Correct pricing [Part 2]
4-min read
If you don’t totally understand how prices get set across all channels, but have gone out with a price somewhere, the chances that it’ll work itself out later and be fine are 0%.
Pricing and margin structure are different not only between channels but within them. (This is Part 2 from last week, so if you’re lost go back here.)
This is not intuitive. So, let’s break things down.
Your product price at retail must make sense across the different storefronts within a channel, and all the other channels you will be selling into. If you get it wrong it can be devastating, not only to profitability, but your future in the biz.
Changing price can be difficult when the reason is not inflation or supply chain, but “I messed up”. You can submit a price change, but it may not be accepted by the buyer, especially after they agreed to a certain price considering competitive items. It calls into question how well your items may sell at the new price.
Understand that you will not have the same retails everywhere, and that is by design. The general rule is the mass channel will have the cheapest price, national and regional grocers will have a higher price, and independent retailers the highest. Your price online should not be less than mass.
Breaking things down
Let’s start with how your retail price can differ within a channel. There are two main variables to consider: the route to market your products take, and the cut the distributor and/or retailer takes.
There are two ways your products get to market: through a distributor or direct.
Distributor model
Distributor business is when your customer is the distributor and they send you the POs. Within the distributor model are the terms they have with the different retailers, which determines the wholesale price offered on your products. It’s important for you to know what these terms are so you can build your pricing architecture.
Margin vs mark up
Once you know what the terms are that the distributor has with the retailers, you then need to get the math right on whether it is a margin or a mark-up. When they take a margin, they want to make a % off the wholesale they will be listing it for. When it’s a mark-up, they are simply increasing the cost by a % to arrive at the wholesale. These terms are worked out between the distributor and the retailer. For example, an independent retailer gets the KeHE “book price” in which KeHE wants to make 20 – 30% profit margin on the wholesale price offered. Whereas with Sprouts, KeHE has a contracted mark-up cost of +8%. At first glance, it is not obvious which retailer will end up with the higher price.
Let’s work it out:
In this example, pretend you are selling to KeHE at a cost to them (your list price) of $2.70. At Sprouts, where KeHE takes a +8% mark up, your products are on shelf for almost $1 less than at an independent retailer where KeHE wants a 25% margin. And note in this example, the retailer margins are the same.
Direct model
Direct is when your customer is the retailer and that’s who you invoice. In this case, Walmart. Here, there is no difference between your list price and the wholesale price to Walmart because you are selling to them directly. Walmart wants the lowest cost from you, so you sell it to them for $2.39.
This is proper pricing architecture. Your cheapest price is at Walmart (mass) and next highest is Sprouts (national retailer) and highest will be a mom-and-pop or a specialty store.
The watch out is when going direct amongst channel competitors. You don’t want HEB competing with Kroger if you were to be going direct to one, therefore you may need to offer a higher direct price to maintain price parity.
E-comm
Amazon is notorious for flagging your account as “at risk” of deactivation if your items are found cheaper online elsewhere. Amazon crawls Google shopping, and if you sell to Walmart, even if you did not list on Walmart.com, your items will show up for pick up or delivery. How to best avoid this is to not sell the same items on Amazon as anywhere else: meaning sell bundles or different pack sizes.
Once you master pricing strategy, then you can focus on the trade support programs that will allow each of your retailers to be successful without building an advantage for one over another.
All my best,
Jennifer