Pricing your product
The fourth P of marketing is pricing.
Price plays an important role in consumers’ purchasing decisions. Some people are looking for the lowest possible price; others equate a premium price with a better-quality product. The research you did for your business plan should have indicated what your customer is willing to pay for a product like yours. Keep that in mind as you set a final price on your product.
In this section you will learn:
- about pricing practices in food retail
- commonly used trade terms
Pricing practices in food retail
When you sell to food retail stores, you do not have total control over how your product is priced on the shelf.
If you are selling through retail, you need to clearly understand how retail practices will affect your pricing and the revenues your business will be able to generate. The following will help you understand common retail pricing practices:
Deals and allowances
Deals and allowances are special price breaks you give to motivate retailers to list or promote your product.
Although most distributors and retailers pass on these savings to the shopper, this is not always the case. You may be able to recommend the ultimate retail price, but you cannot control it.
Private label products
Private label products are sold under the store’s own name, or a name made up just for that store. These products give you an alternative opportunity to access the food retail market. If a retail buyer wants your product for their private label line, they will expect you to quote a net price that is your final bottom-line cost of an item with a cash discount. The retailer will typically determine the retail pricing.
Each retail format and company will have their own pricing strategy and margin expectations. The Ontario retail food channel is comprised of club warehouses, discount stores, conventional stores, independent stores (large and small), ethnic independent stores and others. Retail pricing and margin expectations will vary based on each of the formats’ go-to-market strategy. Some, like warehouse clubs, will focus on an everyday low pricing platform and net costing (includes all discounts/fees) while others like conventional retailers will require inside margins/fees that are captured internally and will not be reflected in lower retail pricing.
Each retailer and format will have various internal cost programs (such as advertisements, warehouse allowance, leaks and swells) that will be the responsibility of the supplier to pay. It is important when quoting any pricing, that you understand exactly what over-above costs need to be captured in your quoted price.
Commonly used trade terms
These are normally single payments made to retailers or distributors to encourage them to carry your products. The listing fee consists of a one-time set-up cost for administration, warehousing, computer listing, quality control and consumer advertising.
Listing fees are negotiable. The more certain the retailer or distributor is that your product will be successful, the lower the listing fee. However, if your product is not a success, the retailer or distributor will want to recover all initial costs, including the costs of removing the failed product from store shelves and warehouses.
In addition to listing fees, you must support your product with extras such as promotional ads and in-store demonstrations to help you get listed. The retailer will often ask for free goods when you are introducing a new product.
This is a discount offered for payment of an invoice within a specified number of days from shipment or receipt of goods. The industry standard is 1-2% off the invoice if paid in 10 days, or the net invoice payable in 30 days.
Discounts: leaks and swells
This is a general allowance that is given to offset the cost of product shrinkage or damage within cases.
Damaged product is usually returned within a certain time for compensation or sent to a reclamation centre (central warehouse). The supplier is billed via a debit note on a monthly basis.
If a product is risky or its potential success is questionable, the buyer will usually expect you to guarantee the sale of the product. You must agree to repurchase any unsold portion of the initial order. However, if the product is perishable, for example, produce or meat, the buyer will normally absorb the risk and take responsibility for the entire lot.
Market conditions might fluctuate so that the product price declines and becomes lower than the price you originally quoted. If this happens, you are expected to compensate the retailer for any stock they are left holding.
However, if market prices increase, buyers will expect you to give sufficient notice so that they can purchase product in advance of the price increase.
Many retailers will not accept price increases in November and December, because this is their busiest time.
Product liability insurance
Most major distributors and retailers will insist that you carry insurance against lawsuits if consumers become ill or injured after consuming your product (see Liability and insurance for more information).
You pay a percentage of the invoice price to the retailer or distributor to cover some of their costs for advertising your product. Generally, 2-5% of the invoice value is used for co-op advertising. However, this can vary.
Some retailers may offer you a promotional package promotion. These packages and advertisements costs are set once a year and listed by retailers for suppliers. Most retailers book ads up to six months in advance. The promotional package prices are often negotiable, but only if you are already listed with the retailer.
