Retail pricing and retail sales channels.
Let’s start with a question: what are your retail sales channels, today and in the future? In other words, where and how are you selling or you are planning to sell your products?
Are you selling on the internet? If it’s on the internet, is it through your own website? Or on another site? If it’s on another site, is the other site a marketplace or a retailer?
Are you selling in a physical store? Again is it your own store? Or in someone else’s store? If it’s in someone else’s store, is it a retailer? Or are you selling on consignment?
Anyhow, you might sell your products to a retailer, it could be another shop, a department store or an e-shop. In this case, you are selling BtoB, which stands for Business to Business. It means that first your Business is doing a transaction with another Business, let’s say a multi-brand store. Then the store will add their markup on the price they have initially purchased your product. In this case, the end customer can then buy the product from the other store and not from you. And the end customer will buy the product at the retail price that has been set by the other store.
You might also sell your products directly to the customer, and this is called a DTC model, Direct-To-Consumer model. In this case your end customer will buy the product directly from you at the retail price that you have set. This price would have to include the cost of the customer acquisition that might be the cost of the online ad and/or the commission that the marketplace would charge you.
So, in order to buy your products, your end customer is faced with 2 options: Option 1) he or she can buy it from one of your retailers. Option 2) he or she can buy it directly from you.
The one thing I encourage you to consider, at the very beginning of your business, is whether you intend or do not intend to sell your products to a retailer one day. In other words, do you intend to engage in a BtoB sales model, whether it is physical or online? Even if you are not doing in right away, but you intend to do BtoB sales some day, you need to understand the markup that the retailers would add to your type of products and define your own retail price that is aligned with the price that the retailer would sell your products at.
Let’s take an example. Let’s say that there is this store you’ve always wanted to sell your product in. This store usually adds a 100% markup on the cost they have purchased your product, your own retail price should then also include this markup.
Let’s say that your BtoB price is USD 50, so for the retailer the cost of buying from you is USD 50. Then the retailer adds a 100% markup and sells your product in his store at USD 100. In that case, your own retail price should be aligned with the retailer’s retail price and should be approaching USD 100 and that, even if you are not selling to this retailer YET.
Why? If you don’t do that, you might lock up your brand in a situation in which it is difficult to grow in terms of sales or lose your existing, first customers.
It’s very tempting, and I’ve seen so many fashion brand owners go down that road, to say, I’m perfectly fine with selling my products to my end customers at USD 50 because it covers my costs and I earn a good profit that I’m happy with and I don’t want to increase my retail price any more because it is the fair price for my customers. And I totally understand that because with the Direct to Consumer model, you do not need a third distribution party, you can cut down one layer of intermediary and, provide a better price for your customers.
However, you need to bear in mind that if you do not include BtoB sales one day, your sales will be capped at your own ability to drive traffic to your own stores and it will be capped at your own ability to generate sales.
And I want to be very clear here. I am not saying that you need to include BtoB sales in your business model but if you do not consider BtoB, your sales growth will be limited to your own ability to generate sales.
This is a very important decision that you need to take into consideration early on in your business. Many of the fashion business owners, I have been working with, have started a Direct to Consumer Model. So for a couple of years, they have been selling their products at a retail price that does not include their retailer’s markup. When they decide to extend their distribution network through other retailers, they need to operate big changes in their business model because their need to increase their retail price to align with the retail price of their retailers. But, as I explained in a previous episode, it is tricky to change your price point once you are already selling to customers.
There are ways to go about that issue and I’ve helped brands going BtoB even if their initial own retail price was too low, but it was always a bit of a stretch and I advise you to have this consideration early on in your business launch.
The takeaway of this episode is to consider your sales channels as early as possible, if you decide to start with a DTC model, which you actually should because you always need to maintain the sales contact with your end customers, you need to seriously consider your own ability to generate sales. Of course, you also need to consider the associated costs to achieve your sales target because selling comes at a cost. So the retail price you set would also include these costs and in the end, you might be surprised, because your retail price might be closer to your future retailer’s retail price, sometimes.
If selling in a BtoB model is a possible option in the future, I advise you to survey your potential retailers to understand their markup structure and to include these elements in your own retail prices, so you get the right price point right away. Remember changing your price point is always tricky.
What has been your experience with defining your retail price? I would love to hear from you.
You can reach out to me by sending an email podcast(at)themindfulfounder.com
Hope this has been helpful and that this episode has given you some food for thought for your pricing strategy.
There will be many more Mindful Monday’s episodes on the subject of pricing. Particularly one on the impact of BtoB pricing and distribution channels, this might be interesting for you, particularly if you are planning to take your brand international and export your products.
That’s it for today, stay tuned and talk to you soon.
Host: Leekei Tang
Contact: hello (at) betterbusinessfounder.com
Music credits: Mister Sunny Face by Wayne Jones / Blue Skies by Silent Partner / Happy Ukulele by Scott Holmes
