Understanding Pricing: Why Your Bigger Picture Impacts It All
The basics of pricing can be rather daunting to work out with so many players from manufacturers, packaging components, retailers, distributors, agents and consumers involved. Navigating margins, mark up, cost price, wholesale price and retail price (RRP/ MSRP) is all part of the process. Adding in the additional complexities from international expansion such as taxes, import duties and distributor margins can turn creating your pricing into an even more difficult task. The key to long term success is building sustainable profit margins into your products. The best way to start the product pricing process as a new brand is to carefully set your bigger picture goals. This means getting clear on which markets and channels you will enter.
Here are some thoughts on how to work out your product pricing more easily:
Determine your Cost of Goods (COGS).
In other words, how much does it cost you to manufacture your products? Your COGS is the starting point that will directly impact your wholesale price, retail price and in turn your margins and ultimately the ability to scale into new markets. COGS has to include your ingredients, manufacturing and packaging charges and labor. Bear in mind this cost should decrease as you scale. If you are not getting the best margins right now, they should improve once you can order larger volumes. Start selling D2C and as you get more demand and begin conversations with retailers you can commit to larger quantities. Then you will be able to achieve a better purchase price that will allow you to work in these new channels.
Calculate your wholesale price.
This price is what the retailer will pay you for your products. Most retailers require a margin of at least 50%. Or looking at it another way, a markup of 100%. However, luxury stores will require a larger margin than standalone independents. Luxury store margins can be as high as 65%. Grocery on the other hand has lower margins but higher promotional costs and less margin to play with as the products are less expensive. These differences are why it’s important to think ahead about your target market, which in turn determines your retailer, which then influences your pricing.
Distributor margins.
Distributors will require even more of a margin than retailers but they will essentially handle your brand in that territory and cover all the costs involved. They usually work with a coefficient of 4–5 times their purchase price. In other words, if the RRP/ MSRP is $100 USD then many will want to purchase that product for $20 USD, giving a coefficient of 5 times. Bear in mind that you can have different pricing and coefficients for distributors in their respective territories and also different channels (grocery/pharmacy/luxury). There is room to move with your pricing but it’s usually always higher overseas. Negotiation is key and if you are willing to support the distributor with a good marketing allowance then you can negotiate even further. Don’t shy away from negotiation, but also remember that a good distributor knows their market better than you ever will. Trust their judgment on the final MSRP.
Finally, you have to set your retail price.
Your retail price will factor in all of the above and ultimately comes down to how much you think customers will pay for the product. Market research is key to understanding your consumers and setting your retail price in line with their expectations. You need to assess where you see yourself in the market and how your price benchmarks against your competitors. It is not always the best idea to price yourself well below your competitors as it gives potential customers more questions as to why you ‘are so cheap’. However, if you are going to be much more expensive than similar competitors then make sure you have the packaging, ingredients and USP to justify your price. Setting this final price can sometimes feel more like an art than a science, but if you follow the steps above you should be able to confidently come to a price range you are certain will sell and sustain your business.
Correctly setting your pricing will allow you to succeed. Give the process proper attention from the start and it will be all that much easier to grow, expand internationally and raise additional investment.