How to calculate a wholesale price

A wholesale price is not your retail price halved. It is worked from the same unit cost as your retail price, with a completely different set of costs attached: no platform commission, no per-order postage, no customer service, but payment terms, carriage, picking and a bad-debt allowance instead. In the worked example below a bar of soap earns £5.47 through the maker’s own shop and £1.16 through a trade account — nearly five times less per unit — and the arithmetic sets a hard minimum order of 34 units, below which the order loses money no matter how good the customer is. This page builds the wholesale price from the cost up, sets the minimum order from it, and shows what happens to both when a buyer asks for 35p off.

The three prices, and how they are meant to relate

There are three numbers in a wholesale arrangement and each belongs to somebody different. Your unit cost is what the thing costs you to make or buy. Your wholesale price is what a shop pays you for it. The recommended retail price, or RRP, is what that shop charges the public. The chain only works if there is enough room between each pair for both businesses to survive.

The oldest rule in retail is keystone: the shop doubles what it paid. A £5.75 wholesale price becomes an £11.50 RRP. Doubling the cost is a 100% markup, which is a 50% margin on the selling price, and that 50% is the number the shop actually needs, because it is what has to pay their rent, their staff and their own losses.

Keystone is a starting point rather than a law. Some categories run above it and some below, and the way to find out which yours is in is to ask the buyer what margin they work on. They will tell you, because it is not a secret and because it determines whether the conversation goes anywhere.

What matters is that the relationship runs in both directions and you can solve it from either end:

RRP = wholesale price ÷ (1 − the retailer’s required margin)
Maximum wholesale price = RRP × (1 − the retailer’s required margin)

The second version is the one that matters most, and it is the one sellers skip. If the market has already decided what a thing like yours sells for — and for most products it has — then the RRP is fixed, the retailer’s margin is fixed, and your wholesale price is therefore also fixed. You do not set it. You discover it, and then find out whether your costs fit underneath it.

Orrell Soap Works

Orrell Soap Works is invented and every figure attached to it is illustrative. They make a bar of soap. The unit cost, built the way any unit cost should be built:

Note what is not in there: postage, the mailing bag, platform fees, the minutes spent packing an order. None of those belong in a unit cost, because none of them happen per unit — they happen per order, and a wholesale order and a retail order are two completely different orders. That distinction is the whole of the next section.

What each channel actually earns per bar

Orrell sell the same bar two ways: at £12.00 on their own site, and at £5.75 to shops with an RRP of £12.00. Comparing £12.00 to £5.75 tells you nothing. Comparing what each leaves behind tells you everything.

A retail order of three bars

That is a gross margin of £16.42 ÷ £36.00 = 45.6%.

A wholesale order of 120 bars

A gross margin of £139.72 ÷ £690.00 = 20.2%.

Reading the two together

Retail earns £5.47 a bar and wholesale earns £1.16. Retail is nearly five times better per unit, which is the number that makes people conclude wholesale is a mistake. Now look at it the other way: that single 120-bar order earned £139.72, and to earn the same at retail Orrell need £139.72 ÷ £5.47 = 26 bars, which is nine separate retail orders — nine customers found, nine parcels packed, nine chances of a complaint.

That is the honest trade, and it is not a trick question. Wholesale sells volume cheaply through one conversation. Retail sells scarcity dearly and you have to find every buyer yourself. Which is better depends entirely on whether you have more spare capacity or more spare demand, and the arithmetic will not tell you which of those you are short of.

Two lines in the wholesale table are the ones people leave out and both are real. Payment terms are a loan you make to the shop; at 30 days and an illustrative 9% cost of money that is £5.10 on this order, and at 60 days it doubles to £10.21. Bad debt is the share of invoices that never get paid, and it is not zero; use your own rate once you have a history, and something conservative before you do.

The minimum order the arithmetic sets

A wholesale order has fixed costs that do not care how big it is, and variable costs that do. Separate them and the minimum viable order falls out of one division.

