One of the biggest mistakes small and medium sized business make when pricing their products is the understanding of sales channels and how folks buy in your particular product offering or setting a good price for your products. Its great to invoice the store that ultimately sells your product but wouldn't it be easier to sell to the person that sells to 50, 100, or even a 1000 stores. With the same effort, almost the same direct contact time, and you've now gone from selling a few units to a real legit manufacturer. This is the way most manufacturers that I have worked truly grow. There are exceptions but most product makers take it to the next level after they establish a strong distribution channel. OK, here's the good stuff; So what does this have to do with pricing? When you initially price your products or quote end-sellers, and end-users, remember what your industries distribution channels normally marks up products. In retail stores, it is generally keystone+ which is 50% but most want a little more. Distributors generally need a 20-40% margin and Sales Reps need at least 5-15%. With this being said, a product that retailers plan on selling for $520.00 should be made with good margin for around $200.00.
Real World Example:
- Manufacturers Sale Price: $200.00- This is your price with the products desired markup.
- Sales Reps Commission: (in this case 10% of $200 = $20- This must be added to manufacturer mark-up since Rep commissions will not be reflected in pricing the distributor receives.
Reason for Reps; Helps find and sell to best distributors, helps represent your brand.
- Distributor Markup: (in this case they will markup your price by 30% so your new price to end-stores is now $260.00. Reason for Distributors; Sells to multiple retailers or end-stores, can ship and maintain your product/inventory.
- End-Store or Retail Store Pricing: (in this case they mark up product by 50% of distributor pricing so final end-sellers retail price is $520.00. on something you sell for $200.00
Many manufacturers would make the mistake to sell this product to retailers for $400 (50% margin) not realizing that when later approached or when negotiating terms, there will be no margin for reps or distributors forcing you to lower you manufacturing margin. MANUFACTURES TAKE AWAY: Price your products 30-40% higher than you normally would allowing room for additional sales channels. Higher if you can. If you do this, you will be able to grow faster and if needed, you can lower your end-store retail without compromising your original margins. It will also allow for adding a promotional budget to products by adding a percentage of sales. REMEMBER, price with all existing and future sales channels in mind. We hope this helps!
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