Recently, I had coaching calls with two talented makers. Each maker has a beautiful and unique product line. But both had the same problem:
“I’m using a formula to calculate my wholesale and retail prices. But after I tally my costs, and add in the wholesale price, I feel like the retail price ends up too high.”
The common answer to this problem is something like: “Don’t doubt yourself! Just look at [fill in the name of super well-known brand charging a lot.] Your costs are what they are -- you need to make a profit.”
And while that might be easy to say, I believe that for many makers who are trying to grow their wholesale business, it’s not helpful advice. Independent store owners aren’t buying for pleasure. They’re creative, hardworking people facing very real challenges, like paying the rent on their shop. They need to purchase things at a price that they know will sell. Your line, in turn, has to meet that need.
So today I want to share a few things to consider if you feel like the retail price for your handmade line ends up too high, once you make “room” for both your costs and the wholesale price/margin.
First, keep in mind these pricing basics:
You don’t have a business unless your price is higher than your costs.
You also don’t have a business if you’re not making sales.
Product matters more than price.
Always, above all — quality and uniqueness are more important than price. So the development of your art, products, and vision will always matter more than your pricing decisions.
Pricing is an art, not a science.
That means there is no “right” answer to whether your prices are set well. And your intuition about it may be your best guide.
The price on your website should never undercut store owners’ retail price.
Most handmade lines should shoot for their retail price being 2x their wholesale price. This isn’t true for every line -- some lines really need to be at 2.2x or higher -- but it’s a good rule of thumb.
The route to making sales isn’t simply cutting your price.
This isn’t a race to the bottom, in which the maker with the lowest price wins. But lines with pricing that doesn’t fit with their product, brand, or marketing will struggle.
Now, let’s look at what happens when you end up with a price that feels too high.
Many makers use this formula to arrive at their retail price:
Materials + Labor + Expenses + Profit = Wholesale Price
Wholesale Price x 2 = Retail Price
BIG caveat here -- this is certainly not the only way to arrive at a price. And in the coaching that I do with makers, we talk about many other approaches to setting prices for their wholesale line. Brand, product mix, market, competition, your long-term vision, and many other factors should all play a role. We discuss those in more detail in the book we wrote on launching products.
That said, I know that many makers use the costs-based formula above. And it’s a crucial calculation to do when deciding on a price, even if you’re taking other factors into account. So today I want to focus on the situation when you, as a maker, have arrived at a price that you think is correct in terms of your costs, but it feels too high to you in terms of your market.
5 options if your retail price feels too high, but your costs make it tough to lower:
Keep the price high.
Consider your price from the standpoint of stores you’ll sell to, your current customers, and your gut sense. Often, if you think your price is too high -- it is. That said, whether to keep the price where it is or try to lower it is a strategic decision, meaning that both routes could work. You could certainly keep your retail price higher and hustle on the storytelling and brand-building end of things to really "earn" that price. That means stellar product photos, incredible production story and photos, and a super-strong product. Plus, of course, know that your market may be a bit smaller and you may have to work harder for each store account.
Take a hit on margin for now, while you build wholesale for later.
Another option is to do what many makers do -- accept a lower margin while you're in these initial stages of growing wholesale. So drop your price a bit, even though it won’t leave room for profit in the way you’d ideally want. This often makes the most sense if you think your costs will come down with higher volumes. The plan would be to take a lower margin now, build your base of store accounts, and then as your costs come down with those higher volumes, your profit per piece will go up.
Of course, if there are immediate ways to get costs down, that could help a lot, too. You may have thought of everything, but it’s something to really brainstorm about. Are there alternative ways of producing your product? Different materials you could use? Elements you’ve always included but may not actually be crucial? A different supplier?
Sell only a chunk of your line wholesale.
You can also consider limiting your wholesale line to just a sub-set of what you sell retail. Perhaps some of your products have higher margins than others? Then consider making those higher-margin products your wholesale products (and not increasing the retail price) and leave the rest of the line to be retail-only.
Hold off on wholesale.
I think it’s important to have “on the table” that wholesale isn’t right for every maker. Often, one of the above solutions will work beautifully and even a maker with high costs can thrive in a wholesale setting. But wholesale isn’t right for all makers -- and sometimes giving yourself permission to focus on the things that are already working for you is the right way forward.
Sometimes makers doubt themselves and underprice out of fear that their line isn’t good enough. (Don’t!) Other times, makers bury their heads in the sand and hope they’ll sell their product, even with a price they know is too high. (Don’t do that, either!) Only you can say for sure if you’re doing one or the other.
The key thing to remember is this: pricing can shift and evolve over time. It will remain an open question -- and it’s wise to use both careful calculations and your intuition in answering that question over time.