The Price is Right! Or is it?: The Importance of Evaluating Your Product Prices
This year’s Summer Fancy Food Show – the largest specialty food industry trade event in North America – showcased an overwhelming number of products that will hit the market in the near future. It begged the questions all food processors and new product developers should be asking themselves: Where are all of these new products going to be sold, and at what price?
The Food Institute analyzed the government’s Producer Price Index (PPI), and reported that 2017 looks to be the largest year over year increase since early 2015. With the increase in food demand coupled with the increased price of ingredients, a re-evaluation of sales prices is now due.
Of course, that is easier said than done. When I ask my clients whether they’ve evaluated their pricing structure recently, I get a variety of questions and challenges. Ultimately, they ask me what we should be considering to ensure their products are offered at the right price, and they earn their targeted profit in the current market.
Here is what you should ask yourself when deciding on the right price for your product:
- What does it cost to buy or make your product? (Hard numbers, no estimations)
- Do the costs include the freight in shipping, handling, and storage?
- Are you offering a unique product?
- What is your competitors’ selling price for the same product?
- What will the consumer pay for your product?
Then, once you have evaluated the costs and determined the gross margin you need, there are a few more components to contemplate:
- Do you cover the shipping costs for the delivery of your product?
- Do you provide broker discounts for larger orders?
- Do you experience a high number of returns for defect issues or consumer dissatisfaction?
Any of these costs or issues can reduce your gross profit margins, and chip away at your bottom line.
Also, when evaluating your selling price, you should have your accounting, sales, and marketing departments involved in the conversation, as they can each contribute a unique perspective. Their approaches may be different, but very relevant when it comes to evaluating your current market, and they should weigh-in on how to correctly price your product.
And remember, you should be adjusting your prices as the market changes. There is no hard rule on how many times you can alter the price of a product in a given year. Each product and its related market conditions should drive how often you evaluate the price structure.
So… in short: Reviewing the actual costs and all related charges of product(s) is an ongoing requirement in today’s changing market, especially when we are focusing on high quantity sales orders to cover overhead. If you are not pricing your product appropriately, the gross profit margins may shrink based on increased product cost, shipping arrangements, broker fees, and returns. Does your increased sales volume matter if your bottom line is shrinking? Making a price reevaluation part of your regular business practices is a must in order to make sure your top line sales grow alongside your bottom line.
KATHLEEN ALEXANDER, CPA, MST, CFE is the Partner-in-Charge of Sax’s Food and Beverage Department with over 20 years of accounting, tax planning, and business consulting experience. She serves clients across a range of industries, with a concentration in Manufacturing and Distribution. Kathleen’s focus is on increased cash flow by establishing good tax strategies to maximize business and personal taxes. As a hands-on professional, her clients rely on her strong knowledge of account controls and best practices. She can be reached at [email protected].