COGs Isn’t My BFF (Repost)
Sorry for the repost but this post mysteriously disappeared from our site. So strange. Anyway, it’s more relevant now than ever.
Getting our cost of goods under control is the thing that keeps me up at night. Well, I guess it’s that and and the crying baby. I used to scoff at some of the high prices I found at our local grocer. I don’t anymore. The truth is that it’s really tough to break even when you are selling a low volume (less than 100k units/year) product through a grocery store.
Even though we are just starting out (or starting to start) we need to look forward in order to set out retail price. We have been working with the numbers for the last few weeks and it’s pretty tough. The ideal scenario is to be in the black from day one. That is, to make a fair margin on every unit sold even before selling at volume. We can’t do that. We are certainly going to be the most expensive microwave popcorn, but we need to keep it within reason. Our aspiration is for our product to be viable in any national grocery chain. That means we have to cap our retail price at a point lower than our current costs would require. In short, it’s going to take high volume and a while for us to be profitable…oh, and some luck too.
Our focus right now is on getting a good handle on our COGS (cost of goods sold) when we are at intermediate volume. I find my self saying things like “Are they kidding us with $0.07!? That shouldn’t be any more than $0.05!” Yup, we are counting pennies and in some cases, fractions of pennies.
When working through the numbers the thing you are really trying to nail is your margin, that is, how much you make on every unit sold. One way to approach this is start with your COGS then assume a “safe” margin and do the math to find the retail price. Then you panic and push and pull where possible. Rinse and repeat.
As an example let’s say you wanted to sell salad dressing through a national grocer. First you need to really understand your COGS:
– Lets say your ingredients (oil and spices) costs $0.75 per bottle.
– You need a bottle and a nice glass one might cost $0.50 per bottle.
– You also need to mix and bottle the dressing which costs $0.25 per bottle. If you are having someone else do this it is called “co-packing”.
– Then there is shipping, case boxes, etc. which tacks on another $0.25 per bottle.
(If you make salad dressing and are reading this, don’t freak out if the numbers are off. It’s just an example.)
Okay so your COGS is $1.75 but you need to make some money too. Let’s say you aim for a “safe” 40% margin in an effort to keep your business in the black given the host of other expenses you will incur. That means you need to sell the product for $2.92.
Now we need to get your product on the shelf:
– It’s pretty likely that you will use a broker to get into the stores. They will take 5% margin.
– You don’t sell to the grocery store, you sell to the distributor. They are going to take anywhere from 10%- 30% margin. This one hurts!
– The grocer is the last step in the chain. They will expect to make 30%-40% margin. Count on 40% if you are in the natural food category.
Starting with your COGS + margin of $2.92 and adding the three margins (distributor at 10%) your retail price comes out to roughly $5.75. That got expensive fast eh.
There is actually a whole lot of additional costs to consider such as discounts, slotting fees, demos, etc. but the above calculation should get you in the ballpark.
The bottom line is that is not easy, but that shouldn’t be surprising. Every product out there is making it work and we can as well. It’s all to tempting to up the retail price, but Kristy and I have a gut feeling for what’s acceptable and we won’t cross that line.