misc Pricing

Dustin

Dustin

My new issue. Pricing. I've been getting quotes from co-packers that the final cost for my hot sauce in a 5 oz woozy bottle will be $3.10. This includes the 2 month fermentation process, 1 month acidification, straining the mash, bottling, and labeling. Most hot sauces are cooked and bottled right away, so I'm sure this drives the price up a little. Also, I need to pay for the labels myself, but they will be applied during manufacturing. This probably adds another 10-15 cents per bottle.
 
My dilemma now is trying to figure out what pricing structure to use. Of course I want to be able to make a little bit of profit in there somehow. But when I go into Whole Foods or HEB (our local grocery store), most of the 5 oz bottles of sauce I see are being sold at the $4 range. The grocery stores will want at least a 30-40% markup, leaving me in the negative if I want to be able to sell my sauce for $4.
 
Would you pay $5-6 for a habanero sauce that is all natural, or do I need to keep finding ways to drop my cost? I know at Farmer's Markets and specialty stores I could easily get $6 per bottle, but that is a whole different ball game.
 
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I may be a little biased, having tasted your sauces already.  But yes I would pay $6 for a bottle.  My reasoning is that at my local grocery, you cannot find habanero hot sauces.  It's all Frank's, McIlhenney, etc.  Nothing hotter than tobasco.  So if I saw a habanero sauce in the aisle, I would be overjoyed.  I do not consider $6 to be that much for a hot sauce.
 
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for better profitability you have one of the two options
 
mass production = leads to cut the price per unit
 
producing something unique which leads to = finding the right outlet and leads to = demand ( i.e.high-end store)  
 
in general, as a customer who is not looking for a specific band/ type/taste, price will be the driving force for making purchase decisions. 
 
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$3 + label to produce is very expensive.

You're also failing to consider hidden costs of production:

Shipping the sauce from co-packer to warehouse is not free.

Storage is generally not free.

If you're getting it into larger stores you'll likely be working with a distributor - they take 15%

The store takes 40-50%

When all is said & done, at $6/bottle retail you'll likely make ~$0.30/bottle


Good luck!
 
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As LD says, you also need to figure in your overhead. Employees, insurance, any gas used (appliances, or your car), electric, anything you rent (booths, kitchens), etc. ANY cost. Then add this to your production cost. Try to drive your production cost down. This may mean a larger order.
 
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Yep - insurance is a big one.

Other thoughts about FM sales - you pay a market stall fee, likely an annual fee to the market org, gas to get there, and of course county health permits for every county you do a market in if you intend on sampling your product. One of mine is $408 a year, the other $280

Then you'll have about $500 in canopy, tables, signage, product display, etc

Fortunately you only need to buy the set-up once.

And of course you'll need a rider on your business insurance to include driving in & out of the FM's

Just more food for thought - you get all the margin at the farmers market but you do spend money in other ways.
 
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Second Lucky Dog - $3.10 cost for a 5oz is *very* expensive
 
A decent rule of thumb is your direct cost of goods sold (cogs) should be 1/4 your target retail price i.e for a $5 retail price your cogs should be $1,25. (Or put another way - with a $3 cost you should figure a retail price around $12!)
 
This gives you enough margin for fixed costs such as
 
insurance and permits,
distribution costs (you either have a distributor or you self distribute - but either way you have distribution costs)
other selling costs such as demos, point of purchase displays (your product wont move off the shelf on its own)
plus leave some $$ over for developing new products and finding new sales outlets 
 
Granted the 4x multiple is hard to get as a small producer but you should be in the ball park. Costs will come down as you grow but if you don't have any margin you wont be able to grow (unless your throw tons of your own money at the business)
 
btw my first foray into co-packer quotes had the same result - price was *way* out of whack. In my experience the small run co-packers are very expensive. I can definitely produce small batches (70 cases of 12 oz bottles) much cheaper myself. When my sales channel supports say 300-500 case production runs, i'll probably explore co-packing again. Hopefully the bigger co-packers will have more realistic pricing
A typical wholefoods price breakdown:
 
Retail: $5
Less WF Cut (40%): $2
Less Distribution (15%): $0.75
Equals Wholesale price: $2.25
Cost: $1.25
Profit: $1 (ie 44% manufacturers margin - which is fair, not great)
 
byw, you should really understand the difference between markup and margin before you speak to any buyers. You said in your original post the grocery stores will want a 30-40% markup, Actually they will want 30-40% margin - big difference
 
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Matanzima said:
byw, you should really understand the difference between markup and margin before you speak to any buyers. You said in your original post the grocery stores will want a 30-40% markup, Actually they will want 30-40% margin - big difference
Click to expand...
 
bingo - and with boutique/gourmet stores that might support a $10/bottle their margin is more like 50-60%. 
 
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All very good points. I'm going to have to see what we can do to get the price down a bit. One of the issues we are having is that our cost for the peppers, bottles, and stuff we have little control over is almost $2 per bottle. Plus all the fees associated with storing it for 3 months and all the labor involved. It would be way more expensive for me to rent a kitchen and do it myself. I guess this is why most people do cooked sauces instead of fermented ones. :)
 
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Dustin, what is the "1 month acidification" after the 2 month ferment?
 
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Tabasco does the same thing. One month with stirring intervals, then strained. Never blended, it's all broken down by the 3-year ferment and then vinegar.
 
