When The Price Is Right, and The Promo Is Strong

By Annie Wang

Ask a founder about pricing and promotions, and be prepared for a lengthy and fascinating spoken-word novel. Setting the right price can be daunting; not only do brands need to consider how much money they need for baseline survival, they also need to think through what will make them the most competitive, and what their consumers are willing to accept. Factor in retail expansion and the promotions required to support a launch, and it often feels like you’re playing in a whole other stratosphere.

So how should brands go about choosing the right price for their product? And how can brands protect their margins and make sure they’re not only surviving, but also thriving?

UNDERSTANDING COGS

To get a baseline for your pricing strategy, you first need to understand your cost of goods sold (COGS) — the cost it takes to produce your product. As a baseline, COGS can include your ingredients, packaging, logistics costs, and the labor required to bring your product to life (as applicable). Businesses with a handmade product vs one made with a co-manufacturer (co-man) will calculate their COGS differently. For handmade products, nailing down an efficient, step by step production system will be critical to calculate labor costs associated with producing your product.

Next comes the big M — margins. After you make a sale, your margin is the money that’s left after subtracting your COGS. Margins are most often calculated as percentages. Your margins are what you use to support your business; the money spent on marketing, non-production related salaries, and other operational costs comes from this percentage. Having a strong understanding of your margins allows for better sales projections and budgeting for sales, marketing, retail, and other promotional spends. Understanding your COGS also means you can be nimble when figuring out which products play which roles in your entire product catalog. For instance, which of your products are your cash cows that act as a point of entry for new customers? Which products have higher margins but require more spend to sell?

PRICING FOR DTC WITH AN EYE TOWARDS RETAIL

Whether you’re selling DTC or in retail, you should dig deep into competitor pricing. Machu Picchu CEO and Startup CPG founder, Daniel Scharff, says that “all pricing is relative”, and especially for retail. He recommends using the market leaders’ pricing as a starting ground. Many emerging brands will go for premium prices, but there are some ‘magic price points’ in every category, above which your volume will drastically decline. You can often determine these by seeing if there are some big round numbers that brands don’t cross at key retailers. Though your pricing might still be higher per oz than your competitors, if you’re the only brand in the category above $5, you’ll pay for it on volume, if the retailer will even accept your pricing.

For DTC brands with goals of launching into retail in the future, there are a lot of expenses to budget for to hit store shelves. In terms of creating margins that can accommodate a launch from DTC to retail, Pulp Pantry CEO and founder Kaitlin Mogentale recommends working backwards from your suggested retail price (SRP) — the price that customers pay for your product. Each retailer also has different wants and margin requirements, but you probably have a sense for where you’d like to land on shelf as compared to competition to generate the volume to remain on shelf. “I like to break [our margins] out by retailer so I come up with a trade spend budget / P&L for each individual channel and gauge how to best leverage marketing dollars by retailer.”

While keeping in mind Scharff’s “magic price point” guideline, and other recommendations on how to set your pricing, Mogentale would include the below margins to budget into your current DTC pricing when getting ready to launch into retail:

l 20-30% distributor margin (big accounts like Whole Foods could be under 10%) l 35-40% retailer margin (snacks, for example, are 40%, but note that different categories have varying margin expectations and you should

ask brands in your category for feedback on retailer expectations) l Minimum 30% for your landed margin given your distributor pricing, which allows for: ■ 15-20% off your top line revenue towards trade marketing spend (displays, promotions, other retailersupported marketing programs, instore activations like demos, etc.) but

VC funded companies might even be up to 20-25% in awareness-building, high-growth stage ■ 15-20% off your top line revenue towards shopper marketing or other marketing support outside of trade

Mogentale emphasizes a 30% margin at minimum to cover marketing spend in retail stores. “I’ve seen some brands get even more aggressive — closer to 15 to 20% spent on trade spend — but then maybe it’s an additional 15 to 25% spent on marketing outside of the retailer. Once you get on the shelf, the work really begins. You want to make sure that you have the capacity to continue to support your retailers with monthly spend and trade [marketing] to stay on the shelf.”

How to arrive at your margin? Work backwards from your SRP:

1. SRP / (1- 40%) = Your Wholesale

Price to the Retailer (assuming a 40% retailer margin, which is common for snack categories, for instance) 2. Your Wholesale Price / (1- 25%) =

Your Price to the Distributor (what pricing you’ll need to offer your distributor, for them to sell to the retailer at the desired wholesale price) 3. From there, you can calculate your own margin - based on your COGS (Distributor Price - COGS) = your gross margin in dollars, divided by your distributor price to get to your % gross margin. same baseline pricing for all retailers and distributors to reduce management headaches, but creating an everyday low price (EDLP) to help when negotiating with retailers with different margin requirements. An everyday low price is a deal brands work out with each retailer to ensure margin & on-shelf prices align. . For instance, if Retailer A has a margin goal of 40% when selling your product, but in recent times they are only getting a 33% margin due to increased purchase price from the distributor or otherwise, your brand would pay Retailer A to close the gap and maintain the desired SRP while meeting the retailer’s margin requirements.

