Acceptable mark up

Hello,

I have produced a product which costs almost a £1 for me to make including retail packaging. I believe I can suggest an RRP of £8 based on similar products on the shelves.

I am trying to decide on a wholesale price per unit for the retailer and would like to know what percentage mark up is acceptable for the retailer?

I checked on a wholesale price of a similar item which is a £1 cheaper:
Wholesale £2.12 + VAT
Retail £5.89 + VAT = £7

So if I've worked that out correctly, we're talking 36% markup.

40% markup is what I was thinking anyway, but I don't want to be selling for £2.12 or £3.12 etc. There's not enough money for me, I don't want the retailer making all the profit!

So would a retailer be happy to pay £5 wholesale and sell for £8?

I'm not VAT registered.

 

[Faevilangel]

From what I have gathered, most large stores like Tesco and B&Q would want a 100% markup e.g. They pay £4 and sell for £8 but it will depend on the product, how much they can shift etc.

How many can you sell per week on average? 36% markup is about right but to make enough ££ you would need to sell a lot. Is there an opportunity to sell rights to one store? You would get a better price, or even launch a new product that is more expensive which would be your main money maker?

 

[Jeff FV]

So would a retailer be happy to pay £5 wholesale and sell for £8?

I'm not VAT registered.

I doubt it.

Depends what sector you are in, but I'd expect most retailers to sell at (at least) 2.35 times the price they paid you.

So for an item with an rrp of £8, they'd expect to pay you no more than £3.40. This still makes you a tidy margin (if your costs are £1). To be honest, you'll probably need them more than they need you - getting your route to market is probably the most critical factor with a new product.

Not being VAT registered will only make a difference if you are selling to other non VAT registered customers. If you sell to mainly VAT registered businesses then it would make sense for you to go VAT registered too.

Jeff

 

Thanks for the replies.

I would happily accept a £1 profit on each item if Tesco and B&Q were courting me! But as my first wholesale inquiry is from a fairly decent online retailer who are only wanting a small order to begin with I should really be setting a price according to their quantity.

I do see your point about needing them more, but you can't negiotiate up once you set a price, so the small retailer should really accept 40% mark ups and when they show some commitment by ordering larger quanitites then they can expect a 70+% profit.

 

[benjamin_c]

Set a price that gives room for negotiation, if you set a RRP of £8 you could set a wholesale of about £4.50 but go down to £2 if the order is large enough, you could also offer a discount to retailers who pay invoices within 30 days. still leaving you with a 50% margin, the likes of tesco and B&Q will squeeze your balls until you give it to them for a rock bottom price, i have a friend who supplies tesco and they always try and get you down by loads, but they do buy large amounts so it's worth keeping them happy, but they take ages to pay, it once took over 4 months for an inovice to be paid from tesco! now they usually pay him within 3 months but it's still a long time for a new small business, so make sure your cash flow can handle the long payment periods, i'm not sure what B&Q are like but i imagine they are the same. Good luck

PS make sure you are able to supply in the volumes the big retailers will buy in, they have hundreds of stores so if your product is something they think will sell then its likely they will take a few cases of it for each store, can you keep up with that kind of demand? they will want to know before they deal with you.

 

[Beachcomber]

The margins for wholesaling do not come from profit per item but profit per order.

You might not want to only make £2.00 per item but making a £2000 profit on a bulk order is desireable.

It's a similar problem you encounter with those who make their living making craft items - if you work out a decent price for an item you make based on an hourly rate you will come up with a ridiculous price no-one will pay - but if someone makes £200 in one day selling things they made pottering about in the shed a over a few evenings a week for a few months they will be happy.

 

Keeping up with demand is a daunting task, but I'm lucky that this particular business idea requires less of my manual labour. My other main job is photographer/ printer so I fully understand your point beachcomber!

I think I'm on the right track with pricing; £4.50 for small orders and a lot less for major orders. I certainly didn't get any favourable discounts for raw materials when I was trying to test the market, it was only when I took the plunge and decided to manufacture for the longer term that I got a price I could actually profit from.

Which takes me onto my next question.....

 

[MASSEY]

It depends on the retailer its pretty complex.

Take john lewis as an example, they by products off thousands of different companies. If john lewis like a product someone is offering they tell the product owner the price john lewis want to buy at. And i imagine its the same for most large retailers.

If you not vat registered by the way you cant charge vat.

If the product costs you £1 and there is a potential retail of £8 then i would not imagine you could shift them for more than £3.50 or there abouts.

