Let me guess, you started your business because you want to make money doing what you love. You have a passion for paper, and planning, and helping people live their best lives. It’s the new American dream, right?
So you dove in, headfirst, and are trying to absorb all the information possible on how to make this dream a reality. You started taking all the classes and reading all the blog posts. And I bet somewhere along the way a very reputable business mentor told you how to price your products.
Well . . . now I am going to tell you they were wrong—so wrong in fact, their advice could be what’s preventing you from getting rich.
I blame this failure on a flawed 50/50 pricing strategy that I call the wholesale pricing myth.
Let’s dive in.
First, let me explain keystone pricing. In the stationery industry, wholesale pricing is typically half of the retail price. This is called keystone pricing, which is the standard pricing method used by retailers when marking merchandise for resale.
An example of keystoning: A day planner that retails for $48 would be priced at $24 wholesale.
If you are just starting out and selling mostly to independent retailers, this method works.
As your business grows and big-box retailers become interested in your products, keystone pricing will no longer be your standard. Large chains like Target, Staples, and Home Goods will demand better profit margins and expect wholesale pricing much lower than keystone.
It can be challenging to meet their expectations, but it’s a good problem to have. Order quantities from big-box stores are typically pretty high, and the exposure is priceless.
If you find yourself in this scenario, congrats! I know how hard you’ve worked to get here. But if you have been following a flawed pricing strategy, I bet your profit margins aren’t meeting your expectations. We want all that hard work to pay off . . . and pay you!
So let’s take a look at your numbers on the back end.
THE WHOLESALE PRICING MYTH = A FLAWED 50/50 PRICING STRATEGY
According to what we just learned above, a day planner that sells for $48 retail would wholesale for $24 using the keystone pricing standard. The wholesale pricing myth is that the cost to make this planner should be $12.
A $24 sale price with a $12 cost doesn’t sound too bad, right? That’s a 50% initial markup. How is this not profitable, you ask? Well, you need to pay for the production of the planner you just sold, which is $12, plus pay for a reprint if you intend to continue doing business.
You see, if you plan on making more planners to sell next year, then you need that extra $12 to pay for the reprint (or another round of production on something new). So there goes your $12 “profit.” And then how do you pay yourself? You didn’t go into business to work for free. We’re not running hobbies here . . . we are building profitable, sustainable businesses.
The 50/50 keystone pricing strategy doesn’t trickle down past the wholesale price, and will never work if you plan to build a profitable business.
Now let me show you how to put some of that profit into your pocket.
THE RULE OF 3
The scenario is the same . . . you have a day planner that sells for $48 retail and $24 wholesale. But this time the target cost to produce your planner is $8, not $12.
By getting the cost down to $8, you can now pay yourself for all of that hard work. You will still collect $24 for each planner you sell wholesale. Then $8 will go towards the production of the planner you just sold, $8 will pay for a reprint so you can continue selling in the future, and $8 will go in your pocket. Cha-Ching!
Get into this mindset . . . the income you bring in from selling wholesale needs to fit into three different banks. This is the rule of 3. In order to run a profitable, sustainable business, you should be putting money into three banks: the production bank, the reprint bank, and the salary bank (your pocket!).
Makes sense right? Of course. The lower you can get your production costs, the better off you’ll be. Stop thinking about pricing as 50/50. Instead use the rule of 3 to build a profitable business that can afford to grow with you.
DON’T LET FAULTY PRICING STRATEGIES PREVENT YOU FROM MAKING A PROFIT, AND EVENTUALLY SINK YOUR BUSINESS
One of the biggest challenges any growing stationery company can face is making the move to selling wholesale. It can take a toll financially and is a lot of hard work. I’ve seen many businesses give it up for one reason or another. In the end, you need to make the best decisions for you and your business.