DESIGNING PROMOTIONS, MEASURING ROI, AND PITFALLS

Setting up your Promo

For new brands, promotions are one of the keys to growth. In order to get yourself in front of potential customers, you have to give them a reason to try your product.

There are numerous promotions you could choose from. Promotions based on price, sampling, and package deals to name a few. But before you can choose what kind of promotion you’ll be doing, you first need to define what you want to achieve. Do you want to engage with new customers or further build relationships with existing customers? Thinking through the goals for upcoming promotions will also help you plan out the best ways to measure your ROI from each promotion. You also want to consider promotions that reflect the use case and buying occasion for your specific product. Some products may be introductory and good for gaining traction with new customers, while others are high margin products with infrequent sales.

If you’re feeling overwhelmed with the vast sea of possible promotions, you can look at promotions competitors are running and test those to see how your customers respond. Your customers will also likely respond differently to different promos online verses on the shelf. As with most things in business, getting to the core of what works for your brand requires experimentation.

When thinking through the best timing for different promotions, Aura Bora’s Head of Strategy and Business Operations, Scotty Jacobs, recommends timing promos for major holidays and the seasonality of your product category. “The best promos occur when consumer intent to purchase is organically high,” says Jacobs. “For sparkling water, that’s during the warmer months and – perhaps unexpectedly – in January when consumers may be looking for a ‘new year, new you’ option. By promo’ing during the high-intent periods, the promo dollars can end up driving greater incrementality than organic demand would otherwise support.”

Measuring the Impact of your Promos

Promos aren’t working if they’re not building your customer base. To find out what’s working and what’s not, brands need to collect data. Both Scharff and Mogentale recommend measuring promotions in weekly increments to see what’s working and what can be cut. If you’re still trying to figure out which promos to focus on, Scharff suggests testing out smaller promos infrequently to see the response from your customers. Examples of these smaller promos could include running a promotion of 15-20% discount or multiple deals once per quarter instead of a 50% BOGO that will burn through your promo dollars, set a bad precedent with the retailer and customers, and give low ROI.

Mogentale personally collects sales data from her retailers each month, but asks for it to be broken down into weekly segments since promotions usually last two weeks and may rotate in stores weekly. In addition to sales data, Mogentale also likes to collect data on the customer acquisition costs to calculate which marketing programs to continue supporting and which to change or cut. Mogentale has found that some of the most valuable promotions have been launch promotions (to drive trials), off-shelf displays (end caps or side caps), in-store sampling, and demos and coupons.

Brands should also be diligent about measuring their key performance indicators (KPIs) through sales data to see which promotions are worth continuing. In general, brands should “make sure their promos are ‘sticking,’ or that you’re seeing a sustained lift in velocity after promoting,” says Mogentale, “Otherwise, this could indicate there are issues on shelf or that product is not being purchased again after a first purchase.”

Track your sales and costs after each promotion to find out which promotions perform best in driving permanent lift (i.e. incremental growth in baseline velocity following the promotion) with the lowest cost. For example, if a 20% off promotion will drive the same lift as a 25% off deal, you can opt to save money in the long run by minimizing the discount while still driving the same end result.

When it comes to fronting the cost for promotions, most retailers will ask brands to foot the bill. But if retail partners are open to splitting the cost for the promotion, it will not only help your ROI but may also help the promotion succeed.

Promotions are not only a great chance to incentivize new and existing customers to purchase, they’re also a great time to build relationships with retailers

Avoiding Promo Pitfalls

Don’t want to spend a lot of time and money on promotions that don’t work? Who does!? Our CPG veterans shared some common pitfalls to avoid. For discounts, Scharff recommends 20% off as an upper limit for promotions; anything above that threshold may be teaching your customers to only purchase from you when there is a deal, thus unintentionally reducing your product’s purchase price.

Instead of relying on frequent and heavy discounts, Mogentale prefers to do demos for Pulp Pantry to support trials instead. For frequency of promotions, Mogentale says to start with one promotion per quarter, one to two deeper discounts like buy-one-get-one deals, and one to two promotions that are 20% off and other lighter discounts. She also warns brands against free fills — when retailers ask brands for free products the retailer can sell on shelf — and that brands should instead negotiate with retailers to do more high-impact promotions upon launch that drive trial and mutual benefit, such as buyone-get-one deals.