It is important to keep in mind that these co-op advertising funds alone will not pay for all your advertising needs. Additional funds will be needed to cover ad costs.
Suppliers of produce, fresh meats and bulk foods usually do not pay for co-op advertising. However, they are expected to offer deals or off-invoice allowances to retailers to lower product prices during consumer promotions.
Promotional or off-invoice allowance
This is normally a dollars-off-per-case allowance, which lowers the regular cost of the product to the retailer. Suppliers usually offer this allowance three to four times a year.
In general, the trade expects a 10% allowance for a minimum of four weeks. When you offer the allowance, give the retailer a minimum of eight weeks lead time.
Many retailers purchase 80-90% of their products on deals over the course of a year. In most cases, the allowance is used in conjunction with other merchandising vehicles such as co-op advertising to achieve in-store merchandising objectives. A retailer will not buy and advertise an item if it does not have an off-invoice allowance.
This is an allowance that supplements costs for such retail advertising as co-operative advertising, flyers, newspaper ads, point-of-sale material and media (radio or TV) within a store group.
This encourages in-store display activity and is paid to the retailer for all cases ordered and displayed during a specified time. Payment is usually by a separate cheque following proof of performance by the retailer.
Inventory deal allowances of free goods
It is good business for you to offer incentives that will encourage retailers to carry your products for the first time. Incentives may include one case free for each store or a case allowance for a certain period (for example, 60 days after an initial order).
“One free with ten” means order eleven cases, pay for ten. “One free with three” means order four cases, pay for three, and so on. To calculate your actual cost, multiply the number of cases paid for by the price per case, then divide that figure by the number of cases ordered. For example:
One free with ten at $10.75 per case:
Actual cost per case = (10 cases × $10.75) ÷ 11 cases = $9.77
Here’s an easy reference to see what free goods are worth expressed as a percentage (the percentages are rounded off to the nearest tenth):
- 1 free with 2 = 33.3%
- 1 free with 3 = 25%
- 1 free with 5 = 16.7%
- 1 free with 10 = 9.1%
- 1 free with 12 = 7.7%
- 1 free with 20 = 4.7%
- 1 free with 25 = 3.8%
Buy one item at a cost of $2.75 or buy two for $5.00. The cost of one item is actually $2.50: a savings of $0.25 per item.
Volume rebates, usually 1-5%, are based on a percentage of the invoice price paid to the distributor. The volume rebate increases on an incremental increase in sales. The objective is to encourage the distributor to move additional cases over a given period. At the end of this period an adjustment is made on the final payment to reflect the actual cases purchased. This is a retail performance incentive.
Volume rebates, once offered to a retailer, are often difficult to withdraw. Before offering them, you should determine if your competitors are doing so, because rebates are not offered for all product categories. Negotiating skills are critically important in dealing through the retail channel.
Over and above
On occasion, suppliers may offer allowances such as lump sum payments or per-case rebates over and above the originally negotiated arrangements with retailers. This is done to strengthen promotions, clear out inventory at retailer warehouses or possibly when launching a new product.
Note that retailers welcome over and aboves but may expect such deals on a consistent basis. You should negotiate over and aboves annually, and the activity provided by the retailer in return for the allowance should be determined in advance of payment.
You might also want to request confirmation that a deal or discount was passed on to the consumer. Ask if the retailer is willing to provide proof of performance, such as a copy of newspaper advertising or pictures of large or end displays. This material will be useful when you are selling to other retailers or promoting your products to independent stores.
Truckload allowance/minimum delivery size
You may wish to offer a purchaser a discount for taking an entire truckload of product. For example, you could offer $1,000 off a 45,000 lb. truckload, worked through to a per-case saving that will vary depending on the weight of the case.
- I have researched my competitors’ prices for similar products.
- I know what price my potential consumer is willing to pay.
- I know which pricing strategy and program aligns with my business and marketing strategy.
- I have tracked the variable and fixed costs for my product(s).
- I have calculated the break-even point at current prices.
- I know how changing my price will affect my profit level. I know how increasing volume could increase my profit.