Price is the second most important element of your CPG product marketing mix.

The Price is Right

Tips for an effective CPG product price strategy.

Price is the second most important part of your marketing mix (Product, Price, Place, Promotion). If you have done the work to launch a well differentiated product you have earned the luxury of price flexibility. If your product has limited differentiators your retail partners may force you into established price points in the category. This can put the squeeze on your profits and your ability to afford the tools to drive awareness, trial, and velocity.

Setting the right price for your CPG food, beverage and durable goods products will have a significant positive impact on sales. Conversely, setting the wrong price can have dire consequences for your sales and ultimately your business. Your price is like a fist that can punch-up sales. The fist is comprised of five independent parts that must come together to hit with force. Here are the five parts of your price fist; 1) total costs, 2) product differentiation, 3) channel length, 4) channel types, and 5) established category price points. Like a fist with five fingers (ok, one is a thumb), your price strategy can only hit hard if each of the fingers and thumb work together.

1 – Know Your Costs

Before we discuss any models to establish a selling price, it is important to know ALL your costs. Deeper dives into all the costs that go into setting the price of a CPG product are available in the Ghost Tree Sales blog. Without capturing all your costs, you are at risk of pricing either too low or too high.

The most common method for determining what price to charge (wholesale price) is often called the “Cost-Plus” model. Put simply, this is where you take your total product cost and overlay the margin (profit) you want to make. For example, if my jar of natural hazelnut spread costs me $2.00, I can then overlay a 35% margin: $2.00 / 0.65 = $3.08. I will charge my customer a price of $3.08 and clear a profit of 35% or $1.08 net profit per unit. This seems like a simple price model but know that it is deceivingly complex as there are many costs to consider in your P&L and plenty of trade expenses that you may not expect which can crush your margins. You will be working with gross and net profits and plenty of fixed and variable costs along the way. This is where it is very important to work with an experienced sales professional. We routinely at Ghost Tree Sales have brands come to us with products selling at retail with no profits going back to the brand because trade expenses were overlooked.

Note: CPG uses margins, not mark-up. You need to know the difference when calculating your selling price. Why does grocery use margin? Some say using margin to set your prices makes it easier to predict profitability, others say it’s just tradition.

Direct to Consumer (D2C): Using platforms like Squarespace and Shopify, you can quickly and easily set up an E-commerce portal and start selling direct to consumers. The challenge here is advertising costs to get consumers to discover you. There are plenty of costs associated with D2C that will impact your selling price.

5 – Existing Retail Price Points in the Category:

The other common method for determining what price to charge is to work backwards from the retail price point (Suggested Retail Price or SRP) you want to charge the consumer. This method is often used during the ideation or exploratory phase of developing a new product to quickly determine what price a seller must charge a retailer/distributor given the established retail price points. Traditional brick & mortar retailers will often force fit all products they sell within a category into a shortlist of retail price points. Retailers like to do this because it is easier for them to manage a category with only a few retail price points versus many. For example, it is easier to manage a category with 5 price points: $1.99, $2.49, $3.99, $4.49 & $4.99. A retail category manager will assign all the products in its category to one of these price points at a minimum profit margin to the retailer, say 35% or more. If a new product being presented to the category manager is above $4.99 it might be blocked from the category because it is priced too high, or if a product is aiming to be sold at $3.99 but its margin to the retailer is less than 35%, the retailer may sell the product for $4.49 in order to make the minimum category profit margin of 35%.

Let’s look at the five (5) elements needed to make a powerful fist. While these are not the only elements, they are the most significant elements to consider if you are launching a new product or entering a new market. It is common for even the most seasoned CPG sales or marketing veteran to make fatal mistakes when setting their price – let this overview serve as a helpful introduction or welcomed refresher.

