Small Business

When a Distributor Sets Prices


An entrepreneur wishing to sell to unions as well as to large retailers needs to understand the markets and then develop separate pricing strategies, experts say

How do I set prices as a sock distributor? I want to sell to two markets: directly (to casino employees) and wholesale, to such giant retailers as Wal-Mart (WMT) and Target (TGT). —M.D., Las Vegas Getting the pricing right is crucial to the success of any business, but this is often more art than science. Your two markets are very different and will require separate pricing strategies. First, you'll need to do some market research to determine current prices for the kinds of socks you are distributing. See how much comparable socks are selling for and then decipher the wholesale cost based on standard retail mark-ups, says Rafi Mohammed, a pricing strategist and author of The 1% Windfall. You will likely have to conduct some competitive intelligence to figure out profit margins for clothing wholesalers, as well as standard mark-ups for various categories of retailers. Don't confuse a gross margin with a mark-up, cautions Dale Furtwengler, author of Pricing for Profit. "Over the 40-plus years I've been in business, this is one of the costliest and most frequent mistakes business owners make," he says. For example, if a company sells an item for $1 and its cost is.80 cents, the company has a 20 percent gross margin. In order to make that margin, the company has placed a 25 percent mark-up on the price, since.20¢ is 25 percent of.80¢. In general, "if your socks are very basic and undifferentiated from what else is in the marketplace, the price will have to be competitive, unless there's some way of changing the playing field," says Anne C. Graham, a profitability and growth expert based in Vancouver. "If the socks are special in some way —branded, better functionality—then there's more room for premium pricing." Price Direct Sales Close to Retail

Let's start with your direct sales to casino union workers. Assuming that the union is distributing the socks to its members rather than reselling for profit, you should be able to get a price close to retail, says Furtwengler: "Although the unions may be seeking some quantity discounts, the price should not drop to, or even near, the wholesale level." One way to get a higher price from union customers would be by creating a sock that bears the union or casino logo or is made by a union manufacturer, Mohammed says. Use this as a unique selling proposition. Distribution to large retailers is another story. Such companies typically purchase uniquely differentiated products that grab customers' attention or homogenous products to be sold at low prices. If you are competing on a commodity level, you'll be at a significant disadvantage unless you can keep your costs very low. "Another caveat is to pay particular attention to payment terms with these giant retailers," Furtwengler says. "I can't speak to Target's practices, but I've been told by a number of Wal-Mart suppliers that their payment terms are onerous. Combine low margins with interest on a line of credit, assuming you can even get one in today's commercial lending market, and you could sell yourself out of business fairly quickly," he says. Unless your socks are somehow different and better than anything else already available to the big-box retailers, you are probably better off focusing on smaller, regional stores, Graham says. Those retailers are more likely to work with a distributor—rather than buying directly from a manufacturer—and their purchasing processes will not be as sophisticated as those of the national retailers.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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