Jonathan Milo Leal, a 20-year food maker, understands how costs and pricing are essential to a specialty food business’ success. During the SFA Maker Prep webinar, “Price it Right: Using Costs to Create Real World Price Sheets,” he shared pricing strategies, generally accepted standards for margins, and how to create effective price sheets.
“Numbers are the language of business. If you don’t get your numbers right, if you don’t understand what your costs and prices are, you’re not going to last long in any business,” Leal said. “Getting your pricing right is the foundation of having a successful company.”
When discussing gross margins, Leal noted that a business’ gross margin should never go below 25 percent, even after promotions and marketing, unless there is a clear reason to do so.
Leal’s company is also a co-manufacturer and he cited an instance where a company wished to test a new product and agreed to execute a limited run of the product at a high price point, knowing that if it scaled production, the cost would decrease. Leal said that the company knew it wouldn’t make money on this run, and it was able to test the market while also creating pricing sheets and projections using the lower manufacturing value to get a clear idea of the profitability of the venture.
Leal shared the following “dos and don’ts”:
• Do have set price sheets, as it is dangerous, and sometimes illegal to give one price to consumer X, and another to consumer Y
• Do change your pricing when costs go up
• Don’t forget to include freight, or transportation costs, in your pricing calculations
• Don’t forget to include marketing costs
• Don’t underprice your product
The last bullet is especially important to consider because, Leal noted, businesses tend to overestimate economies of scale. When the business becomes bigger, prices often don’t fix a poor pricing strategy.
To learn more about how to understand pricing and margins and get access to sample informative handouts and a margin calculator, download the webinar to watch on demand in SFA’s Learning Center.
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