How to Calculate a Good Wholesale Profit Margin
Breaking into the industry of buying wholesale for your store requires dealing with inventory, calculating wholesale profit margin, and defining product markup, which are somewhat complex processes. Especially if you are a newcomer in this sector, you might encounter some difficulties in trying to grasp the differences between wholesale profit margin and product markup. In this article, we’ll discuss wholesale profit margins and mention a few fundamentals to minimize losses. Find out how to calculate wholesale profit margins and find the perfect prices, in order to make profits.
This is fundamental to understand because, at times, you could experience that certain products don’t sell as fast as you expected. Thus, it’ll fall to you to make some adjustments to the retail prices of the products you sell. So, knowing how to recognize a good wholesale profit margin will help you make the right choices.
What is a wholesale profit margin?
Simply put, profit margin defines how much money a business is certain to make for every product sold. It’s always defined in percentage and shows the profits after the ‘purchase and sale’ process is completed. However, you need to know two things. First, you can calculate the wholesale profit margin as a gross amount. Second, you can calculate it after you’ve deducted all the other expenses, such as staff, warehouse, utility bills, taxes, etc. Don’t overlook these details, because, without them, your business wouldn’t exist. Reaching the end goal of getting profits is impossible without these factors.
Having a good wholesale profit margin is great for the growth of your company’s profitability. For example, if you’d like to expand and need a bank loan, they will immediately check the profitability of your company. Unless you’re earning well by setting great profit margins, the chances of getting a bank loan are slim. Yes, financial institutions always ask around about profit margins, because they want to make sure your business is viable in the long run. Besides, if a potential partner wants to invest in your business, the first thing they’d ask is about how profitable it is. That being said, you now know that wholesale profit margins are essential to the financial segment of your company.
What is considered a good wholesale profit margin?
If you’re feeling doubtful about defining the wholesale profit margins, you’ll need to take into consideration a few things first. For instance, you can start by calculating the total costs of running your business. Besides product cost and shipping, you’ll need to write down the office and warehouse expenses, staff wages, bills, and other implied costs. Another important factor to consider is to scout the competitors. For some products, they will most likely show different prices, so using this data, you can adjust your prices accordingly.
As you already know, every product has a different profit margin. Again, this is largely related to the industry your company belongs to, so expect to know the average wholesale profit margin on most products within a few months.
How to calculate the wholesale profit margin?
There is a generally accepted wholesale profit margin formula that every reseller puts into practice. This allows us to find the average profit margin for your items, no matter the industry you compete in. You can simply divide net income by net sales. In case anything is unclear, let’s define both net income and net sales. Namely, net income includes all profits, excluding expenses such as shipping. On the other hand, net sales mean including all sales, without all the discounted products as well as returns.
In most industries, the average percentage of profit margins stands between 10-15%, but it can vary, depending on the industry, of course. The fashion industry, more precisely branded wholesale clothing has seen some of the highest average profit margins, compared to other business sectors.
The formula for calculating profit margin:
(Profit/Retail price) x 100 = Profit Margin
To put in numbers, let’s say you’re buying branded fashion items wholesale and get a handbag for €129 and sell it for €420, your gross profit stands at €291. To calculate your profit margin for this particular product, you need to divide the profit by the retail price, i.e. €291 by €420, which is 0.692 x 100, which gives the markup percentage of 69.2%.
How to calculate product markup?
What is product markup? In the wholesale industry, product markup is the result of the difference between the profit and the wholesale price you paid for a certain product. It’s essential to have a markup on all products simply because it defines the profits. Using product markups will also help cover all secondary expenses, such as staff wages and prices at which you buy the products. This is often called ‘fair markup on products’, since retailers such as yourself use these profits to take care of the most important expenses, such as salaries. While your customers will always be looking to buy your products at discounted prices, you will need to balance this demand with your company’s monthly expenses vs. profits.
Next, you’ll need to decide how much you want to markup any specific product. For example, if you are collaborating with a supplier of branded fashion items and you buy a handbag for €129 and sell it for €420, your profit stands at €291. Defining the markup percentage is easy. You need to divide the profit with the cost, i.e. €291 by €129, which is 2,25 x 100, which gives the markup percentage of 225%.
The formula for calculating product markup:
(Profit/Wholesale Price) x 100 = Product Markup
Always remember, there’s no average markup on any specific product. Every retailer defines their own price, although some luxury products such as branded and high fashion clothing have higher markup percentages and with it, profitability. This, since customers looking for high-ticket products easily spend more money and disregard discounts and special offers, due to them being financially more powerful compared to average customers.
Of course, you need to keep in mind that higher markups won’t always bring in profits. Here, it’s all about the number of the products you sold, meaning you won’t sell much if your products are more expensive in comparison to the competition. This is why you need to keep an eye on their product pricing and position your prices accordingly. Another important factor that determines product markup are rare, hard to find products. If your company is the only one selling a specific product on the market, you can set any markup you wish to. However, once your competitors start importing the same product, you’ll definitely need to start adjusting the markups.
How to properly price your products
There are other methods to use in order to put the best price on your products. We’ll name a few of these strategies, to give you more choices when it comes to this part of the finances. You might know a few of them already but haven’t used them before. Now might be the right time to start.
Check your wholesaler’s recommended retail price
Every wholesaler lists their recommended retail price along with the wholesale price on the products they sell wholesale. In most cases, retailers start with these prices, then check on their competitors, before they define the average markup price. It’s entirely fine to go with the retail price that the wholesaler’s suggested because they add those prices to give you a lead of what would be an acceptable retail price for the products you buy. In reality, it won’t harm your business if you try it out at first, before you define new prices, accordingly.
One of the most popular methods in the retail business is bundle pricing. You can offer multiple products to customers, increase sales, and double your profits. It’s easier to convince your returning customers to buy more products at once because they already know the quality of what you’re selling. Moreover, they will think it’s a better deal you’re offering, and increase their level of trust in you.
Premium pricing for high-ticket products
Customers willing to spend a fortune on luxury products won’t mind the higher markup percentage. As long as you advertise the product properly and are set to considerably increase profits, you should do fine. However, many consider this method a ‘double-edged sword’. This is because if you fail to promote it as a luxury item at a premium price, they might turn to the competitors.
Odd-even pricing method
Many retailers, both small and big have been employing this century-old tactic. Selling products at $59.99 instead of $60 is a visual trick that convinces customers into thinking it’s cheaper. Apparently, they like products ending in an odd number, so it would be great if you can try out this method on your products.
Special offers and discounts
Yet another great method to double sales and profits is to combine products that usually go together. For instance, if you’re selling branded products and the handbags sell the most, you can combine them with same-colored shoes and label them as ‘special offer’. You can ever offer real discounts on the shoes, in case they decide to buy the first bag. Either way, the profits made from selling the bag will make up for the smaller profits due to offering a discount on the shoes.
To sum up
Now that you know the common formulas for calculating wholesale profit margin and product markup, you’re ready to put the prices on your products. You can try any of these methods for your company, but you need to be careful. The safest way to try anything is by testing it on a single product at first. More importantly, you should have in mind that some methods might work perfectly, while others won’t work at all. The important thing is to test the most applicable methods for your store and go from there.
All the knowledge you’ve gained in this article can help scale your company faster than you’ve expected.