin:
Break-even point (sales dollars) = fixed costs ÷ contribution margin
Where: Contribution margin = sales revenue – variable costs
You can calculate your break-even point collectively for your entire product mix, or per product line. When calculated per product line, the result will indicate the sales volume that must be attained for that particular product line to be profitable.
Ideally, this analysis will be run prior to launching a new product line to verify its feasibility, and on an ongoing basis. The break-even formula accounts for all fixed and variable costs. So, if you aren’t reaching your break-even benchmark, you need to dig into the factors preventing you from doing so. Ask yourself this set of questions after your break-even analysis:
- Are costs too high?
- Are prices too low?
- Does this product line have the potential to be profitable?
Keep in mind that a break-even analysis only provides a bare minimum performance guideline for profitability, but does not necessarily help you pinpoint optimal product pricing. To offer the best price at the best time, you need to have real-time data on costs of inventory, labor, shipping, and customer demand.
To stay on top of these various data points, many companies rely on software that offers pricing functionality and reports. With QuickBooks® Enterprise for Wholesalers, for example, the landed cost feature factors in freight, duties, insurance, and other expenses, so that pricing can be informed by true product costs. Users can also take advantage of account-based reports to easily see which customers’ accounts have been most profitable, which customers pay on time, and where it is beneficial to offer discounts and promotions.
Remember, pricing is a process, not a one-time exercise. With fluctuations in procurement costs, inventory management, or changes in market demand, pricing needs to be changed as well.