Distributor:

Wholesale Price / Distributor Margin / Retailer Margin = Retail price (SRP)

$2.00 / 0.75 = $2.67 [A distributor adds 25% to the $2.00 buy price from you]

$2.67 / 0.60 = $4.45 [The retailer adds 40% to the $2.67 buy price from the distributor]

Note: A distributor’s bump adds $1.12 to the final retail price ($4.45 – $3.33 = $1.12)

Pro Tip: If you start by selling direct to small stores because you don’t yet have a distributor, it is wise to charge the independent stores what a future distributor will charge them…in this case charge $2.67 to the retailer and not $2.00. Why? Because as your business grows you will take on distributors and you don’t want to have to at a later point go to all the independent stores you were selling direct to and issue a price increase to buy through your distributor. If you set your price higher considering what a distributor will charge in the future, the transition to a distributor is seamless.

4 – Channel Types:

There are some brands that can influence all their retailers across all channels to maintain a uniform price point. For most brands, particularly new and emerging brands, this isn’t possible. The channel through which you sell your product will ultimately impact the retail price to consumers because of different channel cost structures.

Here is a list of the major retail channels in North American and how they impact your price. For tips on how to manage each of these channels to optimize sales, please visit the Ghost Tree Sales Blog:

Grocery Channel: The grocery channel can be broken down into three types of price models. Note that a retailer can only be ONE (1) of these models…they can’t be two or more at the same time – despite category managers who try to convince you otherwise.

High-Low Price Model: These are grocery stores that charge a high price everyday but offer regular deep deals. These are most of your traditional grocery store chains like Albertson’s, Safeway, Kroger and Publix. You the manufacturer will have to have a promotion calendar to support their deals which will come out of your margins for the most part. There are some retailers that will compress margins, but most want to be margin neutral. Note that both traditional and so called “discount” retailers are both high-low. A good example of this split is Kroger and FoodMaxx. While Kroger banners are positioned as more premium and FoodMaxx more discount…they are both high-low.

2 – Product Differentiation

Product differentiation rather than duplication is very important. If your product has limited to no differentiators from what is in the category currently – you are forced to compete on price and possibly by outspending the competition on trade dollars and advertising. For new brands, the latter is not an option unless you have significant financial support from inexperienced inventors enabling you to buy market share. Without differentiation, your product will need to be sold at an existing price point or at a lower price than other national brands on the market. A low-price strategy is complicated by private label products in the category which are the retail owned and preferred price fighters against national brands.

If on the other hand your product is unique and has easily identified unique points of differentiation versus what is on the market now you can sell at a unique price point – often a premium to what is on the shelf currently. If my all-natural hazelnut spread is made with a unique ahead of trend ingredient, I can charge a dollar more than the most expensive item currently selling in the category. Why? Because I can use my product’s point of differentiation as leverage to justify the higher price to the category manager/buyer to win the shelf space. I can argue that consumers will pay more for the product’s unique features/benefits. Check out Sweet Prairie Haskap or Majestic Garlic – both brands have strong points of differentiation verses anything in their respective categories so they can charge a premium and still turn/sell at a fast rate (velocity). They both earn incremental sales for retailers because they are different and serve an unmet consumer demand.

3 – Channel Length

For traditional brick & mortar retail sales, there are two ways to get your product to market (stores). First, you can get your product to store either “direct” from your warehouse to the retailer’s warehouse or stores. Or secondly, you can use a distributor who buys your product and then ships it for you to the retailer’s warehouse or stores.

The length of your distribution channel refers to the number of middle-people along the way. These are often called “bumps” because each middleperson adds more to your final selling price. For new brands, you will most likely have to use a distributor when selling to a brick & mortar retailer because a) you will be selling to small stores (independents) vs large national chains. These independents buy from distributors because they are too small to buy direct from manufacturers. And b), retailers will not open a spot in their very busy retail warehouses for new and unproven brands. Brands need to prove themselves first through distributors (in most cases) before retailers will take them into their warehouse.

So, when selling direct to a retailer you will sell to the retailer at your wholesale price. If you are selling to a retailer through a distributor, the distributor will buy your product from you, so they are your customer. The distributor will then sell the product to the retailer at a profit of say +25%. So, this is an added cost (bump) that will impact your final selling price on shelf. Please visit our Ghost Tree Sales blog for posts dealing with sales strategies to improve sales and profitability when distributing direct to retailers and when selling through a distributor. There is a lot to know with both distribution models and failure to understand the costs associated with each can be devastating to your business.

