Your Margin is Calling
Your margin is calling. But which one? Gross? Net? Retailer? Distributor? Oh my, this math is annoying. Especially in routes-to-market reliant on 3P distribution. Although most new founders focus on their own wholesale price and NOT on any of the ‘prices’ up the value chain to the shelf, where the consumer will define you subconsciously by the consumer-facing price, the SRP.
For those really new to 3P distribution, I’m taking the time out to share the perspective you SHOULD have on margin. And it starts with the retailer, not you. If you’re a pure DTC business, then you can take a pass. Then again, you may want to read it anyways as you will face this reality one day.
Calculating the following price waterfall analysis is something you should do at the P&L level AND also at the level of each UPC with different retail pricing (i.e., different categories or pack types).
- $3.59 – SRP (consumer-facing price per unit)
- Easily marked on shelf for the consumer and forms an initial quality-tier impressions
- Occasionally promote down to a sale price at Hi-Lo supermarkets, Target, etc.
- Minus the retailer’s margin (~30-50% of SRP); 30% or $1.08
- = Retailer Price of $2.51
- markup calculated in reverse direction…
- paid to the distributor, not YOU
- the retail never pays you anything in a 3P route-to-market
- Minus the distributor margin (~30% of the retailer’s price) 30% or $0.75
- = Distributor Price (i.e., your wholesale price) – $1.76
- Minus misc. 3P fees – 15% or $0.26
- off-invoice allowances for the distributor (e.g. free fills, ads, promo $, etc,)
- broker fees
- merchandising support
- = Your effective 3P unit price (i.e., gross profit) – $1.50
- Minus your gross margins (i.e., COGS) 45%
- If this is not 40% or higher, you are serious trouble, because even initial viable scale will NEVER cover fixed costs let lone produce any net profit to re-invest in the business
- = your net profit per unit or $0.67!
- in food and beverage this is often only 40 cents to $1.25 per unit BEFORE calculating in fixed company operating costs like SG&A, debt costs, etc.
- most of the money from the SRP is made by the retailer, not you (not even close to you)
- YOU pay any temporary price reductions at the retail shelf as a chargeback off the distributor’s payment to you
- they don’t pay you until the retailer pays them, which is why you don’t get paid for months after you ‘sell’ into a distributor
- this startling reality, folks, is why you should try to avoid brick retail before $1M in trailing annual sales if at all possible. Or, raise enough seed money/debt to carry you 6-9 months as you launch.
If the collapse in value per unit terrified you, it should. You need to be able to project out the consequences of 3P routes-to-market for at least a year to know if you’re set up for survival. Don’t just leap and figure it out as you go along. That’s what Amazon is for.