M.S.R.P. will hurt more than it will help
In the general merchandise industry, a manufacturer’s suggested retail price (MSRP) is common. In the food and beverage sector, it will hurt your customer relationships more than it will help them. As brands evolve, one of the biggest challenges for brand owners is to give up the control of the pricing of their products.
Many products begin with an entrepreneur selling direct to consumers. This can be in person and/or online. Obviously, the person selling will control the price at that point. They get some experience with pricing and believe they know the price that will generate the most sales and returns. This is probably true in the direct selling environment.
One reality of selling into retail channels is that you give up control of the retail price. Stores own that decision and they will determine the retail based on the margins they need to earn and their price position in their market. It is usually frustrating for food and beverage businesses to see the margins generated at retail. These are not profits, they are margins used to cover expenses and generate a profit. The larger, more sophisticated the retailer, the less influence producers and processors have over the retail price.
Get the price right early on
If you are selling direct, it is a great opportunity to learn about consumer behaviour and understand the decision when they buy. It is true the lower the retail, the better the value, the more sales you should do. Unfortunately, this is not scalable. Growing volume usually requires more investments in sales and marketing, distributors and allowing for a retailer’s margin. The challenge for entrepreneurs is to generate sales at the price you will need to be. This is proving the concept.
For entrepreneurs selling direct, learn about the expenses you will need to incur and factor them into your selling price. Keep the extra profit you earn and learn how consumers behave at the price your product will have to perform at. You can try certain discounts and incentives to measure the results.
One common misconception is the economies of scale will kick in and your costs will drop like a rock. Yes, you should get some efficiencies and as volume goes up, you might get some cheaper inputs for buying bulk. You will also incur other expenses that offset some of the gains.
Understand the category you are selling into and price your product competitively within that space. Prove it will work when consumers have choice and you will get comfortable seeing the retail where it needs to be.
The more sophisticated the chain, the less control you have
As products evolve, it is common to sell into specialty channels. These stores are usually willing to take some input from producers and processors on pricing. They do not have category managers spending hours on pricing decisions. They will ask, “what is the best price”, and you should be willing and able to let them know. We do not advise telling them up front, but when the conversation comes up, be ready with the facts.
Regional and national retailers will not be happy if you tell them how to price your product or include M.S.R.P on your sell sheet or presentation deck. They own retail pricing; it is their store. I have had some category managers get very upset when they think the brand owner is trying to tell them how to do their job.
Retailers understand the margins they need to generate. Category managers are measured on their ability to deliver the margin. It can be a key metric in their performance evaluation. Managing a category is a complicated job. Depending on the retailer, they might have certain items they are forced to match the competition. These products can deliver lower than the category margin target. Not your fault, but reality is they need to generate that margin, so they will try to set retails that will average out to the budget. They also have ads to write that can reduce the margin and they will be tasked with ‘making it back’ somewhere.
Once they buy the product from you they determine the retail price.
How you influence the retail price
Although we are saying do not use M.S.R.P. there are tactics you can use to get as close to the right price (in your mind). The first is the price you sell to the retailer. Before you talk to them try to learn about the category margin they have. You can learn this if you are already selling products to them, from other suppliers or people in the stores. Determine the retail you would like to see and do the math to determine what price you should sell to them.
Here is the math if the category margin is 45% and the target retail is $7.99:
Your selling price = Retail x (1- Gross margin)
Your selling price = 7.99 x (1-.45)
Your selling price = 7.99 x (.55)
Your selling price = 4.39
Be ready for the conversation. Some category mangers will ask you about pricing. This is great because it tells you they value your opinion and your relationship is at a point where they will ask. Be realistic and do your homework. Understand their margins and the category.
Measure results for your products when you see different retails. One store might sell 14 units per week at 5.99. Another store might generate 10 units per week at 6.29. If they are both paying 4.00, you know the store at 5.99 is generating more gross profit dollars. You should not tell the higher priced store the exact sales in their competition, but you can let them know you believe the store at 5.99 is doing better. They are driving more topline sales and generating more profit.
Sometimes you have to prove a retail is better with temporary price reductions (TPR). In our example you might have to do some TPR in the higher priced store to prove to them the sales are very different at 5.99.
There are enough challenges in this business. You do not need the category manager upset with you because they believe you are telling them how to do their job. Respect their role and position in the value chain but get your products priced at the best possible price to maximize the opportunity you have.
Peter
SKUFood Recipes for Success Podcast
The response to our SKUFood Recipe for Success podcast has been great. We want to thank everyone who has been with us as a guest. So many interesting conversations about our industry.
In this episode, we're privileged to sit down with Eric, a seasoned leader with four decades of experience in the food and beverage industry.
With thirty-three years on the retail side, Eric has honed his skills in distribution center operations, health and safety, process improvement, and more. His diverse expertise spans from quality assurance to procurement, bringing a wealth of knowledge to the table.
But Eric's journey doesn't stop there. For seven years, he's lent his talents to the supplier side, excelling in sales and marketing roles. His contributions extend beyond individual companies, as he's actively involved in industry organizations like the CPMA and CFIA advisory board, where he's made a lasting impact.
Currently the Director of Sales and Business Development at Algoma Orchards, Canada's largest independent apple grower, Eric continues to shape the future of the produce industry.
Join us as Eric shares his insights, lessons learned, and the secrets to cultivating success in this ever-evolving field. Whether you're a seasoned professional or just starting out, this episode is sure to leave you with a recipe for success.
Even the big players develop and introduce products that do not last. There have been a few bizarre items over the years. Interesting to note the development time of 7 weeks vs their norm of 12 months.
I do have travel coming up to Calgary, Saskatoon, Winnipeg, Vancouver and Lethbridge so if you want to connect or have an even in any of these locations give me a call or send me an email.