Before launching your new grocery product, it is imperative to solidify your pricing architecture to accommodate channels of distribution.
The food industry is an enticing space, especially to those who feel they have a new flavor or concept to bring to market. If you’re beginning to sell a new grocery brand or item, it’s certainly not news to you that competition for shelf space is stiff. The food retail industry, which comprises foods sold at food retailers such as grocery chains, mass merchandisers, drug stores, and more, totals to almost $6 trillion in the United States alone.
When launching a new item, there’s a certain checklist you want to run through before bringing your product to market.
- Food manufacturing license? Check.
- Effective product packaging? Check.
- List of potential buyers? Check.
- Well-developed pricing architecture? Maybe not.
Proper pricing is arguably one of the most difficult decisions to reach for new brands. You want to price your product fairly, but you also want to make a profit. You want to cover the costs of labor, ingredients, and packaging, but you don’t want to be beaten out by a product that goes on sale twice a month and has a base price that’s 25 percent less than yours.
Before setting your prices, there are a few key insights you’ll want to know.
Understanding Where Your Base Price Should Live
When you begin producing a new food product, your ultimate goal is likely to be able to sell it while still making money for your business. You’ll need to consider the costs to manufacture your product as well as how to price your product through different distribution channels. To begin, analyze your cost of goods sold, also referred to as COGS. This is the final cost of anything you do or use to produce a finished product. This encompasses costs such as ingredients and ingredient shipping, packaging and packaging shipping, and labor.
For example’s sake, say you are a jam company. Your total cost of ingredients is $2.69/recipe. If said recipe makes 12 jars of jam, your ingredient cost is $0.22/jar. For packaging, including a glass jar, lid, and label, your total packaging cost is $1.01/jar. Say you produce 250 jars of jam: with a labor cost of $0.25/unit, your total product cost, or COGS, is $1.48 per jar. Once you’ve calculated your COGS, your next step will be to factor in margins to get to your ultimate MSRP.
Step by Step: Pricing a Product for Retail
Next, you need to price your product through distribution. The food retail industry works on margin, not markup. Margin measures how much of every dollar in sales you keep after paying expenses. Before you send your product into distribution, you’re going to want a 40% to 60% margin. Leaving yourself a larger margin means that you’ll have adequate wiggle room to allow for any type of broker’s fees for organizing the distribution arrangement, as well as room for promotions once you hit shelves.
With an ideal 50% margin, you’ll sell your jam to a distributor for $2.96/jar. Distributors typically take another 30% margin. A 30% margin on your $2.96 price makes your jam $4.23 per jar. This is the price at which a distributor sells your product to a retailer. Depending on the retailer, they can tack on another margin of anywhere from 30% to 50%, depending on the size of the chain. With a 30% margin, your jam is likely to sell on the shelf for retail at $5.99.
Analyzing Industry Standards for the Best Chance at Success
Voila! There’s your base price. After factoring your COGS and your possible margins, you’re able to determine the bare bones of your pricing structure. From here, check industry standards for your product. Continuing with our example, what is the typical selling price for other jams? Are large quantities sold at that price?
Analyzing competitor data can be difficult if you’re just trying to take notes from the store shelf yourself. Instead, invest in a data provider that can compile the key information you need. Analyzing data such as current base prices, sales prices, and promotion details for both your products and your competitors’ can help you decide if $5.99 is a fair price, or if you could even charge more for your new product.
Taking the First Steps in Pricing
In the retail world, consumers already have an existing set of parameters that influence what they are willing to pay for a particular food product. When you’re beginning to bring your product to market, it is crucial that you understand these values, and where your product can fit within them.
Analyze trends on products in your space, monitor your own pricing, and keep an eye on competitors in every store. As a CPG launching a new product, it is imperative to keep your finger on the pulse of pricing and give your brand the best chance at success.
