Pratikkumar P. Gaikwad | 10 min read | Aug 26, 2020
Pricing is the mechanism by which a corporation sets a fixed price to market its goods and services. This price comes when weighing a few factors: how much it costs to manufacture the products or services, the demand and conditions; the company brand; the competition; the quality of the goods and services; and how much customers can get the goods or services for.
Pricing is one really critical marketing factor. Wholesale companies will need to choose the pricing approaches that will help them to develop and evolve in the long term. In reality, how you sell your goods and services will decide whether your wholesale company can remain open or flop because of poor profits and potential bankruptcies. Here are four of the best wholesale pricing techniques you can use to prevent setting up your company for failure, with the benefits and drawbacks of each.
2. Absorption Pricing
Absorption pricing is where you are factoring in the costs associated with the sale price of a product, including the proportion of the fixed costs and the profit margin. It is referred to as “absorption” because all costs are absorbed in the final price of the product.
To use the absorption method to measure the final price of your items, here are the steps you need to take.
- Calculate the variable cost per each unit of the product.
- Calculate the overhead costs. Such as the recurring running expenses, which can included (but are not limited to) insurance , repairs ,transportation , and employees’ salaries
Total Overhead cost = sum of all operating costs = electricity + repairs + storage fees + workers’ wages
- Calculate the administrative expenses that you intend to pay during the manufacture of this product.
- Find out the profit margin you want to earn from selling your product.
- Once you have all the values put it in the following formula
Absorption Pricing =
Let us understand this better with an example
Total Overhead cost= $40,000
Administrative expenses= $30,000
Variable cost per unit= $30
The company produces 20,000 units, then according to absorption pricing;
Profit margin = $20
Absorptiont price = $30+ (($40,000 + $30,000) ÷ 20,000) + $20 = $53.5
Benefits of Absorption Pricing:
- Absorption Pricing gives one an easy way to determine the selling price. It is a basic formula that is easy to understand and does not require complicated comprehension or difficult calculations.
- As long as the inputs received in the formulations are correct enough, the marginal benefit is guaranteed to the company.
Drawbacks of Absorption Pricing
- This approach does not take into account the competitors and their prices. You could end up charging far lower or higher than your rivals.
- Also, this approach does not consider the price the customers will be able to pay for the goods. Your price may be too high for your consumers to end up shopping from other outlets.
3. Demand Pricing
Demand pricing is sometimes referred to as market-based pricing or customer-based pricing. This pricing approach uses the consumer/market demand for a product or service as the key factor in determining a price for a product or service. Often referred to as competitive pricing it is influenced by market demand which is focused on the intrinsic importance of the good or service. Prices of goods or services may rise due to bad weather, public holidays, or in the event of natural disasters. The price of a good or service rises as there is a probability that the demand will also grow.
There are many ways in which you can use demand pricing:
This pricing strategy is being used by companies with a strong competitive advantage. They enter the market with high-priced goods and services. That is to get the most money. In order to get an immediate return on the cost of production before other companies can enter similar, cheaper products or services. Later in the sales process, firms will slowly lower their costs in order to satisfy consumers with more modest food preferences.
This strategy focuses on setting rates below a certain amount as businesses assume that they have a psychological effect on customers. It is a popular pricing strategy used for companies. The slight price gap is a big difference for consumers. For example, an object priced at $399.98 can be viewed as much cheaper than a good or service priced at $400.
Often referred to as product bundling. This technique is used when two or more goods or services are sold together as a package at a single price. These product bundles come in two types: plain bundles are goods or services which are offered and purchased only as packages; and mixed bundles which are items or services which can be purchased and sold as packages or as individual items. Typically the price of the package is cheaper when the goods or services are obtained individually.
This pricing strategy makes use of low prices to enter a new market or to launch a new product or service. This strategy is used to encourage customers to support a particular product or service. It also serves as a disincentive to the competition. To prevent them from entering the market with a similar product because they will have to lower their prices. Once a customer base has been established, you can subtly move your prices upwards to a moderate price for a longer-term strategy.
Benefits of Demand Pricing:
- If applied properly, this technique will improve the loyalty of your consumers to your company. They buy from you as they put a high value on your goods, resulting in repeat business.
- Repeat sales with the clients mean a long-term rise in earnings.
Drawbacks of Demand Pricing
- Since there is no fixed calculation you can use to measure value, calculating the worth of the goods is always a daunting challenge.
- Another problem with this approach is that it involves depending on the expectations of the client that can change sustainably. Two consumers can have very different opinions on the same thing. If you underestimate the view of your client, your pricing approach would fail.
4. Competitive Pricing
Competitive pricing involves the use of wholesale price techniques focused on one’s own competitors. This wholesale pricing policy is based on the assumption that rivals have already refined their pricing strategies on the basis of existing market conditions. This pricing strategy is often used for companies offering precisely the same or related goods and services on a given market.
Loss leader pricing is a pricing tactic that is popular with customers as it ensures that wholesalers and distributors are offering goods at a reduced cost and at a disadvantage. For this tactic, the goods will be sold below the level paid by the rivals. Although you might be causing profits on such products, the profits may be offset by increased sales of valuable items from the consumer. Loss leader pricing can be competitive for products that need re-purchasing, such as soap dispensers that only work with a limited re-fill kit. The dispenser may be sold at a loss in order to create intermittent demand for refueling, generating a constant stream of revenue for the retailer.
