Hey , 

Happy Monday and Asian-American and Pacific Islander Heritage Month. Check out our latest

Good Food Brands article

highlighting ways you can celebrate featuring some of our Asian founders.

Today I want to talk about pricing strategy, including pricing your product to create a sustainable business.

PS. If you were forwarded this newsletter, please 

click here to subscribe

. 

  Pricing Strategy

If you're like most founders, you priced your product wrong from the very beginning, and have been trying to correct it ever since. Why does this happen? Pricing strategy is an integral part of your overall business, so it's important to think about pricing from the very beginning. But starting out, most founders don't understand all the components from product costs to retailer margin. Today I'm going to break down 5 pricing considerations you need to incorporate in your strategy:

• Product Cost

• Consumer Price

• Competitive Price

• Cost of Doing Business

• Changing Market Conditions

Product Cost

When I launched TeaSquares, I had a vision for a product that had the best ingredients I could buy. I thought about taste, quality, functionality, and a dozen other things before pricing. My primary concern was just to make the product, and then I would figure out the cost and pricing later. My team and I created the product, formulation, and packaging without having a cost goal, which lead to an incredibly expensive product. 

One of the biggest myths about growth is that your product COGs will significantly decrease over time. While it's true that you will save on volume pricing, those savings max out pretty soon. The first big cost savings is when you can order complete pallets. The next price savings comes when you order full truckloads. After that, you max out on savings.

Here are some strategies to reduce costs:

• Reduce Manufacturing Complexity - Every product type has standard manufacturing processes to make the product at large volumes. Deviating from these norms may help make your product more unique, but come at an incredibly high up front cost. Using standard processes provides more manufacturing options

• Simplify Ingredient Sourcing - As you formulate new products, take into consideration ingredient cost and availability. Specialty ingredients with few manufacturers can cause big supply-chain issues if they raise prices or stop producing. 

• Diversify Ingredient Sourcing - Make sure that every ingredient has 2-3 vetted suppliers, with at least one of those being a domestic supplier if possible. This way you can better navigate shipping and COVID delays

  Consumer Price

If you're reading this you're most likely in the premium/gourmet/natural products industry, which means you're working with expensive ingredients and products. Consumers do expect to pay more, but they still have limits. Consumers will pay a higher price depending on: perceived product value (what will this product do for me), competitive pricing (more on this below), and availaibility of substitues. 

Also consider pricing for trial vs. repeat. Many natural product consumers are open to discovering new items and are willing to pay to try it. But unless the product blows them away, they likely won't purchase a second time.

You should also consider how to make your products accessible to consumers typically underserved in the CPG market. Those with lower incomes or who are economically disadvantaged. I've talked with Diana Fryc about this and encourage you to

read her article on it here

. 

  Competitive Price

Your product doesn't exist in a vacuum, so it's important to understand how consumers compare your products to the competiton. Every 6 months you should conduct a competitive pricing study. Look at all the products in your competitve set, document their size, price, and key value propositions. Then you can use this to reflect on your category position. Sometimes it make sense to be the highest priced product in your category, other times it makes sense to be the lowest. This is for you to decide. I can tell you that most consumers chose something in the middle, as they feel the highest priced product is over priced and the lowest price must sacrifice ingredient quality.

Cost of Doing Busienss

Running a CPG brand is incredibly expensive, and everyone wants a piece of your money. Most founders underestimate the high costs of doing business with retailers and through e-commerce. These are costs required to get your product  Let's break down the cost of doing business from my experience with TeaSquares so you can prepare:

Selling to Jewel Osco through KeHE:

TeaSquares Unit Product Cost: $1.25

TeaSquares Price to Distributor: $2.10 (Brand Margin $0.85 or 40% Margin)

Distributor Price to Retailer: $2.45 (Distributor Margin: $0.39 or 14.2% Margin)

Retailer Price to Consumer: $3.49 (Retailer Margin: $1.04 or 30% Margin)

Now this is just the beginning, because retailers also expect brands to support the them with promotions, demos, and merchandising. Taking these into consideration, our trade spend came out to an average of about 15% of our Brand Margin, bringing our effective margin down from 40% to 25%. It's recommended that CPG brands have an after promo margin of at least 30%

Selling to Amazon

TeaSquares Selling Price on Amazon: $16.99 for 3-Pack

TeaSquares Unit Product cost: $3.75

Shipping to Amazon FBA: $0.15

Amazon FBA Fee: $3.28

Amazon Marketplace (referral) Fee: $2.55

Gross Profit: $11.01

Amazon Advertising: ~$5.5 Cost per Purchase

Coupon Cost 5%: $0.85

Net Profit: $4.66 or 27% net margin

As you see, Amazon had a slightly higher net margin than retail. But not a ton more.

