Consider the ‘other’ costs when calculating selling price
You have a better chance of success when you understand, implement and forecast all costs you’ll incur.
Many food processors ask, “what’s the right markup to ensure we cover all the ‘other’ costs?” The right answer is there’s no ‘one size fits all’ solution. It will depend on where you’re selling your products and the category you’re selling into. It’s important to consider each of these costs related to your products and where you compete.
Some of the biggest costs can be in getting your product to market. If you’re not delivering your product to a retailer’s warehouse, distributors fulfill an important role in selling your product and getting it to customers. Most distributors buy your product and re-sell it to retailers, so it’s not an out-of-pocket cost.
Factor the amount the distributor will add to the product selling price into the entire equation to determine your product’s retail price. Depending on whether your product is refrigerated, and the market you’re selling into, the markup or distributor margin will vary – often between 20-25%.
Brokers are another cost that needs to be absorbed if they’re the right option. They’ll represent your products at your customer’s office and their retail stores. If your item is new to the market, brokers usually prefer to charge a retainer until the volume builds, and they generate revenue. Depending on the services they’re delivering, brokers will charge 3-5% of your sales to the retailer.
Once you determine your product’s selling model, develop a program to get it on the shelf and into the shopping cart. Smaller retailers will charge free fill, one case per SKU per store, and larger retailers will charge listing fees.
To estimate free fill, processors should multiply their cost-per-case by the number of stores they are trying to get into. A good estimate for listing fees is $100 per store per SKU. These are negotiable, and therefore only estimates. Essentially, this is the cost of getting to the shelf. Once you’re on the shelf, you need to develop your promotion program. This is unique for each retailer and each category. A minimum would be three to four discounts of 15-25% per year.
Most retailers will want your product listed with GS1 (Global Standards 1). This is an industry-wide resource for unique bar codes and other product information. Retailers access this, and when registered, you can generate unique barcodes associated with your business and your products. The fees are directly related to the number of SKUs you have.
Insurance is another cost your customers require you to incur. They want proof you have the appropriate insurance level to protect against any liability and absolve them of any responsibility related to your products. Each retailer determines the necessary level of insurance required. Smaller retailers will be looking for $2,000,000, and the larger ones will expect up to $10,000,000 in insurance.
Food safety is non-negotiable, and retailers will have expectations that are unique to each department. Some will require minimum standards such as a HACCP (Hazard Analysis Critical Control Point) plan, and others are looking for other third-party audited programs such as BRC (British Retail Consortium) or SQF (Safe Quality Food). Retailers have different requirements for food safety, and they can change by category. It’s advisable to understand your customer’s requirements and then research the costs with each food safety accreditor.
Many products sell much better when they have certifications included on the label. Examples could be non-GMO, Kosher, gluten-free and many more. Each one will include a fee and work required to qualify. There will be initial work and fees to get the certification, then an annual fee to maintain it.
These costs are part of doing business and need to be factored into the equation to determine the right selling price. Selling food into our retail distribution network is complicated, and you’ll have more success when you understand, implement and forecast all costs you’ll incur.
When the potential costs are included, the right selling price can be determined and will include some profit for the hard work.
Article by: Peter Chapman