How Distributors Work, Part II: Pricing
In Part I of this series, we covered the broad strokes of working with distributors. In this post, we’ll go into detail about how to price your products when selling through a distributor. In Part III, we’ll get into distributors’ marketing programs, and the policies and billing practices that surround them.
Pricing Your Products for Distribution
When working with a distributor, you sell your product to the distributor, who turns around and sells it to the retailer.
The basic formula used at every step is:
Price = COGS / (1 — Margin)
From the distributor’s standpoint, “COGS” is your delivered price to them (including any freight/shipping costs in getting your product to their warehouse). “Price” is their sell price to the retailer, which is what they refer to as their wholesale or “list” price (since that is the price they list in their product catalogs for retailers).
From the retailer’s standpoint, “COGS” is the distributor’s delivered price to them, and “price” is their shelf price to the end customer. Distributors list this price as the Suggested Retail Price (SRP) in their catalogs.
A standard distributor margin in the natural/specialty food realm is 27–33% (except when you’re dealing with “Cost-Plus” retailers, which we’ll get to below). This margin will vary from distributor to distributor, and may also vary from one product category to the next.
In calculating the SRP for their catalogs, distributors will generally assume a retailer margin somewhere in the range of 30–35%.
Let’s say your distributor takes 27% margin, and they assume a 33% retailer margin. And let’s say you want your product to sit on the shelf at $9.99.
Working backward then, starting with the retailer, whose COGS is the distributor’s delivered price to them:
Now for the distributor, whose COGS is your delivered price to them:
Therefore, if you want your SRP to be $9.99, you would need your delivered price to the distributor to be $4.88. The general rule of thumb is that your SRP works out to roughly twice what you sell it to your distributor for, and from this example you can see why.
In the real world, however, it gets more complicated than the above example because retailers commonly don’t pay the distributor’s listed price. They all have different contracts and arrangements with their distributors. Nowhere is that better illustrated than with Cost-Plus retailers.
“Cost-Plus” simply means that rather than paying the distributor’s list price (which again includes a built-in 27–33% margin for the distributor), the retailer pays the distributor’s cost plus a certain percentage. This is always the case with very large retailers, who wear the pants in the distributor-retailer relationship.
For example, Whole Foods has a “Cost-Plus 8” contract with UNFI that makes UNFI their primary supplier. UNFI gets a ton of business from the deal (about 1/3 of their overall business comes from Whole Foods, in fact¹), and in exchange, Whole Foods pays UNFI a mere 8% over and above UNFI’s cost. Whole Foods then takes a 42% margin of their own. The above example has now morphed into this:
Therefore, if you sell your product to UNFI for $4.88, it will end up on the shelf at Whole Foods for $8.99 (they’ll round it to the nearest logical price point).
So isn’t that a good thing? Well, yes and no. $8.99 is a better price point for you than your $9.99 SRP, but since this is Whole Foods we’re talking about, $8.99 quickly becomes your new norm. Your product will start to underperform in all those other smaller chains and independent stores that UNFI delivers to, that pay UNFI’s list price and charge customers your SRP.
Maybe you’re thinking, “Well, that’s their problem for pricing my product too high.” But it’s actually your problem, because you need your products to perform well everywhere to prove to UNFI that your product is worth keeping in their catalog. Otherwise, they might discontinue you the next time their category review comes around!
Therefore, you’ll need to wheel and deal with all these retailers individually, by offering them discounts to offset their cost difference and get your shelf price to that $8.99 everywhere. Plus you’ll need to audit all these stores regularly to make sure they’re actually pricing your product at $8.99, and not just pocketing the discount.
How you get this discount to them becomes a bit of a juggling act in and of itself, involving either “scan backs” or “charge backs,” or some combination of the two. We’ll cover that kind of terminology in the next post.
Adding to the pricing madness, all the major Cost-Plus retailers (Wegmans, Kroeger, Safeway, etc.) have a different percentage — Wegman’s is Cost-Plus 10, Safeway is Cost-Plus 12, etc. Each will then take a different margin on top of that.
If it sounds like a lot to juggle and keep track of, that’s because it is! But that’s the price you pay for getting your product out there far and wide. One of the prices, I should say. Oh, there will be others … all that and more in the next and final post in this series.