Brought to You by the Letter ‘P’
It's all about Price!
The ongoing global pandemic has had an extreme effect on cideries, there’s no denying that. Whether this effect has been positive or negative depends on the previous source(s) of a cidery’s sales and how they have been able to adjust over the past few months. Every business has had to conform to the limitations of legal, safe operations within their region or state.
What you may not realize is that distributors’ business has also been radically altered. Consider New York City, where 85-90% of the volume is sold in bars and restaurants - businesses that do not have the ability to generate the volume and revenue that they once did automatically. Imagine being a distributor that forecasts to have enough kegs on hand to keep New York City’s bars and restaurants stocked with beer and cider, and then having your rate of sale plummet through the floor virtually overnight on every single product. Now this distributor has enough kegs for the next six months, much of which is sure to go bad in an IPA-driven craft beer world where freshness is king.
But consumption has not truly tailed off because consumers are buying their beverages at retail and bringing it to the only safe place they can drink it: home. What this means is that the revenue channel that distributors are now putting their blinders on to chase like a horse in the Preakness is the off-premise sales channel. These are your grocery, bulk, convenience, package and wine store sales that are purchased by consumers for consumption away from the premise where it was purchased (hence, off-premise).
Off-premise sales are such a different breed from bar and restaurant sales. There’s room for many more products to exist off-premise, so getting placements typically isn’t the problem. The problem is getting the consumer to buy your product in the sea of all the other available choices. Even in a small convenience store, you can have a few hundred total items with at least half a dozen direct competitive products. So how can you make your product the one that consumers pull from the shelf and buy?
Standard practice says the 4 P’s of Marketing (Product, Place, Price and Promotion) apply. You’ve already done your part with creating a great Product with the packaging and whatever advertising you choose to engage to help Promote it properly. We’re already discussing Place as a specific distribution channel: off-premise. Even taking the concept of Place further, you typically have little control over where your product gets once it’s sold in. So let’s focus on the one thing we can exert some control over, Price.
I recently created an explainer video about calculating retail prices. It’s less than three minutes. Rather than break it down frame by frame, I’m going to highlight the key takeaways.
(If it's not working on this page, you can access it by clicking here.)
The Sweet Spot
Your sweet spot may be slightly different in each market, but shouldn’t be noticeably different. (There is this internet thing that allows consumers to access all sorts of information.) Once you know your sweet spot, work backward from that point to establish your selling price to the distributor. If this method doesn’t leave you enough profit per case, you need to either increase your shelf price or decrease your production costs.
A sweet spot should also be considered in the vein of consumer value. In the example from the video, we’re targeting a $15 retail price per 6-pack. With the assumption that the market is predominantly operating at a 30% markup (not margin - more on this in a second), the targeted distributor selling price for your full case is $46.15. When (err...if) the on-premise world opens again, this translates to a bottle/can list price of about $8. Your keg pricing for this cider should also target a similarly valued price point - roughly $7-8 for a 12oz pour. Why? Let’s say you price out your kegs of this product so that they’re on tap for $6 a pint. Any consumer that develops comfort with that price point will reject the $15 6-pack for not being in line with the perceived value of the product. Do not count on consumers to do the math. I can’t stress this enough because I’ve seen many brands learn this lesson the hard way.
Finally, and potentially the most important point about price setting, it is much better to come in low and have to increase prices later than come in too high and have to lower prices. Retailers will be quick to adjust their pricing when they’re not making enough money. But if you lower their cost and they’re still selling at the old price, why would they lower the price? Because you asked nicely? It’s more work for them to change prices (and to print up a new tag and put it on the shelf). They’re not going to do that unless they absolutely have to, so it’s better to be low than high.
Don’t Forget the Freight
Freight cost can have a dramatic impact on shelf price. Part of your research in opening a new market should be contacting a few local trucking companies and getting quotes for a pallet of your cider delivered to a potential distributor. If you think you can achieve more volume, there are discounts at multiple pallet levels that could decrease the freight cost further.
In order to sell at a consistent price, a distributor must estimate the average cost of freight for each order they bring in. On some orders, freight may come in a little low. On others it may come in high. Freight rates vary based on market conditions like gas prices and demand for that particular route corridor. If a distributor estimates too high, it will make it less profitable for you to achieve your sweet spot. The distributor is not going to take the loss on freight costs. They will push it back to you to lower your selling price to them to account for the freight. If you refuse, they will raise their selling price to reach their target margin (typically 28-35%). But the only way you’ll know if they’re estimating too high, is if you do your homework and get multiple quotes.
Margin vs. Markup
It’s critical to know the difference between these two. Margin is an expression of profit and is typically used by companies with multiple locations (think chain restaurants or corporate retail stores) and is almost always the preferred choice of distributors. Markup is an expression of cost and is used by bars and restaurants, as well as some independent retailers.
Margin is used by companies because it allows them to see the profitability of their business and specific departments within that business. Many retailers that use margin look at the profitability of wine vs. spirits vs. beer. Most grocery chains will look at their alcohol department profitability as a whole.
Markup is easy to use for small businesses because they can get a product on the shelf without the complexity of division with decimals. Bars and restaurants will typically use a 400% markup (often referred to as “4 times cost” or just “4 times”), but this can range from 300-600%. On the retail side, it’s easier to keep pricing consistent with transient employees if you have a set markup for all beer. As technology becomes increasingly more available to store owners, this will change and more stores will use margin.
When creating your sweet spot, you should have a very good idea of what your typical retail customer is using to price their products. This can be very different from market to market - even just the next state over - because each state has their own set of alcohol rules. Consider the astounding difference between a 30% markup and 30% margin. A $15 6-pack can be achieved with a distributor delivered case price of $46.15 if the retailer is using a 30% markup. If the retailer is using 30% margin instead, the shelf price will be $16.50. A $1.50 difference may not seem like much, but it’s the difference between selling quickly and gaining momentum versus selling a bit slower and not getting re-ordered by the store.
And this is really the crux of off-premise sales; there are so many products crying to consumers, “Pick me! Pick me!” that you really only get one shot to prove to each retailer that your product will sell. If it doesn’t, they just cross it off their list as something else they won’t have to order again. A savvy retailer looks at every shelf spot in their store as real estate and they only make money when the product turns over. The proliferation of available pricing information (there’s that internet again) makes it very difficult for retailers to count on individual products or product groups to drive store profit. Instead, they have to drive turnover efficiencies to ensure each square foot of retail space is covering the fixed business costs.
It’s All About Price
Succeeding in off-premise sales comes down to controlling your pricing as much as possible.
Find your sweet spot
It is better to be low than high
Watch your freight
It is better to be low than high
Each placement must succeed the first time
It is better to be low than high
Price is the only one of the Four P’s that you can truly control once your product is out the door. Product and Place are already decided. Promotion can be altered and changed, but you really only have so much control over that. You can’t force people to look at your Promotion. What you can do is structure Price to work within the three-tier system to achieve your desired results.
This public service announcement is brought to you by the letter ‘P’.