The Pricing Dilemma: Wholesale vs. Direct-to-Customer

Posted by Nikhil Kapoor on

As disciples of business, we all recognize that pricing tells a much larger story than just how much something costs. It shapes our customer’s perceived value and it can determine the difference between a high lifetime value of a customer or a low one. Pricing is also the lifeline of our business that can practically sustain growth or bleed otherwise. I however, recommend to not confuse pricing with profitability, as there are many more factors that affect it and pricing is just one of them.

There are 2 basic pricing strategies based for wholesale (selling through traders and distributors) and Direct-to-Customer (selling through own sales team and channel). Many brands aspire to exercise both and land up confusing up the gross margins. Below is what we recommend our clients on how to approach the pricing in thinking a company’s bottom line.

1. Wholesale Pricing

Old schools advocate a cut-and-dry formula of

raw material + manufacturing cost + expense + profit = wholesale price

However, to fully compete in today’s markets, we must treat our business into 2 parts: (a) the product itself and (b) strategy for selling the product. By resisting the urge to merge the both, we can optimize the operations and scale much faster. Factors to consider for wholesale prices:

a. Competitive Matrix

If we are selling to distributors and traders, our brand will be sitting on shelves next to our competitors’ brand and hence, it is critically important to understand them in detail. A comprehensive list of your competitors, their target customers, types of products, length of time in business, place of manufacture, distribution channels, brand value and of course, its selling price.

Even though we might think “my brand is so unique, no one else is doing this”, our customers always have a choice to buy from our competitor. This competitive matrix will guide us through the pricing journey and assist us in marketing and sales outreaches.

b. Manufacturing Cost

We need to spend a solid amount of time researching and understanding the manufacturing minimums, lead times and price breakups first-hand. Though the upfront cost of this will frustrate us, but it saves a lot of money for us down the road. So, let’s get on the phone and in discussions with the manufacturer, now!

c. Perceived Value

How much does your branding activities add value to your product? What does your marketing POSMs and website look like? How is the packaging material and delivery setup? Many times, it costs less to product that splendid brand and customers might be willing to pay more for its perceived value.

d. Buffer

We all know that traders and distributors like discounts and they can also be our faultfinders, when it comes to shipping and logistics issues. Hence, it is strongly advised to build in a buffer of an approximate equivalent to the commission charges altogether.

e. Labour

Reinvesting the earning into brand growth is very important. Despite the eagerness to start paying ourselves, we need to keep in mind that our businesses will not be profitable for first few years. In a start-up, we might need to forego a salary or two, if we must struggle selling our products. If we need to start paying ourselves off the bat, let’s keep our finances lean and consider seeking start-up capital.

2. Direct-to-Customer Pricing

Pricing with our own sales channel setup might seem like an easier task. We might tempt to think, “I will just increase my wholesale price by a multiple of 1.2 or 1.5 or 2.0 and viola – create a direct customer price”. However, this can be very tricky, especially when we need to stay competitive and consider inventory liabilities, all while incurring a higher selling, marketing and administrative spend. Factors to consider for direct customer pricing.

a. Markdowns

In the beginning, many of us assume that customers are willing to pay full price and hence we minimize discount estimations. We need to think ahead about sporadic sales and seasonal markdowns and determine in advance what discounts we will offer in the whole year. Now account for those margin differences in your pricing scheme.

b. Shipping

Many brands build in their shipping costs in their final product price. This should however be done only if the difference between your wholesale price and competitive price allows you to do so. Or else, shipping is technically its own line item that should affect company’s overall gross margin, not a single product’s margin.

c. Packaging

Just like shipping, the packaging costs also factors into gross margin analysis and not product margin. It is a line item under marketing costs and needs to be kept low, by minimalist approach. You don’t necessarily need to include freebies and extra layer of packaging, just when it is still avoidable.

d. Suggested Selling Price (SSP)

If we are selling through multiple channels, we need to price our product in the own sales channel equivalent to the SSP that other traders or distributors are selling at. We need to be aware of the markdowns of our traders and distributors and settle our price adjustment accordingly.

e. Loss Leaders

There isn’t any one-size-fits-all approach to pricing and we need to analyse each product to be able to price some products higher than others. Our pricing strategy might include a range of low (20%), medium (60%) and high (20%) priced products. If we need to be take a margin hit on a particular product, i.e. be the loss leader, we would choose to make it up by slight increase in high volume products.

As an operational thought partners, we at The Blue Ingredient Co. advise most of our clients with a more customized solution and pricing strategies. A very fine balance is required between the costs of marketing, new hires and growth stage reinvestments and among other expenses that sales does not necessarily cover directly on.

About THE BLUE INGREDIENT COMPANY

We are a team of experts in Food Technology, Business Management and Workforce Planning, with the passion to achieve results for our clients. We connect global expertise of food ingredient manufacturers with the best practices of food manufacturers. We offer various consultancy services to our client namely the management, strategic, new product development, marketing research, sales and business development, human resource planning and many more. For enquiries, please write to info@theblueingredientcompany.com

(Source: makersrow.com)

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