PODCASTS / E65
MARCH 1, 2022
I just 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.
But he went a little fast into conventional with virtually the same SRP as he had at Whole Foods. Buyers, by the way, continue to make these mistakes when they are not focused specialists on premium brands. They just don’t think very hard. They get slotting fees which encourage sloppy thinking.
What happens is that your brand may crawl at Whole Foods pricing in a mainline supermarket chain, especially if that Whole Foods SRP is already near the artisan threshold I often counsel clients to avoid.
Every 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 $10 or more.
In commodity categories never used as ceremonial gifts, like cream cheese, there is not a lot of premium you can command and still scale.
Look at Violife plant-based cream cheese in Canada, an extension of a large European dairy conglomerate. It trades for $5.99 per container. Philadelphia sells for $5.19 SRP for a similar-sized amount. That’s an 80 cent SRP difference or only 15% unit premium. Pitiful really to become the #1 market share plant-based cream cheese. Whoopee! And Philly promos down to $3.19 regularly. They have the scale to still make money, barely, off of that price.
In my book, Ramping Your Brand, I talk about 50-200% price premium over market share leading, processed brands as a viable pricing window. But, in dairy, it’s often worse. Consumers just hate overpaying in this space for cultural reasons. These are NOT social, show-off categories. Not at all.
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.
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 Foods show and Expo West.
Often, naive founders will price themselves accidentally into the artisan zone because they want to maintain a 40% gross margin and their COGS are currently high. This can easily lead to SRPs at $8-10 if one is not pausing to think through one’s business model.
Normally, this is a primary reason to raise money as brands scale – to fund lower distributor/wholesale costs OR promo pricing to get it down episodically.
I’m not advocating you gut your price 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 business, and then it will hit a wall. That wall could very be the result of artisan pricing where it doesn’t belong.
In CPG, 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.
Yeah, it’s another math thing…
That’s all for now…
Be safe out there, folks.