5 retail price tips that are essential for the success of your new product.
Now it’s time to calculate the retail price. Because the price at which you sell your product to the end customer is a decisive key to your product’s success. Few people know that the retail price should already be fixed at the beginning of the product development.
from Leo Beese
Sadly, not everyone knows that the retail price is not a matter of gut instinct, but must be determined as realistically as possible. I’ll tell you here why you need the price so early on, why it should be calculated as precisely as possible and how it can be of help to you.
To give you a better idea, I’ll give you an example of what Jannika experienced.
Jannika runs a small organic food company with its own product development and production. Jannika’s company sells its products mainly in the German organic trade. If a product of her company is not listed by organic wholesalers, it has failed.
The concept is written.
Jannika had the idea to develop three varieties of organic porridge. The porridge was to be distinguished from the competition primarily by a high-quality, calorie-reduced formula. In addition, it was very important to her to use the most environmentally friendly packaging possible. Jannika formulated her idea in a concept.
Jannika was sure that the recipes with their valuable grains and seeds were of higher quality than the products of the competition. Instead of the folding boxes that are otherwise often used, she wanted to use compostable block-bottom bags. And Jannika believed that customers would be willing to pay more money for this than for competitors’ products. How much more money, was not defined in Jannika’s concept.
A common mistake – just get going without calculating the retail price.
With this concept, Jannika went straight into implementation. That is, she gave the product developers her concept and asked them to develop recipes. At the same time, she asked manufacturers of packaging materials to send samples for the desired packaging.
After a few weeks, the first product samples were ready for tasting. The packaging manufacturers had also already sent packaging samples.
The product samples of the new porridge varieties were tasted in a large group and after a few bouts of adjustments, the recipes were then perfect. Jannika particularly liked one of the packaging samples because the packaging was 100% home compostable. Unfortunately, the packaging was particularly expensive in comparison.
Jannika thought at the time: With such great products, it won’t matter if she slightly raised the retail price.
What might be the outcome of this procedure?
You miscalculate the end customer price. Because at the beginning, you are enthusiastic about your products – and that’s how it should be. You overestimate the value for the customers and decide on an overly expensive price.
The same thing happened to Jannika at that time.
After the products were ready, Jannika presented them to the organic wholesaler. But unfortunately, Jannika’s porridge never reached the supermarket shelves. Because the buyers of the organic wholesalers knew their customers exactly, they also knew the price structure in the various product categories. And they knew that Jannika’s porridge was above the customers’ pain barrier. Despite the great concept, the products would have become slow sellers.
So Jannika got one rejection after another for her new varieties. When asked, she was told that the porridge would have to become significantly less pricey if it was to have a chance.
That is the moment of rude awakening.
Of course, Jannika immediately looked into the calculations of the products to work out how much cheaper she could offer them in the retail. She quickly realised that she would have to start the whole organic porridge project from scratch, because there was no margin in the calculation.
What are the cost drivers?
Jannika could not offer cheaper because the cost price (recipe, labour and packaging) of her porridge was much too high. Especially the recipe costs and the packaging drove up the cost price per product. This was because the many different high-quality ingredients cost a lot of money.
On the trade profit margin, which Jannika had to grant to the wholesalers and retailers, she had but little influence.
Of course, she could have done without any profit for her company, but even this has its limits, because the products also have to generate money.
Could this have been avoided?
Yes. Yes, a well-researched retail price right at the outset of the project would have prevented that. This would have allowed Jannika to go into the recipe and packaging development with a clear price target.
A price analysis on the market in the concept phase is therefore a must-do and can avoid a lot of frustration. Jannika wanted to price the new porridge slightly above the competition. If she had known the price structure of the product category, it would have been clear to her what “slightly above” meant.
Because if you know the price structure of the product category, you also have a realistic sense of when the products are “priced out of the market”.
Calculating backwards against frustration.
But how can the retail price derived from the market be calculated? How is the maximum cost price worked out?
For that purpose, you calculate backwards. In Jannika’s case, the price of the porridge is the starting point. Now you go backwards via the VAT, the desired profit, the trade margin and possible cash discounts for prompt payment and other discounts, until only the sum for the cost price remains.
Now you can see what you can spend on the cost price of your products.
This fixed amount for the cost of goods sold can now be divided into the recipe, the packaging and the manufacturing costs (wages) per product. In this way, product and packaging development can be started with a clear cost target. But remember:
Small buffers will sweeten your life.
My advice: make sure you have some leeway in your calculations. Because if you want to make your new products palatable to retailers at the beginning by offering discounts, or if you want to see them occasionally displayed in secondary placement, you need a buffer.
Wouldn’t it be annoying if you ran a great display promotion in the supermarkets with thousands of packs sold, but didn’t earn anything from it because the display and the additional handling costs in logistics “ate away” your profit?
But if you consider promotions and discounts in your calculations from the outset, you will be spared this frustration.
Clear price targets strengthen your product idea.
Many people dislike the idea of being limited by a maximum price, right at the outset of the project. Do you also find that a price target for formulation and packaging hampers you in the development of your idea?
From my experience, I can say that price pressure can be an advantage for your idea.
You are forced to concentrate on the essential advantages of the product. Some ingredients or particularly playful packaging details may not be feasible. But now it’s up to you to work out the product features that really set your product apart from the competition (Unique Selling Proposition – USP).
The resulting clarity of your product will later help you in marketing and sales. Because the clearer and simpler the advertising message, the stronger it will be.
The mixture makes the difference.
If you want to launch a new product range with different varieties, the recipe costs will probably differ. It may be that one variety is even slightly above the target cost price, and that is still okay. How can that be?
In that case you can look at the three varieties in a mixed calculation. One variety is cheaper, one variety is more expensive and the third variety might hit the maximum cost price exactly.
It now depends on which variety sells and how well. If the sales figures for each variety are balanced, the cost price in the mixed calculation matches again. If the variety with the lower purchase price sells best, this is even positive for the calculation, as the average cost price turns out to be lower.
You can save yourself a lot of trouble if you take a look at the market at the very outset of your project and determine the retail price for your products.
Because with the retail price, you can draw up a backward calculation. This way you can determine the maximum cost price. Only when the maximum cost price has been determined should you proceed to product and packaging development.
When determining the maximum cost price, consider any discounts or promotions you want to offer with the product range.
Work out product advantages clearly and write them into the briefings for formulation and packaging. In the briefing for product and packaging development, describe which USPs are a must for your products and which are “nice to have”. The “nice to have” can be deleted if the cost price rises too high.
If the cost prices of the products vary and, for one product, even exceed the maximum cost price, it is advisable to consider the product range with a mixed calculation.
If you follow these rules, listing in the trade is more likely, the rotation of your products is higher and, last but not least, you will also earn good money with them.