Episode 134 –Why Artisan Pricing Doesn’t Scale in CPG

 

January 15, 2025

 

I once worked with a Phase 2 client that utilized natural and specialty channels to get over the $1M sales line pretty successfully, that’s roughly $2Mish in retail sales using this route to market. 

 

But then he went fast into conventional stores with virtually the same SRP as he had at Whole Foods. And it was a very high price when benchmarked to nationwide, omni-channel price averages. 350% above category unit averages to be precise.  Part of the issue is that buyers too respond to artisan-positioning and forget to challenge founders. They may even want artisan-priced offerings to project a certain image to shoppers in specific zip codes.

 

There are multiple categories in your average suburban supermarket where you’ll find this artisan-priced specialty food creep onto the shelves. Pasta. Pasta sauce. Jam. Wine. Bottled Water. Specialty cheeses. Chocolate. Even fresh, baked, artisan bread in some cities. You won’t find a lot os artisan-priced UPCs selling 4x or more of the category average in a typical supermarket  (for equivalent pack sizes), but you’ll find some. Especially in highly educated zip codes.

 

And they generally do not move fast at the Food Lion or Kroger’s of the retailing world. Specialty retail pricing works well for specialty stores because – a) their shopper base is coming in large part for this tier of goods – they are psychologically primed to trade up – and b) there are also ‘mere’ premium and mainstream offerings at these stores as well. A shopper does not actually have to trade up across the board at these stores (like they generally do at Whole Foods or at an online specialty website). Most people feel in control of their trade up, even though, honestly, these stores are so beautiful and enticing that it’s unlikely you’ll avoid some very pricy impulse buys.

 

Every CPG category has its grey upper line where unit pricing transforms your brand from an everyday consumable (for some) to essentially a fancy gift or holiday purchase. 

 

In pasta sauce, this is at $12 or more as of New Year’s on 2025. 

In chocolate bars, it’s around $10 or more…

 

In commodity categories that we do not use as ceremonial gifts or feature at dinner parties, like cream cheese or shredded cheese, there is not a lot of premium you can command and still scale. It’s very hard. This is why, in part, it took so long for Tillamook to get its price down and ultimately scale. They still age their cheddar cheese for 15 months, not three (or less) and this takes very large scale to bring down initially artisan costs.

 

In my book, Ramping Your Brand, I talk about 50-200% price premium over market share leading, processed brands as a viable pricing window. This finding is not a guess. It was based on correlations between sustained unit volume growth and Average Retail Prive for a large randomized set of brands. 

 

But, in dairy and cereal, it’s often a narrower pricing window. Consumers just hate overpaying in this space for cultural reasons. In part, it’s because therse are NOT social, show-off consumer categories. Not at all. Very few people raid your fridge and pantry to assess your cereal and dairy choices (aside from me…which is I don’t get many invites).

 

And there are dozens of other categories just like this, where the base price is already high and folks won’t trade up much more at all even for a considerably new and attractive outcome. Kevin’s Natural Foods correctly anticipated this price ceiling in refrigerated, precooked proteins. 

 

In categories with very low price elasticity AND a low premium pricing ceiling, placing yourself well above the grey line means you will just attract a tiny niche with little chance of expanding feasibly. 

 

Even if you aren’t in a commodity category like cream cheese, don’t ever price yourself into the artisan stratosphere or you will wind up selling mostly in gift shops and Q4. 

 

There is a massive difference between premium CPG pricing and artisan pricing. It’s the difference, honestly, between the Fancy Food show and Expo West. 

 

Often, naive founders will price themselves accidentally into the artisan zone because they want to maintain 40% gross margin and their COGS are currently high. So they set a high wholesale price to the distributor or retailer. This can easily lead to SRPs at $8-10 if one is not pausing to think through all the mark-ups to the shelf in third-party distributed retail. Oops.

 

One primary reason to raise money early on is to fund lower distributor/wholesale costs OR promo pricing to get it down episodically. This is about raising money to fund a money-losing business until it can scale and reduce certain variable costs. I’d prefer that founders have a better unit economics model from the start OR raise a lot of private seed money to carry them for 3-5 years. 

 

I’m not advocating you slash your wholesale pricing by any means, but you have to be realistic about consumers’ willingness to trade up in your category. In the first $3-5M you may easily find enough folks to prop up your artisan-priced business but it will hit a wall. That wall could very be the result of artisan pricing where it doesn’t belong. 

 

Some listening might point to Doctor Squatch which scaled a $7 bar of soap in a category where that much can get you a six-pack of Dove. Impressive, yes. Artisan pricing commanded and supported by an massive, internet marketing campaign. Yes, this is technically possible, but you have to be willing to take those creative risks AND you need seed money to fund the initial marketing experiment. A lot it. This is a privilege that Liquid Death and Doctor Squatch had that you probably do not have. So, these anecdotes are a distraction.

 

In premium CPG, if you want to avoid artisan-pricing that turns everyone off and you don’t have a couple million for a performance marketing experiment, you really need to look hard at your gross profits, not just your gross margin % when selling to the distributor. The margin obsession is pushed by institutional investors, because, once they strip out all sorts of expenses from your low gross profit but high gross margin business, the net profits will be up enough to make the Enterprise Value look better. Institutional investors can and will scale an upside-down P&L with potential. But, most founders will need to seed raise enough to support a premium SRP (after all markups to the shelf) without venturing into artisan pricing.

 

Or get to eight figures with artisan pricing and invest in reducing wholesale pricing to mere premium levels with outside money at this stage. Not easy. 

 

Whether you avoid or continue with artisan-pricing at least understand if that’s your reality and plan your growth accordingly. 

 

Be safe out there, folks