Changing Market Conditions

Three major market conditions are increasing pricing: supply-chain delays, increased labor costs, and ingredient inflation. I just talked with two businesses who shutdown because they could no longer make any profit due to rising ingredient costs. 

Now is the time to correct your product pricing, as consumers and retailers are expecting and understanding of price increases. If you don’t now, you’ll have a harder chance doing so in the future. While you may want to “save” you consumers the trouble of increased costs, it won’t help them in the long run if you have to shut down your business. 

Want to dive deeper into the topic? My friend Sari Kimbell offers a course on Pricing for Profit. Don’t make all the mistakes everyone else does; know your COGS and margins correctly so you can start on the path towards profitability as a packaged food business. You get her amazing Pricing for Profit tool that makes your calculations a breeze. This workshop helps you to avoid becoming an expensive hobby. https://www.foodbizsuccess.com/a/28418/eWSPX3HY

Wow, so that was a lot! Let me know your thoughts on pricing and how you’re combating rising costs. 

Jordan Buckner

Foodbevy

PS. Check out some new offers I was able to curate for you below:

AUTO-APPLY THE SMALLEST DISCOUNT THAT GETS EACH CUSTOMER TO BUY MORE

I'm personally using this great new tool to create personalized discounts for each of my Good Food Brands customers and products and you should too.As a brand, it's incredibly important to make sure that you’re profiting as much as possible from each sale and not overspending on discounts with universal promo codes, email pop-ups and point loyalty programs.You may not know it, but you are likely losing money by offering too much discount on products to shoppers that don’t actually need it to checkout.Why offer a 20% off SUMMER promo code or email signup pop-up when the same shopper would still purchase with only a 9% discount?Veeper is a Shopify app that auto-applies the smallest discount that gets each customer to buy more - increasing average order value by net 14%.Test Veeper on my own Good Food Brands site and request an intro

NEED HELP WITH SALES TAX?

Sales tax obligations are changing in many states and because you are a packaged food, it is even more confusing. Learn the rules and next steps to make sure you are compliant. 

NEW PODCAST EPISODE: 41. From KIND to SOMOS, Launching a Made in Mexico Brand, with Miguel Leal

SOMOS is a new line of authentically made in Mexico meal-kits co-founded by Daniel Lubetzky (founder of KIND), Rodrigo Zuloaga, and Miguel Leal. Join me as I talk with Miguel to learn how they decided to launch the brand, overcame supply-chain obstacles, and are creating a story resonating in households across America.

Listen on Spotify | Listen on Apple Podcasts

DISCOUNTS

- Mindful Goods 

is an awesome Amazon expert that can quickly get you started or optimize your pages for strong ROI. 

Get 10% of their services 

 use code FOODBEVY.

- Maverick Lab 

allows you to create individually personalized videos (with a customer's name) welcoming them to your community. Foodbevy members save 40%. Reply to this e-mail for an introduction.

Check out their demo here.

- Chop 

is a

rebate platform

that allows you to drive in-store trial, collect customer shopping data, and build customer profiles to further drive your business. Foodbevy members save 20% off. E-mail me for the discount.

- Stripe 

is now providing $20,000 in fee-free processing for new and EXISTING customers.

Save over $600

The Accountrepreneur 

is your go-to outsourced CPA and CFO firm for the food and beverage industry. Receive

 a free financial assessment + Foodbevy Members get 20% off services for one year.

- Airtable

 can store information in a spreadsheet that's visually appealing and easy-to-use, but it's also powerful enough to act as a database that businesses can use for customer-relationship management (CRM), task management, project planning, and tracking inventory. 

Receive $2,000 in free credits

With your help we're building an amazing community of Food and Bev entrepreneurs helping each other!

Jordan