Orrell’s fixed cost per order, from the table above: carriage £28.00 + picking £21.00 + admin £5.83 = £54.83.

Their variable cost per bar: goods £4.00 + terms (£5.75 × 9% × 30 ÷ 365 = £0.0425) + bad debt (1.5% × £5.75 = £0.0863) = £4.13.

So each bar contributes £5.75 − £4.13 = £1.62 towards the fixed costs of the order, and:

Break-even order = fixed cost per order ÷ contribution per unit
£54.83 ÷ £1.62 = 33.8, so 34 bars

An order of fewer than 34 bars loses money. Not earns less — loses. A charming independent shop asking for a trial of a dozen bars is asking Orrell to pay for the privilege, and the correct answer is a minimum order quantity rather than a discussion about whether they seem nice.

The same formula sets a sensible minimum rather than a survivable one. To make £100 of gross profit on an order:

(£100 + £54.83) ÷ £1.62 = 95.6, so 96 bars

Which is where a minimum order quantity of 96, or a round 100, comes from. It is not a negotiating position. It is the smallest order that is worth the afternoon.

What 35p off does to that number

Here is the part that makes this worth working rather than estimating. A buyer asks for £5.40 instead of £5.75 — a 6.1% discount, which sounds like nothing.

The contribution per bar falls to £5.40 − £4.00 − £0.0399 − £0.0810 = £1.28, and:

A 6.1% cut in the price raises the minimum viable order by 26% and the sensible minimum by 26% as well. That is the compression effect: the discount comes off the contribution, not off the price, and the contribution was only £1.62 to begin with. The right response to a request for 35p off is therefore not yes or no. It is yes, on 121 bars rather than 96, which is a conversation both sides can have.

And at £5.40 the 120-bar order earns 120 × £1.28 − £54.83 = £98.66 against £139.72 at the full price — a 29.4% cut in the profit of the order for a 6.1% cut in the price.

The margin stack, and what it does to your own shop

The moment you have a trade account, your own retail price stops being only your business. It is now a number your stockists can see, and the whole chain has to hold together.

Orrell sell to shops at £5.75 with an RRP of £12.00. The shop’s markup is (£12.00 − £5.75) ÷ £5.75 = 108.7%, which is a margin of £6.25 ÷ £12.00 = 52.1%. Slightly better than keystone, which is why the account is attractive to the shop.

Now suppose Orrell run a sale on their own site at £9.99. Their stockist is trying to sell the identical bar at £12.00 while the maker undercuts them by 16.8%. The shop’s customers can see both prices in the same three seconds, and the practical result is that the shop stops reordering. The lost order is not the £139.72 from one consignment; it is every consignment that account would have placed.

There is no clever arithmetic that gets around this. If you hold trade accounts, your own site is not a channel where you can discount freely, and the cost of a promotion has to include the accounts it annoys. That is a genuine constraint on the business and it is one of the real prices of wholesale, alongside the £4.31 a bar of margin you already gave up.

Working backwards when the RRP is fixed

Most of the time you do not get to choose the RRP; the category has already chosen it. In that case the whole chain solves backwards and it can solve to a number you cannot reach.

Say the market RRP for a bar like Orrell’s is £12.00 and the buyer works on a 55% margin rather than 52.1%:

Maximum wholesale = £12.00 × (1 − 0.55) = £5.40
At a 20% wholesale margin, maximum unit cost = £5.40 × (1 − 0.20) − the per-unit variable extras = £4.20

Orrell’s unit cost is £4.00, so they have 20p of headroom. That is genuinely thin, and it is worth knowing before rather than after. Had their unit cost been £4.60 — a dearer fragrance and three more minutes of labour — the product could not be wholesaled at that RRP at all, and the honest conclusion would be to leave it as a retail-only line rather than to squeeze the margin until the account is not worth servicing.

