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General Retail Business Issues/setting prices from manufacturing body/facial lotionsto wholesale

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QUESTION: Hello
I have a bath and body products line that I have started.I have sold at craft shows and online but that is "small potatoes" and I want to move into  retail stores.I now have an opportunity to sell at the retail level (health food and a homeopathic clinic) that are interested in my products.I have formulated a "recipe" and  manufacture  these  lotions myself.Since these are all natural, quality  ingredients, I would think the demand would be  good.
For example:At craft shows I sold an 8 oz bottle of lotion for $15.00. i think, however, the retail price would be  more in the range of $15.00-$20.00.If the mfg costs inc. packaging, ingredients etc add up to $1.50 per 8 ounce bottle and I am also the manufacturer, what wholesale price should I charge to these stores? Would I add in labor cost and then percentage or the labor would automatically be included in the  price? I get so confused with numbers that it gives me a headache!! I much rather  just  make the stuff!!! Also what is the difference between margin, profits etc.
I also need some type of formula  for the rest of my products.
Thank your for your time and this post!!

ANSWER: Hi Terry,

Well done on the plan to expand your business! Wholesale pricing and markup is probably the area I am most asked about - fortunately, I am also a manufacturer who wholesales as well as retails, so I see it from both sides of the fence.

I am excited for you, as your COGS (Cost of Goods Sold, or, your physical ingredient/product cost) is very low - just $1.50! That gives you a very viable business.

Now, retailers are going to want a decent margin, and you cannot set their RRP for you - they will set that depending on your wholesale price. So you don't need to worry too much about that for now.

Let's look at your margin v profit question - Margin is simply your profit expressed as a percentage. So let's say your costs are (example only):  $1.50 (cogs) + $70c (labour) + 10c (marketing) + 20c (expenses like power etc)...that means your total costs are $2.50. Now lets say you sell that for $7.00. That means your 'operating' profit is $5.50, which is a margin of nearly 65%.

But understanding all of that isn't really necessary. Here is a simple way to look at it. (all figures exclude any taxes)...I always recommend you work backwards...

Imagine the retail price is $15. You have the margin to support this retail price, and you will sell a lot more at $15 than $20, so you may find $15 is a solid Retail price. I will work on $15 for the purpose of this equation.  Your retailer will want to *at least* double their money. So if they sell to the customer for $15, they will want to buy it for $7.50. So now you can look at whether $7.50 is enough. WE know your physical COGS is $1.50, leaving you OPERATING INCOME of $6.00. Is $6.00 enough for you to pay your overheads, labor, rents, etc, and also make a profit?

The method above ensures you maximize your profitability. Many people actually tell you to work from your cost up - a common one I hear is tale your cost of goods (COGS) and triple it to get a wholesale price (one third for labor and costs, one third for profit). For you, that would mean $4.50, and that is too low!

You have the perfect price points to sell at $7 or $7.50 wholesale, and still do very well. I hope this helps answer or at least clarify your thinking!

All the best,

Stu



---------- FOLLOW-UP ----------

QUESTION: Thanks  for the  answer!! that  helps a lot. One more question that I forgot to include. They are also asking for a minimum purchase. Is there a standard minimum wholesale purchase?  Is $100.00 a reasonable  minimum purchase or should it be  more? Thanks again

Answer
The main reason for "minimum order quantities", or MOQs, is simply when you have a FREE FREIGHT arrangement with the retailer. So if you are offering free freight, you do not want to be shipping small orders. Generally, your MOQ should be around 10x your freight cost at a minimum.

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Stu Jordan

Expertise

Simply put, I help Retailers make more profit! You will NOT hear me talk about excessive stock control mechanisms, specialized POS software, or sales training. Instead, I am available to answer questions relating to retail fundamentals - the art of buying and selling - and making a healthy profit along the way. Areas of specialty include: - CASHFLOW - how to keep your business in the black (or get it out of the red!) - PRICING - strategies, margin, mark-up, wholesale to retail, etc. - PRODUCTS - what to buy, what to avoid. - PRESENTATION - the science of product placement! - SALES - how to grow these fast, and keep the cash register ringing. - AGED STOCK - a silent profit killer! How to manage this area of your business - SUPPLIERS - leveraging these relationships so you get more from them! - MARGIN EROSION - and how to prevent it. If you have any general or specialized retail issue, I am happy to help you out. Also happy to talk to manufacturer/wholesalers who are looking for advice on breaking their products into the retail market. Follow me on Twitter @retailguru, or check out my blog for other useful advice (free!) retailprosperity.com

Experience

15+ years experience in the Retail industry - unlike many experts, I have made my money from my own retail ventures, not from selling my advice! Over ten years of my retail life was as a troubleshooter - my job was to fix the messes! I have worked with a huge variety of retailers to turn their struggling businesses around, and have found there are a number of principles that apply to all types of retail businesses, from luxury boutiques through to 2nd hand stores. I own a successful retail business in New Zealand, which has recently been franchised. My success comes in retail from the same strategies I am happy to share with you. I am also the author of The Retail Prosperity System - a handbook for Retailers who want to make more money from their retail businesses. This outlines the strategies I have developed and used in retail myself.

Organizations
A number of Retail Associations, including NZRA, BNI (you would be amazed how networking can improve your revenues!), EMA, New Zealand Franchise Association

Publications
Author of The Retail Prosperity System, various forums and blogs.

Education/Credentials
Studied Law at Otago University, and let's be honest - nothing beats 15 years real experience in the retail world, including building my own successful retail chain from scratch!

Awards and Honors
New Zealand TOP SHOP finalist - 2010

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