What is the difference between the retail price and the wholesale price?

Prices vary - and not only because of the place or type of product! Virtually all of us have come across the concept of wholesale price and retail price. While every consumer has contact with the latter category, wholesale and retail prices are an area of interest for traders.

What exactly is the difference between the retail price and the wholesale price and what factors influence their formation?

Wholesale price

The wholesale price is the net value of the goods, used in trade between economic entities in the case of large-scale orders. "Large scale" is key here. The wholesale price is usually lower than the retail price. This is due to the fact that the costs of the transaction itself as well as logistics costs are lower than in the case of retail trade.

The wholesale price of a given good is often determined in the course of individual negotiations between the distributor of goods and his client - an entrepreneur offering goods in retail trade. It is the level of the wholesale price that determines the final retail price of the product. A person wishing to purchase products at a wholesale price must not only run a business, but also register as a customer of a given distributor.

What affects the wholesale price of goods?

Wholesale prices are not a uniform or constant value. Their amount is affected by factors independent and dependent on the parties to the transaction. What exactly are these aspects?

Among the factors independent of the parties to the transaction (i.e. the wholesaler and its client), the availability of a given good can be mentioned. In the case of food, the basic factor influencing the amount of goods in circulation will be the amount of crops. Another aspect shaping the level of wholesale prices is the general cost of production, transport and storage of goods, and it will be affected primarily by human labor costs, electricity costs and fuel prices. For this very reason, the wholesale price of processed products will be higher than the wholesale price of unprocessed products.

The retail price

What is the simplest way to explain the concept of retail price? This is the price that consumers deal with on a daily basis. This price applies to one piece of a specific product (or one specific service) that the consumer can purchase at the point of sale.

The retail price is higher than the wholesale price. The difference between the two prices is called the "retail margin": it is made up of the retail outlet's profit plus the storage and rotation costs of the item. Stores therefore buy a larger quantity of goods at a lower wholesale price and then sell these goods by the piece at a higher retail price, thus making a profit. Therefore, the greater the difference between the wholesale price and the retail price of the product, the greater the store's profit from sales.

As consumer research shows, the retail price of a given product affects not only the store's profit, but also the perception of a particular product by the consumer. The phenomenon should not be surprising to anyone: the lower the price of the product, the more it is associated with low-quality goods. In turn, the higher the price, the product gains the status of a "luxury good" and a high-quality product. However, not all buyers are buyers of luxury goods.

Gross and net retail price

The retail price can be distinguished into a gross retail price and a net retail price. The net price is the price excluding value added tax (VAT). This type of price is usually used in contracts between traders. In most countries in the world, including European countries, the final price displayed in the store is not the net price, but the gross price - including all tax costs already calculated. However, in some countries, the price shown on store shelves is the net price, and the buyer must calculate the difference himself, which he will pay at the checkout. The USA is one of such countries.

The gross price, on the other hand, is the final price, including all tax charges.

Sometimes consumers may also come across the concept of "proposed retail price". It is the manufacturer's suggested amount of money that the consumer can pay in the store for his product. From the legal point of view, the use of "suggested retail prices" by producers is possible in a situation where these prices are not hidden fixed or minimum prices, and the recipient (store) is free to set the prices of products offered to its customers.

Retail price evolution

How are retail prices formed? The basis for their determination is the preliminary calculation of the expected production costs of a given product. The retail price is also influenced by the current demand for a given product, the relation to competition prices and the observation of the market situation. Prices are also influenced by the costs of remuneration for commercial agency and tax costs (costs of excise duty and VAT).

The retail price should not be lower than the production costs - if such a phenomenon occurs, it is a sign of unfair competition (price dumping).

Although the overpriced product may discourage some consumers, its introduction is sometimes justified from the marketing point of view. In addition to goods that have a permanent status of "luxury goods", an inflated retail price may occur when a new, previously unknown product is introduced to the market (the so-called "novelty price"), a unique product and goods for which there is an increased demand at a given moment. Such a situation often occurs in crisis situations, when a product that used to be cheap and widely available starts to run out. The best examples are the increase in the price of toilet paper during the coronavirus pandemic or the increase in sugar prices in 2022 as a result of the "buying panic".

Methods of shaping retail prices

According to research, the most optimal retail price of a product is the "average price", i.e. one that is associated with a high-quality product and at the same time is achievable for the average consumer. Retail prices can be determined using market methods, which include, among others, PSM (Price Sensivity Measurement), BPTO (Brand-Price Trade Off) and DPA (Direct Price Acceptance). They make it possible to determine the range of prices acceptable to consumers and to check consumer loyalty in the event of price fluctuations of a given product.

Once set, the retail price is not a fixed value, on the contrary - it changes frequently. Some are the result of general market factors (inflation, increase in input prices, changes in taxes), others are deliberate distortions caused by sellers. Such "deliberate disturbances" include well-known phenomena such as: promotions, rebates, discounts or discounts for regular customers.