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How to price a CPG product

Start from the price a shopper will pay on shelf and work backward. Each step below takes a cut, and what reaches you has to cover your product cost, your trade and selling costs, and still leave something over.

Updated

Start from the shelf price

Your suggested retail price, or SRP, is the price you recommend a retailer charge shoppers. It is the top line of your price waterfall, and every number below it is worked back from it.

Set it by looking at the shelf, not at your costs. Find what comparable products sell for in the same size and pack, in the stores you want to be in, and decide where you want to sit against them.

The retailer sets the actual shelf price and can move it or promote it. Your invoice price usually stays where you negotiated it, so a shelf price change mostly moves the retailer’s margin, not your revenue.

Shoppers compare your price with the product next to yours, not with your cost of goods.

Take off the retailer and distributor margins

Retailer margin is the retailer’s selling price minus what it paid you, as a percentage of its selling price. So the retailer’s buying price is its selling price times one minus its target margin.

If you sell through a distributor, it takes its own margin from its selling price to the retailer, and pays you the rest. What you invoice the distributor is your net revenue in Vaaha Unit Economics.

Margin and markup are not the same. Margin divides gross profit by the selling price; markup divides it by cost. Ask every buyer and distributor which one they mean before you quote, because the same percentage gives very different prices.

Worked example

Working down from a $6.00 SRP

  1. Assume a 12 oz product with a $6.00 SRP, a 40% retailer margin and a 25% distributor margin.
  2. Retailer buying price = $6.00 × (1 − 0.40) = $6.00 × 0.60 = $3.60.
  3. Your invoice to the distributor = $3.60 × (1 − 0.25) = $3.60 × 0.75 = $2.70. This is your net revenue per unit.
  4. The distributor keeps $3.60 − $2.70 = $0.90, and the retailer keeps $6.00 − $3.60 = $2.40. Of the $6.00 SRP, $2.70 (45%) reaches you.
  5. If someone instead adds a 40% markup to $3.60, the shelf price is $3.60 × 1.40 = $5.04, and the retailer’s margin is only $1.44 ÷ $5.04 = about 28.6%, well short of its 40% target.

Know your landed cost of goods

Your cost of goods sold, or COGS, is what it costs to make each sellable unit and get it to your warehouse. Use landed cost: the co-packer or supplier price plus inbound freight, insurance, any import costs and prep, divided by the units you accepted as sellable.

Build it from a bill of materials and a current production quote, not from a percentage of SRP. If a turnkey quote already includes materials, do not add them again; if a tolling quote covers only conversion, add the materials yourself.

Worked example

Landing the 12 oz product

  1. Assume you accept 10,000 sellable units from your co-packer at $1.20 each: $12,000.
  2. Freight to your warehouse, insurance, and labeling and prep add $1,500 in total, or $1,500 ÷ 10,000 = $0.15 a unit.
  3. Landed COGS = $1.20 + $0.15 = $1.35 per unit.

Work out gross margin on your own revenue

Gross profit is your net revenue minus COGS. Gross margin is gross profit divided by net revenue. Use what you invoice, not the SRP: the retailer and distributor margins are already reflected in your price, so do not take them off again.

Vaaha Unit Economics takes trade spend off below gross profit. Your accountant may deduct some trade from revenue instead. Either view works, as long as trade is counted once.

Worked example

Gross margin on the $2.70 invoice

  1. Gross profit = $2.70 − $1.35 = $1.35 per unit.
  2. Gross margin = $1.35 ÷ $2.70 = 50%. The markup on cost is $1.35 ÷ $1.35 = 100%.
  3. If your accountant records $0.30 a unit of trade allowances as a reduction of revenue, net revenue is $2.40, gross profit is $2.40 − $1.35 = $1.05, and gross margin is $1.05 ÷ $2.40 = 43.75%. The $0.30 then does not come off again below gross profit.
  4. Figured wrongly on the SRP, it would look like ($6.00 − $1.35) ÷ $6.00 = 77.5%, which is not money you receive.

Take off trade, broker and marketing to reach contribution

Gross profit still has to pay for the costs of selling. Trade spend covers promotions, scan-backs, free fills, slotting and demos. A broker is usually paid a commission on its sales. Marketing you run to move the product is a cost too.

Contribution is what is left after the costs that rise and fall with volume. It is what each unit contributes toward your fixed costs and profit. Keep one-time costs such as a slotting fee or a fixed campaign with your fixed costs, so the per-unit picture stays honest.

A product can show a solid gross margin and still have negative contribution. If it does, selling more at the same economics only makes the loss bigger.

