February 19, 2013
Yesterday we talked about classes of trade and today we’ll start walking through each of those to get a better understanding of what you need to take into account pricing-wise at each step to ensure that you’re making money through all of the steps.¬† First up, selling direct to customers.¬† Whether it’s online, at farmers’ markets or festivals, special events like catered functions, maybe you have your own mail order catalogue, or 101 other avenues, this is typically one of the ways small food businesses sell their products and make money.¬† So let’s take a look at¬†selling direct¬†and see how you figure out a retail price point for your products.
I don’t think I need to go into too much detail about what exactly selling direct to customers entails other than there is essentially no middle man between you and the end customer.¬† Yes, you may have to pay credit card transaction fees or website hosting fees, but really it’s you and customer conducting a transaction with one another.
So how do you make sure you’re making money from that transaction?¬† Well, you could guess at what you think your final retail price should be.¬† That’s not a good strategy but, sadly, I can’t tell you how many times I’ve seen from food entrepreneurs.¬† Too often small food businesses don’t have a firm grasp on what their Cost of Goods Sold*¬†¬†are and simply price their products based on what they think the consumer is willing to pay.¬† There are several reasons why this is a very very bad idea:
1. If you don’t know what your costs are you can’t know if the price you’re charging is actually making you money.¬† Don’t laugh – I’ve seen it happen on more than one occasion!
2. If you choose your price willy-nilly then you may not be building in enough of a cushion to account for all those pieces of running your business that aren’t associated with your Costs of Goods Sold.
3. If you plan to grow into other classes of trade down the road – ie, you want to start selling into retail stores or working with distributors, your final retail price needs to take into account enough margin so that each of those players can get their piece and still leave you with enough money in your pocket so that you’re turning a profit with every unit.
So How Do I Determine My Retail Price?
Because every product category is different there is no hard and fast number but, if you plan to one day expand into selling wholesale to retailers,¬†the rough rule of thumb is that you want to¬†set a retail price that gives you¬†50 – 60% margins over your wholesale price.
Tomorrow we’ll take a look at how you determine your wholesale price and¬†walk through¬†a few examples so you can see how this might look price-wise on different items but in the meantime the reason you want margins that are roughly in this range is to help you pay for all the other expenditures that go along with running your business such as your marketing costs and to account for your time (or staff’s time) that isn’t directly related to the actual making of the product.¬† You’ll also see, later this week, how these margins are going to get squeezed the more middlemen we add to the puzzle and if you don’t start out with good margins you will quickly find yourself in the position where you’re either losing money with each product or you’ve limited your ability to grow.
* As a reminder, your cost of goods sold (or your Per Unit Product Cost) is comprised of those things that directly impact the cost of each unit.¬† For food businesses this is typically your packaging, your ingredients, and the direct labor associated with the product.¬†¬† Cost of Goods sold don’t usually include things like your overhead, your administrative expenses, or your marketing expenses.¬† Cost of Goods Sold also shouldn’t take into account the time you spend on the business that is not physically related to the making of the product so things like time you spend in line at the post office to mail¬†product to a customer, time spent working on updating the business’ social media pages, or time spent getting your accounting books up-to-date does not fall into Cost of Goods Sold.¬† This is yet another reason why you need a healthy margin – to help pay for all the rest of the time you spend running the business that isn’t actually in the kitchen!