 

[Jeff FV]

Hello,

I checked on a wholesale price of a similar item which is a £1 cheaper:
Wholesale £2.12 + VAT
Retail £5.89 + VAT = £7

Looking at the example above - which seems reasonable - the retailer will buy the item for, effectively, £2.12 (because if they are VAT registered, they can claim the VAT back) and sell it for £7. They are multiplying the ex VAT cost by 3.3 to arrive at the rrp.

Keeping up with demand is a daunting task, but I'm lucky that this particular business idea requires less of my manual labour. My other main job is photographer/ printer so I fully understand your point beachcomber!

I think I'm on the right track with pricing; £4.50 for small orders and a lot less for major orders. I certainly didn't get any favourable discounts for raw materials when I was trying to test the market, it was only when I took the plunge and decided to manufacture for the longer term that I got a price I could actually profit from.

Which takes me onto my next question.....

Your rrp is £8. Any retailer who is VAT registered will see £6.81 of this £8, paying the remaining £1.19 to the VAT man. If they pay you £4.50 for the item, the make £2.31 profit on the sale, which is a percentage profit of 51% or a profit margin of 33%.

The multiplying factor of £4.50 to £8 is 1.78. I do think you are trying to charge too much. As I said, in our sector the multiplying factor is typically (at least) 2.35 from ex VAT wholesale to retail price. This allows the retailer to double his money, after VAT. It is possible that some online retailers can work with a lower margin (fewer overheads etc.) but I doubt any bricks & mortar stores can.

I don't want you to price yourself out of the market - if you can make something for £1, offer it wholesale for £3.40 with an rrp of £8.

Jeff

 

[Blagger]

I would say the retailer would want a 100% mark up, once the product gets popular and competitors compete they would have enough margin to do so.

Suppose it would really depend on what the product is.

 

As I said, in our sector the multiplying factor is typically (at least) 2.35 from ex VAT wholesale to retail price. This allows the retailer to double his money, after VAT. It is possible that some online retailers can work with a lower margin (fewer overheads etc.) but I doubt any bricks & mortar stores can.

I don't want you to price yourself out of the market - if you can make something for £1, offer it wholesale for £3.40 with an rrp of £8.

Jeff

£3.40 with or without VAT in your example?

 

[Jeff FV]

£3.40 with or without VAT in your example?

The £3.40 was without VAT.

The numbers have changed slightly now the VAT rate has gone up - the multiplier is now 2.4 i.e the retail price will be 2.4 times the wholesale price (without VAT) that the retailer buys from you.

So, if the rrp is still £8, you sell to the retailer for £3.33. The retailer times this by 2.4 to get the rrp of £8.

When he sells the item, the retailer sends £1.34 to the taxman, keeping £6.66 for himself, thereby doubling his money. (If he's paid you any VAT he can claim this back)

Hope that makes sense!

Jeff

 

[Rpl85]

Hello,

Please could someone confirm that this is correct then?

Assume myself and the retailer are VAT Registered

RRP = £5.95 inc VAT
Wholesale price £2.48 exc VAT
Retailer gross profit = £2.48
Retailer gross margin = 50%
Retailer markup = 100%

Wholesale price exc VAT = £2.48
Direct cost to manufacture (exc labour, treat this as an overhead) exc VAT = 25p
My gross profit = £2.23
My gross margin = 90%
My markup = 887%

Thank you.

 

[GabrielPurdey]

It entirely depends on what your product is, if they can sell thousands a week then you would only need to be making £0.10 on each one, but if it is something that is aimed at a smaller niche and not everyone will buy it then the margins you are talking about seems fine. I am guessing it isn't that big if it only costs £1 to make, obviously how much space it takes up on their shop shelves will make a big difference to how much money they want to make on it.

 

[JamieM]

Hello,

Please could someone confirm that this is correct then?

Assume myself and the retailer are VAT Registered

RRP = £5.95 inc VAT
Wholesale price £2.48 exc VAT
Retailer gross profit = £2.48
Retailer gross margin = 50%
Retailer markup = 100%

Wholesale price exc VAT = £2.48
Direct cost to manufacture (exc labour, treat this as an overhead) exc VAT = 25p
My gross profit = £2.23
My gross margin = 90%
My markup = 887%

Thank you.

All looks correct to me except I make your markup 892%.

Nice margins! What kind of product is it?

 

[Rpl85]

Thank you for your response. I just did the markup on a calculator using the whole numbers and it comes to 892% like you worked out. The numbers in my post are from Excel and so I think it's just the roundings flowing through the slight difference.

It's a craft product. High margins are required to cover overheads as the product is relatively cheap yet also quite niche.