January 13, 2014

Distributor/Broker Negotiation Cheat Sheet

Cheating First and foremost, welcome to the new site.  What do you think?  I realize at first it can be a little disorienting – sort of like walking into a supermarket and realizing they’ve changed up all the aisles – but hopefully you agree with me that this new look and feel is exactly what Small Food Business needed.  However, back to our regularly scheduled programming – and today that has us talking about distributors and brokers.I’m not kidding when I say the best ideas come from you guys and this is one example of that.  I had an entrepreneur contact me a few weeks ago as she prepared to head to San Francisco for the Fancy Food Show.  She wanted to know the best way to negotiate with the distributors and brokers she’s hoping to meet there.  Specifically, when they start throwing margin calculations around, what’s the best way to look professional (aka – not fumble with a calculator) and still make sure you’re making money.

So it was that question that prompted me to create a Distributor/Broker Negotiation Cheat Sheet.  It’s a pretty simple spreadsheet – simply put in your Cost of Goods Sold (COGS) and your wholesale price in the orange cells and then the spreadsheet will calculate a  number of different price points and your associated profit at that percentage amount.

distributor food broker negotiation

Just to be clear, I’m not advocating a 50% margin to anyone, but I wanted to give you a range of percentages so that if someone threw out to you – for example – 17% – you’d have a rough idea of what that would mean for your profits.

Best of all, this prints out neatly on one page (when printed in landscape format).  So you can keep it hidden from view as you sit across the table talking to distributors and brokers.

Actually, the best piece really is that it’s free (for now at least…it will likely be integrated into a future update to the Product Cost & Pricing Spreadsheet).   So whether or not you’re headed to the Fancy Food Show this week or any other tradeshow in the future, go grab yourself a copy of this spreadsheet so you can make sure that when negotiating with food brokers and food distributors, that you’re not giving away the kitchen sink.

Click here to access and download the Distributor/Broker Negotiation Cheat Sheet.

Speaking of the Fancy Food Show, are you going?  If so let me know your booth number as I’d love to stop by and say a quick hello on Monday.

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5 comments on “Distributor/Broker Negotiation Cheat Sheet

  • Jeanne Petrus-Rivera on said:

    I’m ready to move from direct selling through farmers markets and festivals to wholesaling to stores and restaurants. I used the pricing tool to figure out my COGS (excellent tool, by the way!), but now it seems like setting my wholesale price can be whatever I want it to be. My profit margin will be whatever I want it to be, or whatever will be negotiated. Might a retailer try to negotiate a better price than what is on my pricing sheet? I hear different things from different people about how I should set my prices. Right now, my product costs, for example, $2.50 to make. I’m selling it for $10. So I plan to wholesale for around $5. I mentioned that to someone “in the know” who said, “Oh wow! That’s a lot to make per product.” But then when I decide to have a distributor join the circle, then that will cut into my $2.50 profit, correct? And then the Cheat Sheet has such a huge range of commissions for the broker and distributor. Does it vary by region? By food type? How can I have any idea that I’m getting a fair deal? I just feel confused and overwhelmed right now. Thanks for any insight!

    • Jennifer on said:

      Let’s see, lots of questions and I’ll do my best to answer:
      1. Might a retailer try to negotiate a better price than what is on my pricing sheet? Absolutely – the retailer or distributor will always try to negotiate the best possible deal for themselves. One way they commonly do this is by committing to buy a larger quantity (i.e. – promise to buy 100 units instead of just 10) and want a price break for that. Offering those discounts is not necessarily a bad thing especially if it helps you build relationships and/or sell more units but you’ll need to evaluate that for your business. But in a nutshell, yes, they will try to negotiate the best possible deal.
      2. How to set your prices. There’s no hard and fast about this but someone ‘in the know’ saying that you’re making a lot per product seems like a rather strange remark to me. You, as a business owner, should try to be making as much as you can per product while a) offering the best quality for the price b) being in line with what competitors are charging and what consumers are willing to pay. Think of it like this, there are some luxury stores that sell the same products as, for example, a JC Penneys but they have different price points because the luxury consumer is willing to pay more for the experience of purchasing from the luxury store. So is the luxury store wrong for charging more when their customer base is willing to pay for it? Also remember that it may seem like a lot but out of that profit is how you’ll be financing your company’s growth, paying yourself and/or staff, paying for any marketing that you do. It’s very easy for those margins to get winnowed down when you start to add in those other things.
      3. When I decide to have a distributor join the circle that will cut into my $2.50 profit, correct? Yes, you’re going to offer a distributor a ‘distributor price’ which is lower than your wholesale price so it will absolutely cut into your profit. And again remember, you still need to be able to pay yourself, pay for marketing, pay other overhead expenses, etc out of that now-reduced margin.
      4. The range for the cheat sheet – the range is there because, as you mentioned, there are different acceptable ranges for different product types, different regions, and even different distributors. The range is so wide on purpose so that if a distributor or broker says “I need X margin” you’d be able to quickly determine what that would equate to profit-wise and determine whether or not that makes good sense for you. Again, remember that all good business people will always try to negotiate the best possible deal for themselves and in those instances you don’t want to end up entering into a relationship that isn’t going to make good financial sense for you. I’ve seen that happen before simply because as numbers were flying around in a meeting an entrepreneur got confused and said yes to a margin or price point that, when reexamined later, proves not to be worthwhile to the company.
      5. How can I know that I’m getting a fair deal? The best way to do this is to understand the financials of your company and understand all the costs (direct and indirect) that go into the running of your company. Then from that you can determine what your baseline margins are for various partners (distributors, retailers, food brokers). You may ultimately determine that you’re only willing to do X% margin if the retailer/distributor purchases certain minimum order sizes to make it worth your while or may determine that certain margins simply don’t make sense for your business.

      I hope that helped.

  • kmccarron on said:

    I have read many of your articles with interest…thank you for sharing your knowledge. I am very comfortable with our wholesale price but have run into issues with our “suggested MSRP”. The MSRP needs to be a 50% margin for one ttpe of retailers and a 40% -45% is comfortable for another type of retailers. Our direct to consumer sales (i.e via web and farmers markets) would be best with a 40% margin but I have run into some pushback from retailers that want 50%. I can’t really lower my wholesale but don’t want to loose these customers. Do I offer a price break on larger orders? Do I bring my MSRP up to 50% to meet the demands of one retail group and let the others decide? I would like to keep selling directly too.

    • Jennifer on said:

      This will be a short answer to a complex question but in a nutshell, your MSRP is your suggested retail price point and retailers can ultimately choose to price your product higher or lower based on their preferred margins. However, it’s typical to provide an MSRP that provides margins of 45-50% for retailers. In answer to your first question, yes you certainly can offer a discount on your wholesale and/or retail price point for large orders and that’s commonly done. Secondly, I’m not a fan of underselling your retailers (i.e. – offering your products during direct sale at a 40% margin) because otherwise what is their impetus to carry your products if customers know they can get it cheaper elsewhere? For those consumers perhaps you want to offer different product sizes and/or flavors that they can’t purchase in the stores. Then you could have a 40% margin on those products and not compete directly with your retailers. Though, ultimately, it’s your company and your call. I hope that helps a little bit.