Promotions are not only a great chance to incentivize new and existing customers to purchase, they’re also a great time to build relationships with retailers. Pulp Pantry relies heavily on paid local college students to manage their in-store activations and promotions. Part of the training for these local brand ambassadors is building rapport with store managers. “Anytime we’re doing a demo, [the ambassador should make] contact with the grocery manager. Make sure to call stores ahead of your demos to check on inventory and make sure you’ve got enough inventory to do a demo. We really look [to local ambassadors] as building the relationship on the store level [so the retailer knows] that we’re supporting them on the ground.”

In addition to visiting stores to support active promotions, Mogentale’s team also visits stores prior to promotions to secure additional displays, make sure inventory looks good, and make sure shelf tags are up to maximize success. Mogentale tries to use promotions to gain leverage for better placement within each retail location.

FROM SURVIVING TO THRIVING

Regardless of whether or not your goal is to launch in retail, hitting the right price points and analyzing sales data for promotions are invaluable tools for brands looking to grow. As founders, it can be easy to feel overwhelmed by the mountains of information that should be gathered. At the end of the day, it’s important to remember that mistakes made are just lessons learned on the path towards building a successful company.

Whether you’re starting out and just figuring out your pricing, about to launch into retail stores, or have been running your business for a while experimentation is key and a growth mindset will save you a lot of undue pressure. So go forth and price, promote, and learn!

Pure Gold Series: How to Build a Field Marketing Event & Demo Program with Seth Goldman

Seth Goldman covers how you can build your own field marketing program how to take field marketing and demos beyond just sampling with merchandising, displays, customer feedback, and market research. You may know Seth as the co-founder of Honest Tea and author of Mission in a Bottle, and Seth is now the Co-Founder and CEO of Eat the Change, Co-Founder of PLNT Burger, and Chair of the Board for Beyond Meat.

“You cannot launch innovation without finding a way for people to taste it….You’re not going to be able to demo enough to justify the cost. What you’ve got to be able to is to get enough demos going to encourage repeat purchase and that will eventually pay for itself.”

#55: Nationally Launching the Reimagination of Jam with Chia Smash

Anna Peck, CEO and Co-founder of Chia Smash, discusses how a focus on velocity at their first Whole Foods Market location helped Chia Smash then launch regionally. Plus, how they supported their national Sprouts Farmers Marketing launch with promotions.

“So we were in the store multiple times a week, we built relationships with the store team, knew them really well, we were able to work with them to get window displays and cross merchandise with other brands, get end caps and really make sure that our product was always on shelf, it was always looking good, and we were doing everything we could do to support getting our shelf.”

#48 Just TOAST-IT! Data-first, customer-focused, and expanding into

Publix with Mafe & Coco

TOAST-IT co-founders Coco & Mafe share about how they leveraged consumer data to get on shelf at Publix and how they evaluate sell-through data constantly and adjust their promotional strategies accordingly.

“Nobody wants to have a brand being picked up by a retailer and then have the product just sit on the shelves. You want it to move. And as a brand you need to be able to support that… we do a lot of demos. We also have a broker agency that helps with merchandising, which is so important, just making sure that the product is there, has the pricing, and just understanding the velocity in the store.”

#47 Authenticity 101: Developing a clear & authentic brand identity at SOMOS with Miguel Leal

Miguel Leal, Co-Founder and CEO of SOMOS, shares about how they are supporting their national HEB, Kroger, and Sprouts launches with digital strategies, including geo targeted advertising and leveraging their own website to drive trial and then in-store purchases. Miguel co-founded SOMOS alongside two former co-workers and KIND Snacks executives, Daniel Lubetzky and Rodrigo Zuloaga.

“In all of our [retailer] conversations, [sell-through] is the #1 KPI. We have these wonderful retail partners...that are giving us their most precious asset which is real estate on their shelves. And our commitment to them is that we are going to invest in getting consumers to try the product.”

#50 The Data Behind the Modern Wellness Consumer with

Social Nature’s Jessica Malach

Listen in to hear Jessica Malach share what you need to know about the modern wellness consumer to understand and better serve them in store including: how they define health, which certifications and labels resonate most, how they find new products, what drives repurchase, how not to market to them, and more. Jessica Malach is the VP of Marketing & Insights at Social Nature.

“A lot of the natural health retailers (including chains) will have “buy local” sections. So I think it’s really important for locally made brands to build relationships with local retailers and to partner in the storytelling together….You’re going to have shelf talkers or some kind of displays that are speaking to [your product]. The local store staff might be trained about [your product] and can let people know when they see someone picking… it’s actually made here.”