*Repost* FOB: Pricing Your Products to Position at the Wholesaler
Article 5: Ensuring Profitability: Margins and Cost Considerations in FOB Pricing
One of the most shared articles in the series thus far, I wanted to bring this article back to the attention of many new subscribers. I think there’s some relevance with the current financial subject matter I’ve been posting about. Leave your thoughts in the comments below!
When setting FOB (Freight on Board) prices for your products, ensuring profitability is paramount. Understanding the importance of margins and cost considerations in the pricing process is key to establishing a successful pricing model. In this article, we will explore how margins and cost considerations impact FOB pricing, emphasizing the significance of providing flexibility to wholesalers in order to achieve mutual success.
Margins: A Balancing Act for Profitability
Blended margins play a critical role in determining the profitability of your product. Striking the right balance between your own margins and the margin expectations of the wholesaler is essential for sustainable business growth. Consider the following:
a. Supplier Margins: Determine the cost of making, packaging, and holding your product. Factor in all the associated costs, such as materials, labor, and storage. Ensure that your margins are sufficient to cover these expenses, support your team, and build a security and growth fund for future production and expansion.
b. Wholesaler Margins:
Understand the margin expectations of your wholesaler. Collaborate closely with them to determine the margins they need to maintain their business model. By providing flexibility in margins, you empower the wholesaler to make deals and pricing decisions without the need for extensive blended margin calculations. Time is one of the most precious commodities of your wholesale business manager and sales team. Giving them the ability to make informed and quick decisions will help you in the long run.
Cost Considerations: Building a Sustainable Pricing Model
Consider various cost factors when establishing your pricing model:
a. Product Costs: Calculate the cost of goods, including raw materials, production expenses, and packaging. Understand the cost associated with producing your product in bulk and selling it in quantities that match production. This will help you determine the minimum pricing required to sustain your operations.
b. Carrying/Storage Costs: Assess the cost of holding inventory and not selling it. This includes the cost of storing your products at an importer warehouse, which often has a set monthly storage fee per case. Additionally, consider the carrying cost associated with tying up money in producing the product without regular sales. Depreciation can be calculated as a generic 9% of the cost, impacting your expenses towards goods. Carefully evaluate production planning cycles and align production volumes with market demand to optimize cost efficiency.
c. Marketing and Promotional Expenses: Allocate a portion of your pricing to support marketing programs, sample billbacks, and other promotional activities. This ensures that you have funds available to drive brand awareness and support your product in the market.
Conclusion
Establishing profitability in FOB pricing requires careful consideration of margins and cost factors. A successful supplier can price their product at a fair FOB while providing flexibility to wholesalers. This flexibility empowers wholesalers to build a pricing model that aligns with suggested retail prices (SRPs) and allows them to make deals and pricing decisions independently. By understanding your own cost structure and collaborating closely with your wholesaler, you can create a sustainable pricing model that supports profitability for both parties.
Insightful Takeaway:
The key takeaway from this chapter is the importance of pricing your products in a way that ensures profitability for both you as a supplier and your wholesalers. By establishing fair FOB prices that consider your own margins and the margin expectations of the wholesaler, you create a foundation for mutual success. Providing flexibility in margins to your wholesaler gives them the ability to make deals and pricing decisions that align with market dynamics, ultimately driving their own success without the need for complex blended margin calculations. By focusing on profitability and building a sustainable pricing model, you set the stage for long-term growth and prosperity in the marketplace.