I get this question often when helping people start their food product business. Many think the “how much” question depends only on the manufactured cost of the product. Wrong! Your selling price depends on the maximum amount a consumer “will spend” for your product in the store. How much is that? It all depends on what store your product are in. If you can have a barbecue sauce in regular grocery stores the product will have to retail for $1.99 but in a gourmet store the same formulation could retail for $4.99. Packaging (bottle size), label design, brand awareness, and other products in the store all have an affect on what your retail price should be. Sounds complicated? It is really not because it comes down to YOUR knowledge of the category and your brand.
When you start to market a barbecue sauce always start with your best guess on what the highest retail price could be. When I started Big Show Foods I had to make that decision. I knew my distribution channel was going to be traditional grocery stores. I knew my customers were going to be middle class working people that enjoyed cooking on the grill (the NASCAR fan which was the JB&B fan). I also had some knowledge of the marketing power to the JB&B Big Show.
With all this marketing knowledge the next step was to study the barbecue sauce category and learn where the retail price levels were. In 1999 the barbecue sauce category had three price levels; Products from $1.00 to 1.99, products from $1.99 to $2.99 and products higher than 2.99. Based on the sales information I had I could see there was a direct relationship between and low price and high case volume. I also noticed that these lower price sauces were manufactured by the leading food corporations (Kraft, Heinz) . Is that a fight I wanted to get in? It’s the “made to sell not to eat” race which did not appeal to me from a marketing stand point. It had been my experience that when your marketing is based on low price you get stuck there with no place to go except even lower. Since your cost are almost always going up it does not take long for margins to disappear. To this day I do not understand why large corporations get in this trap. Kraft tried to get out by creating a new more expensive brand (Bull’s Eye) but most of the time they were buying down that retail to get sales.
My decision was a retail price of $2.99. I was 60% sure our target customer would pay that retail especially when we sold them our brand story on the radio show. If I was wrong I could always buy down the retail with an off invoice allowances. With this retail price decision made I could work down the ladder to get my delivered cost.
How much was I going to let the grocery retailer make? At that time 26% gross profit margin was standard in the category. Based on a $2.99 retail the gross profit was .79 per unit or $9.48 per case.
I knew to get on the wholesaler deal sheets and to guarantee a $2.99 unit retail in the chains I had to have some kind of allowance off invoice to use all year. I decided $4.80 per case would be the correct amount. Working with these numbers I came up with this pricing:
Delivered List Cost $ 31.20 2.60 unit
Less allowance Off Invoice 4.80 .40
Deal case cost $ 26.40 2.20 unit
Retail at $2.99
Case Retail $ 35.88
Case profit $ 9.48
Ok, that is the story for the retailer but what about the profit picture for Big Show Foods?
This is sensitive information that a lot of people are curious about. To get the rest of the store you are going to have to send me an e-mail at tom.price@earthlink.net and ask by putting “I want the rest of the store” in the subject line.