Worked example

Contribution on 10,000 units

  1. Assume 10,000 units at $2.70 net revenue: $27,000. COGS is 10,000 × $1.35 = $13,500, so gross profit is $13,500.
  2. Variable trade spend of $0.30 a unit is $3,000. Broker commission of 5% of $27,000 is $1,350. Variable marketing is $2,400.
  3. Contribution = $13,500 − $3,000 − $1,350 − $2,400 = $6,750, which is 25% of net revenue, or $0.675 per unit.
  4. If your accountant takes the $3,000 off revenue instead, gross profit is $24,000 − $13,500 = $10,500, and contribution is $10,500 − $1,350 − $2,400 = $6,750, the same.
  5. If your fixed costs are $13,500, break-even is $13,500 ÷ $0.675 = 20,000 units at these economics.

Test the price against competitors per ounce and per unit

Once the waterfall works, go back to the shelf. Shoppers often compare unit prices, so put your price and your competitors’ prices on the same basis: per ounce, per count or per serving, whichever the shelf tag and the category use.

Compare the pack too. A smaller pack at a lower price can look cheaper on the shelf while costing more per ounce, and a multipack can look expensive until it is divided out. Check the stores you are actually targeting, since the same item can be priced differently from one chain to the next.

Worked example

Comparing three products per ounce

  1. Your product: $6.00 for 12 oz = $6.00 ÷ 12 = $0.50 per ounce.
  2. Competitor A: $4.50 for 10 oz = $0.45 per ounce.
  3. Competitor B: $8.80 for 16 oz = $0.55 per ounce.
  4. You sit between the two per ounce, while A looks $1.50 cheaper on the shelf. Decide whether your product gives shoppers a reason to pay $0.05 an ounce more than A.

Use the Rule of 5x only as a rough screen

The "Rule of 5x" says your SRP should be about five times your COGS. It is a quick way to spot a price that is far off before you build the full waterfall, not a profitability rule.

It ignores your actual retailer and distributor margins, your trade terms and your channel. A product can pass it and lose money, or miss it and work. Decide on gross margin and contribution from the price your customer actually pays you.

Worked example

Screening the 12 oz product

  1. SRP ÷ COGS = $6.00 ÷ $1.35 = about 4.44 times.
  2. Five times COGS would be $1.35 × 5 = $6.75, so the product misses the screen.
  3. The full waterfall still shows a 50% gross margin and $0.675 of contribution per unit. The screen flagged the price for a closer look; the waterfall answered the question.

When the numbers don’t work

If the waterfall leaves too little gross profit or contribution, you have four levers: the pack, the cost, the channel and the price. Change one at a time and rerun the whole waterfall, because each one moves more than one line.

Change the pack: a different size, count or format changes both your cost and the price shoppers compare. Change the cost: renegotiate inputs, simplify packaging, or run larger batches if your cash and shelf life allow it. Change the channel: selling direct to a retailer avoids the distributor margin but adds your own delivery and account costs, and your own website has fulfillment instead. Change the price: only if the shelf test still holds.

  1. Write down the gross margin and contribution per unit you need to cover your fixed costs at a realistic volume.
  2. Rerun the waterfall with your actual retailer, distributor and trade terms.
  3. Try one lever at a time and note what it does to gross margin, contribution and the per-ounce comparison.
  4. Check the new price against the shelf again before you quote it to a buyer.

Worked example

If landed COGS were $1.80 instead of $1.35

  1. At the same $2.70 net revenue, gross profit = $2.70 − $1.80 = $0.90, and gross margin = $0.90 ÷ $2.70 = about 33.3%.
  2. After the same $0.675 per unit of trade, broker and marketing, contribution = $0.90 − $0.675 = $0.225 per unit.
  3. Holding price, you would need to bring COGS back to $1.35 to return to a 50% gross margin.
  4. Holding COGS at $1.80, a 50% gross margin needs $3.60 of net revenue, which works back to an SRP of $3.60 ÷ 0.75 ÷ 0.60 = $8.00, or $0.67 per ounce. Test that against the shelf before choosing it.

Common questions

How do I calculate the wholesale price from the retail price?
Multiply the SRP by one minus the retailer margin to get the retailer’s buying price. If you use a distributor, multiply that by one minus the distributor margin to get what you invoice.
Is margin the same as markup?
No. Margin divides profit by the selling price and markup divides it by cost, so the same dollars of profit give a smaller margin than markup. Confirm which one a buyer or distributor means before you quote.
Should my retail price be five times my cost?
The Rule of 5x is a rough screen, not a rule. Work out gross margin and contribution from the price your customer actually pays you, after their margins and your trade terms.
Should I price my product lower to get into stores?
Only if the waterfall still leaves enough contribution to cover your trade and fixed costs. It is far easier to launch at a workable price than to raise it once you are on shelf.

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