General Retail Business Issues/Wholesale pricing when dealing with a variety of retailers
Hello Dr. Dion,
I am in negotiations for establishing a subsidiary for a foreign manufacturer where I would have exclusive distribution rights to North America for a particular product line that we feel can undercut the prices of our competition.
I unfortunately cannot go into details of the product themselves without marking this private. But I think my questions could benefit others, so what I can say is that our target retailers are Costco, Wal-Mart, Target, Home Depot, as well as an e-commerce distributor.
According to financial reports, these retailers have significantly varied gross profit margins (14%-35%). This leads me to two questions that I think many start-up wholesalers must run into.
1) Let's assume that the products sell at MSRP and we set an MSRP for a given product at $100. Considering we are selling to a variety of retailers, how do we set our wholesale prices? Home Depot could only earn their 35% if we sold the product at or below $65, whereas Costco makes their 14% even if we sell the product at $84. Do we sell the same product to each store at a different price or how do we manage this?
2) The desired gross profit margins are based on the actual sale price, not the MSRP. And we can generally assume that these retailers, being mostly discount stores, will offer some sort of discount off the MSRP, right? If we are targeting a store who reports a gross profit margin of 30%, it would be easy to calculate what wholesale price achieves that for them using the MSRP as a denominator, but how do we account for the likelihood of a difference between the MSRP and the actual sale price when setting our MSRP?
Thank you very much,
If it was only that easy! First of all, in the United States, you have to offer the same wholesale cost to every customer, the only thing that can modify this is the quantity that is ordered. (you can charge $50 each, but if you buy over a thousand that cost can drop, and if you buy over ten thousand the cost can drop further). This is because there are laws in the US that state that you have to offer essentially the same deal to every customer and only volume can mitigate this price. So your problem will be just what you identified. Costco, because they operate on a 14% margin will take a product that costs them (wholesales for) $25 and sell it for $29.00, while Wal-Mart will sell it for $32.00 and Home Depot at $38.50. So, your MSRP is almost mute as if you sell to Costco or Wal-Mart you will be at the mercy of their discount and margin structure. You simply cannot have different wholesale prices for different MSRPs and customers.