This is the most useful thing on the page. Wholesale viability is decided by your unit cost long before anyone negotiates a price. If the sum does not work, the lever is the cost line — a cheaper input, less handling, a bigger batch — not the price line, and certainly not hope.

What this arithmetic cannot tell you

The sums above price a wholesale order correctly. They do not tell you whether to want one, and several of the things that decide that are not numbers.

• It cannot tell you whether the volume exists. Every figure here assumes the order happens. Finding shops that will stock you, and keeping them reordering, is the actual difficulty of wholesale and no cost sheet touches it.
• It cannot price the shelf. A product sitting in a well-regarded shop is seen by people who would never have found your site, and some of them buy from you directly later. That is real and it is not measurable from an invoice, so the £1.16 a bar is the floor of what the account is worth rather than the whole of it.
• It cannot see capacity. A 120-bar order is a day of production that is not available for anything else. If you are already at capacity, the right comparison is not wholesale against nothing but wholesale against the retail orders you would have made instead — at £5.47 a bar rather than £1.16.
• It cannot forecast returns and credits. Trade customers return unsold stock, dispute short deliveries and ask for credits, and the rate differs by customer. The bad-debt allowance above covers invoices that go unpaid, not stock that comes back.
• It cannot tell you what the buyer’s real margin requirement is. Every number in the backwards calculation depends on it, it varies by category and by retailer, and the only way to find it is to ask.
• It says nothing about the contract. Payment terms, exclusivity, territory, minimum reorder commitments and who carries the cost of a faulty batch are all things that change what an account is worth, and none of them are arithmetic. Take advice on the terms before signing them.

The three inputs this page runs on are worked through elsewhere on this site: the unit cost, in how to calculate landed cost per unit; the retail price it has to support, in how to price a product so it actually makes money; and what a wholesale order does to your stock position, in the reorder point formula.

Arithmetic and general information only — not financial, tax, legal or investment advice. Your own figures, and your own accountant, decide what any of this means for you.

Frequently asked questions

How do I calculate a wholesale price?

Start from your unit cost, which is materials, direct labour and unit packaging only, with nothing that happens per order. Then either work forwards to the wholesale margin you need, or work backwards from the market RRP: maximum wholesale price equals RRP times one minus the retailer margin. In the worked example a 4.00 pound unit cost supports a 5.75 pound wholesale price against a 12.00 pound RRP, which leaves the shop a 52.1 percent margin.

Is wholesale price half of retail price?

That is the keystone rule and it is a starting point rather than a law. Doubling the wholesale price gives the shop a 100 percent markup, which is a 50 percent margin on what they charge. Some categories run above that and some below, and the only way to know yours is to ask the buyer what margin they work on, because that number decides your wholesale price rather than the other way round.

What should my minimum wholesale order be?

Divide the fixed cost of fulfilling an order by the contribution each unit makes. In the worked example the fixed costs are 54.83 pounds of carriage, picking and admin, and each bar contributes 1.62 pounds, so the break-even order is 34 units. To earn 100 pounds of gross profit the order has to be 96 units, which is where a minimum order quantity of 100 comes from.

Why does wholesale earn so much less per unit than retail?

Because the retail price carries the cost of finding and serving the customer, and the wholesale price does not. In the worked example a bar earns 5.47 pounds through the maker own shop and 1.16 pounds through a trade account, nearly five times less. The compensation is volume through one conversation: a single 120 bar order earns what nine separate three bar retail orders would, without having to find nine customers.

What happens if a buyer asks for a discount on the wholesale price?

The discount comes off the contribution rather than off the price, so it bites far harder than it looks. In the worked example dropping from 5.75 to 5.40 pounds is a 6.1 percent cut in price, but it cuts the contribution per bar from 1.62 to 1.28 pounds, raises the break-even order from 34 units to 43, and cuts the profit on a 120 unit order by 29.4 percent. The useful answer is usually yes at a larger order size rather than a flat yes or no.

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