How to maximize your profit margins as a wholesaler
One of the main challenges of wholesale companies is choosing the right pricing model. Setting the right price for a product is important for all businesses but especially for wholesalers, due to their position as a the ‘merchant middlemen’. Wholesalers typically buy large quantities of goods from manufacturers to sell them to other businesses or retailers in smaller quantities.
During the covid-19 pandemic wholesalers could have seen the demand for their products change. Most of the time, the change in demand fell into three different categories according to a study of McKinsey. Wholesalers either saw their demand drop sharply, increase explosively or experience irregularities. One way to deal with such changes is to use data and analytics to set the right price.
But what is the right pricing model for wholesalers? Here are 5 models, ranked from good to best. For maximizing margins and sales to ensure that wholesalers stay resilient during times of changing demands.
#5. Competitor-based pricing model
A Competitor-based pricing model is basically like cheating on a test in primary school. For this price model you look at the prices of your competitors for the same (or similar) products. You hope that they have done their homework properly and that their answers (read prices) are optimal.
For example, competitor A has set a price of 25 euros and Competitor B has a price of 30 euros. With this model you will opt to choose a price between 25 and 30 euros to ensure that you’re similar priced as your competitors. However, it’s easier than it seems.
Proper “cheating” is not always possible since most competitor wholesalers have their net prices behind logins to avoid transparent prices. We have to find creative solutions to find the right competitor prices to act on.
#4. Cost-plus pricing model
A good pricing strategy to use for wholesalers is a cost-plus pricing model. The price of the product is set by looking at all the costs for the specific product plus an additional profit margin. This could be 5% but also 50%. A pro of this pricing model for wholesalers is that they ensure a profit on all the goods that they are selling.
However, this pricing model may not be ideal for products that could expire fast or for which the producing price is fluctuating often. Therefore, it is a good pricing model, but not the best.
#3. Surge pricing model
Another pricing model that could be beneficial for some wholesalers is the surge pricing model. Surge pricing occurs when the price of a product or offering increases when demand increases. When demand is low the price of the product is low. If demand is high, the price of the product increases exponentially. A famous company that uses this model is Uber. When a lot of taxi drivers are available the price of a ride is low, but when there aren’t, the ride is rather expensive.
This pricing model is useful if the demand for a wholesaler’s product is not always the same but experiences ‘peak hours, days, seasons, or weeks’. However, this strategy could also cause a lot of backlashes from consumers if prices increase too steeply.
#2. Customer value-based pricing model
A customer value-based pricing model works by determining the true customer’s willingness to pay for a particular product. This could be determined by looking at the data and see what the optimal price is for customers – to maximize margin, enter the market or to drive the most amount of traffic. This best customer value-based pricing models price a product exactly at how much the customer values the benefits of your product.
#1. Key-value Item model
For wholesalers it is not always important to get the maximum margin possible om every product. Sometimes it is better to drive customers to your store with a sharply priced product, knowing that customers spend more when they are already buying from you. Such sharply priced products are Key-value Items, products of which consumers remember the price. For example, if a supermarket has a discount on a Key-value Item such as cheese, then it is more likely that customers will buy more than only cheese at your store.
Wholesalers can have a much larger margin on these other products, also known as ”foreground” or ”background” products than Key-value items. To compensate for the lower margins on key value items. The main goal of the Key-value item model is to attract customers with good deals on Key-value items and to maximize margin on products that are less price sensitive.
There are many different pricing strategies that wholesalers could choose from. A lot of them work well, but what is best for organization A is not necessarily best for organization B. SYMSON has experience with wholesale businesses, read here a case study about how we identified the right pricing strategies for a technical irrigation system wholesaler.
SYMSON makes it easier for pricing and data managers to implement pricing strategies by making use of AI & Machine learning. It helps you to automate the mundane tasks and seize opportunities that may not have been possible in the past. Curious to how we could help you? Let’s plan a call!
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