Direct to Consumer, Food Service, Large + Small Scale Wholesale
You know how much your product costs to make per unit, it is time to evaluate your pricing scale. When setting your pricing scale you need to consider where your product fits into the market as well as where you will be selling your products. Are you targeting high consumption or daily use items like snacks or pantry staples, or are you entering the luxury market with a specialty event item, or somewhere in between. How do you plan on getting your product in the hands of customers, are you planning to sell direct to consumer through your own retail website or store, are you entering into food service selling to restaurants and bars, or wholesale/distribution where you sell to stores ranging from small boutiques to larger chains. Or perhaps you are planning an omni sales channel approach. Knowing where your product is selling will give you insight into the kind of margins you can build into your sales.
Direct to Consumer Sales - High Margin
Your highest source of revenue will also likely be your biggest use of time - Direct to Consumer Sales via your own retail shop. While you have the greatest opportunity for margin, you will also likely spend the most time and money on each individual sale, at least initially. With Direct to Consumer you have to consider the time and energy you will be putting into every single sale and if that is something you can make work, or want to make work. Making, packaging, selling and shipping your product can be a big undertaking but can offer a bigger payout compared to some other sales avenues. Direct to Consumer can also create great challenges around marking, preparing and shipping easily taking enough time to generate part-time to full-time role that will need to be filled.
Large Scale Distribution / Wholesale - Medium Margin
When we talk about large scale distribution we are talking about selling to large companies with high buying power. Think along the lines of, Kroger, Whole Foods, World Market, etc. These companies have the power to take on a higher risk and you have the opportunity for a higher reward. These larger buyers can buy for single store, an entire region and at national store volumes, but often expect a better price for the large volume. Be mindful of how much product you can realistically create and what your production timeline looks like, and remember that when working with larger buyers a solid contract setting realistic production timelines is key!
Small Scale Distribution / Wholesale - Low to Medium Margin
Like large scale distribution you will be selling your product in multiples, where Wholesale could be looking at units in the thousands or even hundreds of thousands; smaller retail shops will likely be purchasing in units from 10 - 1000. These smaller shops are a sweet spot for building meaningful long-term relationships, gaining valuable insight into your customers and creating a flexible purchasing schedules which can be vital in the early growth of your business. Think mom and pop shops or boutique stores, you will be selling at lower volumes but likely more often, to help reduce the purchasing risk of these smaller stores.
Food Service - High Margin
Not all products can go to food service, it is simply the nature of the product you make. One major benefit of Food Service is how your margins increase. The price at which you sell to food service skews from your retail ready product because you have the opportunity to dramatically reduce your overhead by removing store ready packaging from your cost calculation. Be mindful the food service purchasing is a bit like the wild west. Your Food Service Buyer and their sales team drive the sales of your product and the stocking timeline, which could leave you scrambling to fulfill orders if you don't have a structured timeline in place. It is key to build a solid relationship with these buyers and the restaurants, hotels and bar your product is going to.
Takeaway!
Any sales avenue will generate revenue, you need to decide what works best for you and your company. Direct to Consumer and Food Service will often yield your highest margins, but can leave you rushing to fulfill orders and dealing with additional time intensive tasks like shipping orders. Large and Small Scale Distribution ( Wholesale ) is an easier way to calculate flow of money and product. With larger buyers often working inside of contracts with predetermined timelines, and small buyers bringing the benefit of direct customer contact, you make up for smaller margins with consistency and market value.
Want to learn more about pricing your product read Getting Real About Product Pricing and see what goes into setting your unit price.