How to Price a New Product in Foodservice
For many manufacturers it’s tempting to use their retail pricing model for new products intended for foodservice. Foodservice is unique when compared to any other channel of business – especially retail. There is an engine that runs foodservice in a distinctly different way that may seem familiar, but looks can be misleading. The engine has arms that move one or two steps beyond those in retail. There is partnership, compliance, and trade dollars that weave back and forth on one or two additional levels.
So where to start? First start where you normally would at the cost of manufacturing, after all, it’s what you know best. Like any good manufacturer you know your strengths and limitations, you know your competitors. But pricing for foodservice requires you to know your potential foodservice competitors. Why are they leading? What makes them different? What are their economies of scale? How do they compare to yours?
Then you’ll have to think like a distributor and make them your partner. Consider their expertise in delivery and compliance. The costs involved in drayage can boggle the mind, so think beyond the trucks and pickers and warehouse slots to the risk that is involved in bringing in a new item that will, for lack of a better phrase, take up space. Working with a distributor has its advantages but you’ll see there is a cost attached to those advantages which needs to be considered when making product pricing decisions.
It is the distributor that has the end users and it will need to be determined if they are also your end users. The distributor will train and provide a seasoned and expansive sales force. That means putting themselves on the firing line for your new product and frankly, overhead costs money.
Inevitably any discussion with a distributor will turn to segment cost of goods. Sometimes this translates to a rebate and other times a net pricing. The tighter the margin, the more a distributor must rely on you, the manufacturer, to be a partner. Because the majority of foodservice operates in non-independent multi-unit chains (upward of 70%) you’ll have to factor in that their operations rely on efficiencies and cost of goods also. The distributor understands no matter the product, organic or all natural, electricity still has a price attributed to every product.
Why would segmentation be such a defining factor in pricing for foodservice? Because in foodservice you’ll need to price to your most demanding and complicated segment. In the nearly one million foodservice outlets, the least complicated segments can assist in the recovery of margin eaten up by the most complicated segments.
Trying to price for foodservice, in a nutshell, is complicated. There is a lot to consider as all the variables weave back and forth. If you haven’t considered all these touch points you will find yourself grasping for pennies and scrambling to support your published price list.
Of course, after you’ve tackled all this you’ll have to consider how to support the marketing of your brand and generate qualified leads, yes you’re still in the game. There is no hands off, you’re always all in.