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Answer from our Guest Expert Peter Hupalo of Hupalo Ltd.
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Second Approach to Pricing
One way to reduce your risk is by offering to pay less for the item when you purchase it. So with that said, let's say instead of offering $25 for the name brand jacket, you offer $10 and feel you can resell it for $60. Because you have a substantial margin of mark-up to a reasonable discounted selling price, you increase your chance of success. Even if some of your items prove unsalable, the other items can be sold at enough profit so you can succeed.
Incidentally, notice that your gross profit margin is $50 ($60 - $10), which is comparable to the gross margin you'd have buying the item new at wholesale and reselling it for the going new retail price. As speculators sometimes say, the profit isn't made on the sale, it's made during the purchase. Be sure you're not paying too much for the item.
To help you to do this, estimate a realistic, discounted, selling price you feel you can charge for the item. (When in doubt, give yourself a margin of safety by going lower in estimated selling price.)
Then subtract from this figure, the amount of contribution (or gross margin dollar amount) you need from this item's sale to cover costs. (When in doubt, allow for more.) The total contribution of all products sold must pay all overhead and non-acquisition expenses and allow for a profit, including any inventory write-offs. What remains is the absolute maximum you should pay for the item.
Your selling price of jacket $60
Your estimated contribution for jacket -$50
Maximum offer on jacket $10
Offering less to the seller gives you more of a margin of safety. Calculating how much gross margin you need per item is tricky because it depends upon how many items you're selling on a daily basis; the distribution of different items you're selling and their various levels of contribution; and your fixed overhead, such as rent.
For example, suppose your average contribution per sale is $50. Suppose your total overhead is $1,000 per month. Then you need to sell 20 jackets per month to break even. If you hope to make $2,000 per month in profits, then you must sell 40 more jackets per month. For further assistance on breaking-even, go here.
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