With all of the cost increases and volatility in the supply of food we are experiencing significant inflation. The most recent number from Statistics Canada, released June 22, was 9.7% for May year over year. With all of the changes in the market it is time to review your pricing strategy. Line pricing some of your products might simplify your business and allow you to deliver the return you need. This year we are helping you define different industry terms. We share insights into the terms and also how they are important to suppliers in the industry.
Line pricing take is a pricing strategy where a number of items are priced the same. These can be different flavours and, in some cases, even different sizes of one product.
Line pricing is preferable for some retailers because it simplifies the retail pricing in the category. This strategy can also be advantageous for suppliers because it can result in a higher margin on your best-selling SKU.
Your pricing strategy
One question I get asked often is, “how do I get the retailer to price my items properly?” If I think back to my days with Loblaw, I might have been of the opinion, my idea of the right price is different than yours…
Now, my first response is “do not tell them how to price your products.” Retailers see retail pricing as their domain and they do not appreciate suppliers telling them what to do. That being said, you can influence their decision.
The biggest impact you have is the price you sell your product to them. You control this and it will usually be the biggest influence on the final retail price. If you have a good idea what the category margin is they are trying to achieve or have been making on your products, you know what they are trying to achieve.
For example, if you have been selling your product to them for $2.80 per unit and the retail is $3.99 you know they are making 30% margin. If you are forced to work on a cost increase you have a good idea they will need a 30% margin and if your per unit selling price increases to $2.95 they will probably change the retail to $4.29.
Line pricing does require some work
Now that we established the largest impact you can have on retail pricing, we can explore line pricing. It is likely each of your SKUS have a different cost. If they are in one family, you should consider line pricing.
To determine the right line price you will need:
Your cost of goods for each SKU
Sales forecast for each SKU, sometimes you will hear this called the ‘mix’.
To arrive at the right line price we can use the following example:
If you sell at these prices your margin $ will be:
SKU A 10,000 x 1.12 = $11,200
SKU B 8,000 x .93 = $ 7,440
SKU C 12,000 x 1.09 = $13,080
Total $31,720
If you can line price these items at 2.85 your margin $ will be:
SKU A 10,000 x 1.17 = $11,700
SKU B 8,000 x .83 = $ 6,640
SKU C 12,000 x 1.19 = $14,280
Total $32,620
You can make the argument sales will increase with SKU B because there is something that increases per unit cost and value to consumers. More units are usually a good thing from an efficiency perspective. You just have to ensure consumers do not trade from SKU A or C to B.
The line pricing has generated $900 more margin for you. The average decrease in margin from SKU A or C to B is .35. If 2,571 consumers trade from SKU A or C to B you will be back to your original margin $. That is a significant switch. It can happen so it is important to develop your sales and marketing to deliver the mix you need. Perhaps more focus on SKU A and C.
Margin is one benefit of line pricing. This also makes the buying decision easier for the consumer. It is difficult to get their attention but when you force them to consider different options in the same line up, they can get frustrated and avoid the decision to buy. In other words, you lose the sale. Make it as easy to buy as possible.
Every retailer is different so make sure you understand your customer. Some will appreciate the simplicity of line pricing and others will think you are making more. Know your customers and deliver the right strategy.
Line pricing can be the right tactic in your pricing strategy. Consider the options and in this period of volatility if you do need to get an increase in your selling price line pricing might be the best option for you and your customers.
If you have any questions or require help figuring our line pricing, you can always send me an email peter@skufood.com or call me at (902) 489-2900.
Peter
Dairy prices to increase in the fall
As we discussed earlier, we are experiencing price increases across many commodities and sectors of the food industry. The Canadian Dairy Commission has determined milk prices will increase approximately 2.5% September 1. This is the price farmers are paid by the processors (dairies) for their milk. Now, the processors who sell to retailers and food service, will have to work with their customers to get a price increase. This is not automatic.
It is interesting to note this mid-year increase will be deducted from any increase determined in early 2023.
Flipp acquires Reebee
It was reported in Canadian Grocer this week that Flipp has acquired their largest rival, Reebee. With more focus on reducing grocery bills for consumers checking our flyers online is important. These apps allow shoppers to compare flyers and they are looking to expand the experience. They also include flyers from many sectors, not just food.
In the article it states combined they have 6,000,000 subscribers in Canada. This translates to approximately 40% of Canadian households have access to these tools.
When is Peter speaking?
United States Department of Agriculture- June 28
Ecommerce in the Canadian Food Industry
FCC Peer groups in fall of 2022
It has been a real privilege to work with FCC in 2021/22 to launch the pilot program for their food and beverage industry peer groups. We had some incredible discussions with processors about our industry and they really did learn some very valuable insights from each other. We discussed so many topics from customers to ecommerce to distributors to co-packers and so much more.
We are excited to let you know FCC plan to continue with the program and if you are interested this could be a great program for you in the fall of 2022. Check out the details and if you have any questions just let me know!
