by Christine Jaros | April 27, 2021
When most business owners start their business, they typically have big dreams and goals of what they want the business to be. For those business owners creating products or goods, they may find themselves asking the following:
- Do I want to sell directly to the consumer or partner with a retailer?
- What if I want to sell to an organization?
- What about co-branding opportunities?
After analyzing the possibilities, the business owner realizes there are multiple levels, avenues, or channels to which they can appeal. No matter the path they choose, businesses want to be as profitable as possible, so in the end, they need to appeal to all of those.
If the goal is to one day make it to the retail shelf, the initial price point of the product will be important. For these producers, the path often begins at e-commerce and they must realize that profit and cost of goods in the e-commerce arena is vastly different than those in the retail arena.
Setting the Price Point
When setting the initial price point, the business owner often considers their target consumer and what their competitors are doing. Though this is the correct thing to do, benchmarking against the competitors doesn’t ensure that they will actually end up at the correct price point.
Not only could the competitors be pricing their items wrong, but also there could be major differences in the operations of the two businesses, which could impact the final pricing.
When a producer first enters the market, they have an idea of their ideal consumer. However, only a thorough analysis will determine which consumer is right for their product. Local demographics will help to determine the target market. There are multiple market research reports available that can help to identify industry, social, and financial trends, and if and where the market is open for specific products. Those reports are typically accessible via your local library but utilizing local experts within the economic development industry will connect you to consultants who can help interpret those reports.
Once the correct target market is found, then it is time to do a comparative analysis of the competitors to determine if the market size and competitive environment is favorable for the product. Once a business owner enters the arena, they must understand the competitive environment. One way to do this is to view the players as marbles and sort them based on features and benefits. The business owner must focus on those marbles that have features and benefits that most resemble their own. Then zero in on those who have a great presence with the ultimate consumer, including great reach, brand notoriety, and satisfaction. Once that target competitor is determined, then they must ask themselves how their product and level of service compares. This will allow the business owner to assess the strengths and weaknesses of the competitor while identifying the gaps in the market.
Cheaper Is Not Always the Best Strategy
Once that competitor is determined, the solution should never be to undercut them in price. There will always be a product on the market that is cheaper. Instead, the focus should be on creating a valuable product, generating interest, and creating sustainable brand loyalty. If a producer starts low in the beginning and then raises the price later to enter the retail arena, this will affect loyalty negatively. No matter the competitor, look for ways to differentiate your product from the competitors’. Maybe the producer can offer the product in more sizes, more colors, etc.?
Preparing the Price for Growth
Entering the retail arena means that big-box stores or retail chains expect to source a product at a discounted cost and then sell it in store for 200 to 250 percent more than what they purchased it for. In order for a producer to have price parity with a future retailer the e-commerce price point must factor into the anticipated retail price from the beginning.
If it costs $10 to manufacture a widget, and the business owner wants to make an extra $10, then the e-commerce price point, in theory, should be $20. But what if the business owner realizes that their local competitor is selling a similar product for $35 and the retail store is selling a similar product for $25? In this case, the business owner is underpricing their product and negatively impacting their profit margin. The business owner should determine how the features, quality, and value of their product compare to alternatives available in the market and then price their product accordingly.
Using that same example:
If a retailer is to sell the widget for $30, they will buy it from the producer for $15. If the widget costs $10 to make, the business owner will make $5 a widget. However, if the owner finds a way to cut manufacturing costs while maintaining the same level of quality, that would mean a bigger profit margin for the producer.
The business owner needs to account for all costs incurred to produce the product and bring it to market. It is risky to set a price without knowing the total product costs. There is a chance the business owner could unknowingly set a price with margins that are unsustainable/unprofitable.
Creating a cost sheet will account for all costs incurred to produce the product and bring it to market. It is risky to set a price without knowing your total product costs. You could unknowingly set a price with margins that are unsustainable/unprofitable. This cost sheet should include, but is not limited to:
- Barcode cost
- Return policy
Are You Ready for Retail?
It is important to note that retail is not right for every business. Many chains have strict stipulations before they will even consider providing shelf space for products. They look at things like:
- Does the product have a barcode for inventory purposes? What is the quality of the product?
- Is there brand awareness/loyalty?
- How many social media follower does the product have?
Is the Juice Worth the Squeeze?
After crunching all the numbers, the producer may find themselves asking whether it would be better to go the big-box store route or create a path that leads to opening their own business and selling that product and others through their own storefront.
If the owner is successful in getting on the retail shelf, they will increase exposure on a national level by becoming widely distributed. The business owner may sacrifice profit margin by distributing through the retail channel, but that owner saves the cost of opening a storefront. These additional costs include, but are not limited to:
- Rental space
- Increased Labor
- Increased Marketing
Retail is not for everyone. However, if this is a goal the producer must manage the production cost of the product and initial price for that growth from the very beginning. Set the goal high and be sure to follow the steps in this article along the way. If they do this, they are on their way to success.