The price below your rival depends on your resources. If you can maximize the output without increasing the cost of production to a significant degree, this might be a reasonable option for you. However, there is a possibility that the profit margin will drop and you will not be able to recover the sunk cost and may face bankruptcy.
In hyper-competitive markets with the same or very similar goods, price matching is a technique used to draw and retain buyers. Wholesalers and distributors agree to meet prices set by a rival competitor after receiving evidence that a product is offered at a cheaper price from another store or manufacturer. When you set a price equal to that of your rival, the differentiating variables will cease to exist. The emphasis turns to the product itself, and if you can actually deliver more (and better) features, it’s a win-win for you, and your rivals will fall behind you.
Few stores may also retroactively match pricing after delivery for a short period. That is also called price adjustment. The customer gets a refund equal to the difference between what they have spent and the actual purchase price.
Premium matching is another wholesale pricing approach that relies not on goods but on quality. Wholesalers and retailers using this approach seek to combine premium offerings such as free delivery, flexible return, and swap plans and limited warranties as a means to stay profitable in a fragmented marketplace.
Many value matching strategies include marketing a similar commodity that is distinct from the market in a manner that lets buyers believe like it’s worth the higher price.
One firm that has effectively implemented this approach is Apple through the sale of its mobile goods, i.e. the iPhone. iPhones are probably the most costly smartphones on the market today, at their performance level. Yet millions of people around the world are still purchasing iPhones because they feel it is a high-quality device.
Benefits of Premium Pricing:
- By luring consumers away from your rivals, you will achieve a greater market share and thereby influence the competition.
Drawbacks of Premium Pricing:
- Using competitive pricing approaches such as the loss leader strategy will lead to losses rather than gains, particularly where goods are priced at rates that are below cost.
- Using this technique needs a large amount of data collection because you need to have detailed knowledge of your rivals to predict shifts in their pricing as they decide to change their prices.
5. Geographical Pricing
Geographic pricing is, as the name suggests, a pricing model where the ultimate price of the product is determined on the basis of the region or place where the product is being sold. If an organization operates within a country in multiple countries or multiple regions, so regional pricing must be applied in accordance with local tax laws and local requirements.
Point of production pricing
The seller quotes the sale price at the point of manufacture in a commonly used regional pricing technique, and the customer chooses the mode of shipping and charges all the freight costs. This technique, generally referred to as FOB factory pricing, is the only one in which the retailer does not pay all of the freight costs. The price shipped to the customer depends depending of course on the freight prices.
Uniform delivery pricing
Again a form of geographic pricing where the prices are held the same, irrespective of the potential geographical demand variations. This is extremely helpful because the business needs to keep the sales price in place and does not want to risk its market value due to penetrative competition or would not want to trigger an internal battle with its own distributors.
Zonal pricing, as the name implies, is a form of regional pricing that uses zones rather than regions to discriminate between the offered rates. When shipping distances rise, costs increase. Often this is achieved by drawing clustered circles on a map with the center plant or warehouse and each circle representing the price zone boundary. Instead of using circles, price lines that are irregularly shaped can be drawn representing location, population density, transport networks, and shipping costs.
The term “zone pricing” can also refer to the process of setting rates that reflect local economic pressures, i.e., the supply and demand market powers, rather than the real transport costs.
A seller may be able to pick up some of the freight expense to enter distant markets. Therefore a supplier will advertise to the consumer a shipped price equal to its factory price plus the freight costs that will be paid by a competitive retailer situated close to the consumer under freight-absorption pricing. A freight-absorption policy is being implemented to offset the economic drawbacks of FOB prices for factories. Business is at a competitive disadvantage of FOB factory quality as it wants to sell to customers based in markets near the plants of a rival because customers pay the freight costs under FOB factory pricing. A local manufacturer has an edge over more distant suppliers – for freight costs at least. Owing to variations in freight prices, freight absorption erases all price advantage. This amounts to a discount on price which is seen as a sales strategy.
Benefits of Geographical Pricing:
- Using the system of origin FOB ensures you get similar income for the same product irrespective of where the customer is, precisely because they take care of the delivery.
- Using the uniform method of delivery you supply all clients with the same level of service. It’s important to handle all the customers the same as this helps promote faith and loyalty.
- You don’t risk money by using the zone pricing system, since you increase rates based on how far the customer is.
- If you wish to move into other markets and extend your scope it is best to use the freight-absorption process.
Drawbacks of Geographical Pricing:
- Under uniform delivery pricing, you risk losing money selling to far distant consumers.
- In the zone pricing system, consumers that are outside the limits will be charged more. You may lose their business if they are able to find a vendor closer to their place.
- Under the freight-absorption process, you may lose money in the long run if you choose to pay for shipping costs.
These different types of pricing techniques are those that you can use to see what works for your company with your wholesale selling, and which ones to disregard. For example, when used in a contractual agreement, the cost-plus pricing strategy is more effective while a demand-based pricing strategy may cause customer dissatisfaction and threaten your customer loyalty. Be sure that you closely research the responses of the industry and consumers to other goods and determine what you expect to get from your company and seek to do it with the appropriate price strategy.