January 21, 2016
I received a great question the other day asking about intra-company margins. The entrepreneur wanted to know what margins should be used if the company was selling product retail, wholesale, but then also using that product in another ingredient or, in this case, ‘selling’ it to the catering arm of their business.
Like most things in the food world, the answer really comes down to ‘it depends’ but let’s see if we can break this down a bit and provide a bit more clarity:
- Selling Wholesale – you have determined which margin works best for your business and set your wholesale price point on that. This price should have enough wiggle-room to allow for broker and/or distributor pricing as needed either now or as your company grows as well as promotions as needed.
- Selling Retail – your manufacturer’s suggested price is your wholesale price + the margin you anticipate your retailers will demand. While you don’t ultimately control this margin – your retailers do – you do want to ensure that the price you are suggesting is inline with the price you assign for any direct-to-consumer sales you make through your own storefront, an e-commerce store, farmers’ market, etc. Basically, don’t underprice your suggested retail price when you’re the one doing the sales as that’s a quick way to lose retailers.
- Intra-company sales – so now the conundrum, how do you price your products when one arm of your company is selling to another arm. Ultimately this is a cost accounting question – here are a few things to be considering as you make your decision:
- Are both arms of the company operating under the same business license/business entity/tax ID number? If the companies are two separate business entities then how much you charge may impact the taxes one or both companies owes. In this case, you definitely want to discuss this with an accountant to determine the best course of action for both of your businesses from a revenue and tax liability standpoint.
- What are you trying to gain? If both arms of the company are under the same business entity then margin choice is up to you. You could ‘sell’ it to ‘Other Arm’ at cost, at cost plus some small margin, or at your distributor/wholesale price point. To help you determine, you should do some analysis into what the fully loaded cost to product the product is in the first place – making sure to include labor and the appropriate packaging (this is important as the packaging you sell the product to ‘Other Arm’ in may be different than your typical packaging or there may be no packaging cost at all). Then evaluate how different price points impact both sides of the business. Price it too low and future analysis for ‘Arm 1’ may be skewed by really low margins on this product and may lead you to believe that Arm 1 is not as profitable as it should be. But price too high and it may cause ‘Other Arm’ to price the finished product so high that customers won’t purchase it.
While there is no ideal industry margin for this type of intra-company sale, a little analysis on your end looking at both lines of business and keeping in mind what you’re hoping to achieve for each individually and also for your combined business will hopefully help you find the perfect margin for you.