How to Determine a Right Retail Price For Your Product
Setting the “right” price is one of the major decisions you will have to make as a small business owner.
When selling to a retailer you will be expected to provide a suggested retail price for your product. It should be competitive, cover your costs and contribute to the growth of your company.
PRICING STRATEGIES
The right price for your product not only covers costs, but also generates a profit and funds to grow your business.
What is the right pricing strategy?
The right pricing strategy is typically a blend of several strategies to achieve balance between costs and value.
Covering your costs is only part of the equation. Pricing should also factor in the value and benefits the product offers, your customers’ willingness and ability to pay as well as the value the product provides compared to competitive products.
What is value?
To the retail buyer value may mean a professional marketing plan, guaranteed delivery dates and in-store promotions. To the end consumer value may include local, convenient packaging, environmentally friendly or high nutritional quality.
The following table compares five common pricing strategies:
KNOWING YOUR COSTS
Business owners must keep track of fixed and variable costs:
Fixed costs: Costs that do not change regardless of the amount of product produced.
Variable costs: Costs that vary depending upon the amount of product produced.
“HIDDEN” COSTS
When selling to a retailer, you may be faced with a number of additional costs that must be factored into your pricing. Examples are listed below:
Listing Fee or Slotting Fee: a fee charged by the retailer to put your product on their shelf.
• Negotiable between seller and retailer.
Cash Discount: The retailer takes a discount for early payment.
- Example: 2/10 net 30; retailer takes 2% off the invoice when they pay in 10 days, or pays the full amount in 30 days.
Provides incentive to pay faster but costs you, the vendor, a lot more; a 2/10 discount equates to 37% of sales on an annual basis.
Product Liability Insurance:
• Required by most retailers.
Promotional Allowance: Reduced pricing to the retailer to promote product sales.
• Expect to offer reduced pricing three or four times per year.
PRICING FOR RETAIL
The retail grocery business is all about margins. Buyers refer to margin percentages which are related to profitability.
CALCULATING YOUR SUGGESTED RETAIL PRICE
The example below uses cost-based pricing to demonstrate the different layers involved in pricing to the retail trade. While you may not have a broker or distributor right now, you may want to factor these costs into your introductory pricing rather than risk raising prices later.
What happens if your suggested retail price is too high?
If your suggested retail price is too high the retailer may not list your product. A product listed at a high price may not sell resulting in it being delisted.
Should your price be higher than competitive products make sure to examine your costs and identify savings opportunities or find ways to build value to differentiate your product from the competition.
THINGS TO THINK ABOUT WHEN SETTING YOUR PRICE:
Getting your product onto the retail shelf is only a start.
Getting it into consumers’ carts is also your responsibility. In-store demos, social media campaigns and special promotions all need to be factored into your costs.
Selling retail and direct-to-consumer?
You risk putting your relationship with your retailer at risk if you sell the same product directly to the consumer (e.g. e-commerce) at a lower price.
Your direct-to-consumer price should be similar to the retail price or you should differentiate your product so the consumer sees it as a different product. For example make a 6-pack for retail and a 10-pack for online sales.
PRICING FOR OTHER DISTRIBUTION CHANNELS
The pricing strategies and principles for retail can be applied to other channels as well.
Your pricing strategy is a critical component of your company’s overall marketing plan. For more information see our guide on “How to Develop and Use a Marketing Plan”.
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