Setting and getting the right price for your product
As part of my profile raising strategy to publicise my book — “Recipe for success — the ingredients of a profitable food business”, I was asked to deliver a masterclass how to make a profit.
And it got me thinking — how few people in the food industry actually talk about making money — so is it a dirty word (or indeed phrase?) . There is much written on creating your brand, designing great packaging and generating great innovative ideas (see my last blog!) but what about simple focus on making money!
I have read Simon Sinek’s book “Start with why?” He says it is not about making money or selling the widget for a profit, It is about “why”. People are looking for a story — the reason that you get up in the morning. The purpose, cause or belief that inspires you to do what you do. And that is great foundation for why you are making the nut butter, gluten free bread or vegan sausages. BUT, you cannot achieve your why without making money and you may want to save the world from a shortage of nut butter but to do this you need to make a profit so you pay the mortgage, rent or buy your own food!
So how do you make it happen? To make money you need to focus on very simple economics:
- Set the right retail price
What price will your product sell for?
- Know your USP — if you have a unique product that you cannot get anywhere else then you can set a high price. I have just paid £78 for a replacement Apple charger for my macbook air — other brands are available but I love my mac! Would I pay more? Probably!!
- What’s the competition pricing — there is always a competitive alternative even if your product is the most unique on the planet. Especially if it is a food because at the end of the day you are competing for share of stomach — and theres lots of alternatives out there for that. So be careful in defining your market
- Market strategy — where does your product sits in the hierarchy — premium, midmarket or economy?
- Negotiate the optimum selling price to retailers and wholesalers (or online)
My clients often ask what margin should they allow for when selling to retailers — it really does depend on the market category, retailer and strength of the brand. But you can ensure you are at the top end of the margin spectrum by simple negotiation techniques:
- Avoid sending a price list — share the price verbally. It makes it easier to justify.
- Be 100% committed. Know that your selling price is the one you need to sell at and ditto with your retail price (and have the evidence to prove it).
- Be firm and direct — no soft signals such as “I think the price is around £x”
- Offer other negotiation chips than than price eg free sampling, social media support
Be prepared to negotiate but also to walk away — you won’t sell to everyone so don’t compromise on price and undermine the profitability of your business
- Design your cost base to deliver profit from 1 and 2
Here are 7 key killers of profit before you even think about marketing and selling costs!!
- Bespoke ingredients and packaging — a unique ingredient maybe the backbone of your USP and in which case it’s a great idea but for most of us, the simpler the better — don’t overcomplicate with bespoke recipes or packaging. Innocent didn’t use a specially tooled bottle — why should you?
- Labour intensive production — try and simplify the number of stages in manufacture so that you keep the labour costs down as much as possible — do you really need that extra garnish?
- Low volumes — time and time again, clients of mine come up against MOQs from suppliers — it is the killer so when designing your business model — try and think of how to maximize volumes or use standard off the shelf components
- Shelf life and waste — waste is such a buzz topic at the moment and deserves a blog of its own. But minimizing how much you put in the bin, whether that is made stock due to over enthusiastic forecasts or waste during production will have a massive impact on profit. Work on creating a product with maximum shelf life — invest in good shelf life testing — retailers love it and so will you!!
- Raw materials inflation — if you are dependent on a specific raw material — eg nuts if you are making a nut butter think about how you will hedge against inflation — in these days of Brexit, it is not going to go away as a challenge to the bottom line
- Distribution — small businesses struggle with finding ways of getting product to customers.
- Retailer requirements — ensure that when you are negotiating you are not building in agreements that add cost eg asking for small uneconomic deliveries, shelf ready packaging they don’t use (that cost one client of mine £250k per annum) etcetc
Did you notice the order in which I had written those three economic factors? I started with the end in mind at the beginning. How many people actually deliver the process in that order?? Set the retail price, calculate selling price and THEN design the product. In own label situations, I have done this a lot — create a ready meal for £3, retailers needs x% margin, we need y% and therefore this is the target cost. It is a great way to change the perspective that you work from.
Conventional wisdom designs the product, does a cost plus calculation and then goes into the market place to sell it. And then we cost engineer to try and claw back enough money to make a profit. This doesn’t really work! It is better to start with proft and work backwards.
There is a great book called Profit first by Mike Michalowicz who says from DAY 1, you start by banking profit in a separate account and this is a great way to focus the mind — maybe it does stifle investment and growth but it does enable you as the entrepreneur and business leader to ensure you are making money from the start. He says if you aren’t making money then don’t do it — simple!
In summary then, I don’t think making money is such a bad focus and we do need to have it as an underlying theme throughout our product and business design. We need to talk about it more to ensure that food businesses thrive and flourish. Then we can achieve our why in the least stressful way (and make a profit!).