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To sell in retail – have a discount and price reduction strategy

2.5 min read

Retailers work to drive traffic into stores and sell products to consumers. And we’ve trained consumers to look for deals and discounts on food and beverage.

In almost every category, promotion is part of the game you must play.

Temporary price reductions (TPR) are a big part of most retailer’s strategy, and they expect suppliers to reduce prices to make their offers enticing.

In almost every category, promotion is part of the game you have to play.

If you’re going to sell into retail, be prepared to offer ‘a program’ of TPRs to your customers to fit their strategy and support their objectives.

Understand each retailer’s discount strategy

When developing your program, understand the initiatives employed by each of your customers. For example, at Sobeys you need to consider Air Miles, in-store specials, ad opportunities and theme promotions. If you’re selling into Walmart, you can participate in rollbacks (like an in-store special) or ads.

Every retailer has their own ideas on what’s most effective. Research the details, such as the program’s duration, the level of discounting expected and the payment method for the supplier. Learn about the programs during your store visits and talking with your category manager or their team.

Monitor the different discounts in your category, and shelf labels often include the duration of discounts. Once you develop an annual promotion calendar, understand what it will cost your business. Don’t think that the extra sales volume or production efficiencies will make up the difference. This can happen, but you must experience incredible efficiencies or volume increases to support a 15% discount.

Consider the following examples

If you discount your price by 15%, your profit per unit decreases to 5 cents per unit.  If you don’t achieve any efficiencies to lower your product cost, you’ll have to sell a lot more. You need to sell four times the volume or 40,000 units to generate the same profit before the discount.

Table 1

  Normal price 15% discount Recover profit with no efficiency
Product cost $0.80 $0.80 $0.80
Regular selling price $1.00 $0.85 $0.85
Regular weekly volume sold 10,000 units 10,000 units 40,000 units1
Weekly profit $2,0002 $5003 $2,000
1 Calculated as follows: $2,000 / ($0.85 - $0.80)
2 Calculated as follows: ($1.00 - $0.80) x 10,000
3 Calculated as follows: ($0.85 - $0.80) x 10,000

The formula is:

Weekly profit = (Regular selling price – Product cost) x Regular Weekly Volume Sold

As illustrated in Table 1 (above), a 15% reduction in selling price needs a 400% increase in sales to generate the same profit.

In some cases, a volume increase will result in better efficiency and a lower product cost. If you can improve your product cost by 5% and reduce it to 0.76 per unit, you need to sell 22,222 units to deliver $2,000 in profit.

Table 2

  Everyday price 15% discount No efficiency 5% efficiency in product cost
Product cost $0.80 $0.80 $0.76
Selling price $1.00 $0.85 $0.85
Regular weekly volume sold 10,000 units 10,000 units 22,222 units
Weekly profit $2,000 $500 $2,000

As illustrated in Table 2 (above), when you have a 5% lower product cost, you require a 122% increase in sales to generate the same profit during the discount.

Your plan should include some product cost efficiencies and volume increases to offset your TPR programs. These efficiencies and volume increases do not just happen. They require planning and great execution so you can continue to generate the profit you need in your business.

Article by: Peter Chapman

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