For now, here is the basic retail math associated with selling direct to a retailer and selling through a distributor:

Direct:

Wholesale Price / Retailer Margin = Retail Price (SRP)

$2.00 / 0.60 = $3.33

Note: 0.60 represents a retail margin of 40% (1-0.40 = 0.60)

Every Day Low Price (EDLP) Model: The best example of this price model is Walmart. Sam Walton pioneered the EDLP price model. EDLP retailers are not the lowest price in the market, and they obviously are not high-priced like High-Low. EDLP prices are usually less than High-Low everyday (regular) prices but higher than High-Low deep deal prices. Experts say they are about 10% lower than everyday (regular) High-Low grocery account prices. Note that High-Low retailers cannot also be EDLP retailers. We routinely see high-low retailers asking for EDLP pricing but then several months later also ask for promotional support. If a retailer is EDLP they get no promotional support, they just sell at everyday low prices all the time – that’s it. Wegman’s is a good example of a retailer running this scam – they ask brands to give them EDLP pricing and then come back later and ask for price support to run deals. Weak.

Club/Warehouse Channel: This is Costco and BJs. They take 13-15% margin, have no slotting fees and generally sell larger format offerings of items currently selling well in conventional grocery. They aim to give their members value by giving them a lower cost per oz in return for buying bulk. Note…many manufacturers sell Costco cheap versions of their products, particularly apparel brands.

Amazon: Amazon is a great channel to cast a wide net and start generating sales when you are a new brand. Profitability is often a challenge for CPG products that are heavy, hard to ship and low value. Take for example beverages in glass bottles. Shipping costs along with promotion costs and Amazon fees make Amazon a low profit channel for many CPG products.

Deep Discount Channel: These are retailers that sell 40-60% less than the lowest High-Low price. Grocery Outlet is a good example of this type of deep discount retailer. Others like TJX, Ross, Burlington Stores and Big Lots sell durable goods along with a more limited assortment of grocery items. They too are considered deep discount retailers. Typically, they sell shelf stable products and limited perishables. You will sell direct to these retailers without a distributor. Deep discount can be a great channel for new brands and to manage down your inventory if you find you are long on anything. There are a few strategies here to help ensure your price point drives profits and you don’t impact your other retail channels by undercutting them on price. One is offering a cheaper version of your existing product (ie., The TJX Version of Ralph Lauren…cheaper material vs product available in The Ralph Lauren Store). The other is offering a smaller format (i.e., the 24ct case of bottles water vs the 35ct case…both have the same price per oz).

Convenience Channel: 7-Eleven and Circle K are good examples. They require a distributor like Core-Mark and McLane. They charge higher prices vs conventional grocery because they offer convenience. They have a limited but growing assortment of grocery items to help them off-set the decline of both gas and cigarette sales. We don’t recommend convenience to new brands because these retail environments are small, and they typically only want proven fast-moving brands. However, there are some more progressive accounts that fill their stores with new, healthier emerging brands.

Pure-Play E-Commerce: Vitacost, iHerb and Thrive Market are E-Commerce retailers without brick & mortar stores. For manufacturers, these generally offer lower volume sales than Amazon but they are not a bad way to get some awareness and trial. There are plenty of costs here that will impact your selling price.

So, if you are looking to sell a new hazelnut spread to XYZ retailer, it is helpful to know what range of price points exist within the category you are targeting. If you feel you want to sell your hazelnut spread for $4.99, then you can work backwards from this retail price point and peel away the cost layers to get to the price you need to sell to the distributor/retailer. If you are familiar with retailer margins, trade spend costs, distributor margins and required marketing costs, you can quickly run this math to get to your selling price. We will caution you here, if you are new to retail, we strongly recommend working with a seasoned salesperson who understands the channels, categories and retailers.

Ghost Tree Sales specializes in assisting brands launching new products or brands entering new markets. If you’re new, contact us before you make your next move. We can help structure your marketing mix for success.