Question

Topic: Strategy

Pricing Online V Offline

Posted by Anonymous on 9/1/2013 at 7:03 PM ET 25 Points
i have just commenced an online business, my product will predominately in the early part sold online however as its a physical product that i am holding stock, i wanted to approach some specialist retailers to purchase my product at a wholesale rate.

the product will be sold online for $7.50.

if i sell to wholesale in tiered fashion.

i.e 1-50 = $3.00 ea
50-200 = $2.75 ea
250 + = $2.50 ea


knowing that the product will have the website featured
on the product itself and consumers can jump online and buy it for $7.50 online, should the retailers be advised to sell it cheaper or same price, or flexibility to sell for say $10.00 and bank on the fact that people will buy on impulse?


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RESPONSES

  • Posted by Jon Hungerford on 9/3/2013 at 7:34 PM Accepted
    You're giving those retailers a lot of margin. That may not be a bad thing in your industry, but it's backfired for us in the past.

    We import products. Initially we sold only direct to end user, but after a while we started chasing some of the big fish (distributors). We had a fairly good understanding of what gross margin these distributors work on (it's pitiful, if your branch averaged 15% you were doing well, most branches were between 7-12%, some bigger ones worked on 3-5%.)

    So we thought we would be nice and give these distributors some good, sharp pricing, which meant they should have been able to sell our products for around 30% GP. We also thought this would benefit us, in that the distributors would want to push the products that gave them a higher profit.

    Unfortunately, we totally underestimated the apathy and ignorance of wage slaves (the people running the distributor branches). All that happened was that these distributors slapped on their usual 5-15% profit margin. They totally undercut our price to the end user, which meant we had to react to keep our larger customers.

    After the dust had settled the average sale price of our product had dropped by about 40% and our brand was viewed as the cheap alternative. Even though it was at least as good as anything else on the market, customers only bought our product when it was considerably cheaper than anything else.

    So lesson learnt. We still deal with these distributors, but now we only give them their "slave" margins. It limits what they can sell the product for, and protects us and our brand.

    This may not be an issue for your industry. But I would still recommend finding out what margin they work on, figure out what price point you want your product to be represented at, and that will give you your wholesale price.

    The wholesalers will then work out what they want to sell it for. Any distributor we have dealt with totally ignores RRP, they just work on margin. Therefore, the only way we can control the market price is by the cost price.

    Again, this is a specific bastardised trade industry in Australia. Could be totally different in a niche industry in another country.
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