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Yeah, but I do have to blend it. I have no way to do a fermentation that long, especially at this point in time. I think Tabasco actually continuously stirs it during that one month period, which would be nice to be able to do but again, I don't have the proper equipment for that.
 
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Also, thank you for pointing the difference out between markup and margin. It will be a few months until I am ready to talk to grocery stores, but I want to make sure I am in a position where I can negotiate a price where I can sell it in the store for a decent price. Now I have a more accurate idea on what to expect. I'm not worried about making a profit, I just want to get my product out to people who are willing to buy it and not be turned off by a higher than average price.
 
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I know this is an old thread, but I found this link that has a good explanation of margin vs. markup.  Thought someone might find it useful.
 
http://yummyyammy.com/setting-pricesmargin-vs-markup/
 
Also, rather than starting a new thread, this seems like a good place to ask a pricing question.  Typically, by how much is a retailer's margin reduced if the product is provided on a consignment basis, rather than as an outright wholesale sale?  Another way, if a MSRP is $6 with a retail margin of 40%, then the wholesale price is $3.60.  What would be a reasonable or typical consignment price?  $3.90? (35% retail margin)  $4.20? (30% retail margin) 
 
Thanks!
 
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Sawyer said:
I know this is an old thread, but I found this link that has a good explanation of margin vs. markup.  Thought someone might find it useful.
 
http://yummyyammy.com/setting-pricesmargin-vs-markup/
 
Also, rather than starting a new thread, this seems like a good place to ask a pricing question.  Typically, by how much is a retailer's margin reduced if the product is provided on a consignment basis, rather than as an outright wholesale sale?  Another way, if a MSRP is $6 with a retail margin of 40%, then the wholesale price is $3.60.  What would be a reasonable or typical consignment price?  $3.90? (35% retail margin)  $4.20? (30% retail margin) 
 
Thanks!
Click to expand...
Basically with consignment you're selling at the same wholesale price - the only difference is when you get paid & how you track inventory.

Of course this is negotiable. I don't sell consignment but if I did I'd probably want a larger margin for myself since I'm getting paid sporadically and piecemeal. There's additional overhead in having to track & maintain that stock as well.

As for MSRP, remember, this is suggested. The retailer may well sell your sauce for $8/btl. but yes - typically that's the wholesale. Normally that would also Be the consignment pricing unless you negotiate something different, which I would for the additional work.

And for that there isn't really a set formula. It's whatever you feel is worth it. Just remember that retailers are generally in the business of doubling their $, so if you go up to $4, they might sell it for $8, and your sauce might collect dust on their shelves instead of selling.

In that light it might be best to keep the pricing the same as wholesale (or avoid consignment like the plague, as I do. lol)


Ps - holy topic rwssurecion, batman! Nice to see folks use the search feature! :cheers:

This topic's so old I had to go edit one of my posts as my pricing was out of date!
 
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Thanks, LD; I use the heck out of the search feature on this site.  Also thanks for all of your input.  After much googling, I think this is the most relevant of your comments, "...this is negotiable."  I've seen both wholesale and consignment margins all over the place.  On the one hand, that's a little frustrating, but on the other, it's nice to know not everything is regulated to death (I'm looking at you, 21 CFR § 101).  But yeah, if I'm retaining ownership and risk until the retail sale is final, I want a bigger piece of the pie. 
 
Cherry-picking the heck out of the search results, I found numbers I like on this site.   To quote, "Most retailers in the gourmet foods industry use a margin of 40%...", and from the author's reply to a comment, "Each consignment store has its own policy, but most take from 25 to 35% of the purchase price."
 
I'm just getting started with marketing, but have a few local boutiques agreeable to carrying my products on consignment.  I'll post an update when I know how that turns out.
 
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just a FYI- most upscale boutique, (insert whatever cliche name) stores run on 50%.  which means, whatever they pay for the product, they double that and that's the sticker price the customer sees in that upscale boutique gourmet food store.
 
Selling on consignment is easier for the store owner, but ios much more of a PITA for you to keep track of.  It is a sellig point that you should be able to negotiate for a higher price since you are carrying the cost of inventory, maintaining the inventory tracking....
Most grocery stores (depending on what department the product is maintained through) can run on 25-35% margins. 
 
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Thanks for the info, SL.  I wouldn't call any of the places I'm looking at "upscale", exactly.  My MSRP is toward the mid to lower end for similar products for this area, so if someone really wants 50% margin, I think I'll be okay.  I'd prefer to have the same retail price in all outlets, but if someone thinks they can move product at a higher price, that's their business... assuming they've purchased outright.  I think for consignment sales I should have a little more say in the matter.
 
That's good to know about groceries; I was assuming they'd want 40%.  There are a few local/regional stores that have expressed interest, but we haven't talked numbers yet.  I have a few kinks to work out on the label end of things, but the big hold-up is finding good help for scaling up production.
 
I imagine you guys are curious as to what product(s) I've been talking about.  I'll start a new thread in the appropriate forum when I get these last label kinks worked out.  I've held off so far because I really need to start moving product.  I'm doing my own label, so it's a fairly simplistic design, but I'm reasonably committed to the concept.  I anticipate all the feedback I'll get from THP will help refine that concept for future printings.  (I've had help with all the legal aspects, so hopefully that won't be an issue.)
 
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