Managing Your Wholesale and Retail Pricing
Strong brands should take responsibility for their retail prices
Say you’re a manufacturer of consumer goods. It could be electronics, or lawn fertilizer, or laundry soap, or guitar pedals. The principles we’re going to talk about here are the same. The key thing is: you make a product and sell it at a wholesale price to retailers who then sell it at a retail price.
Your costs have been going up, and the time has come when you need to take a price increase. You sat down with your finance team and determined that if you take a 2% price increase, this will recover your costs and even expand your margins a little bit.
I’ve been there. For seven years I managed this annual problem for Scotts Miracle-Gro, a strong national brand with $3 billion in annual sales.
Here’s what you should not do: take all your prices up by 2%. Let me tell you why.
If it’s a general inflation problem that you’re trying to solve (say your labor costs and your energy as well as some of your raw materials for manufacturing have all become more expensive) it seems to make a lot of sense to take a simple price increase such as raising all your wholesale prices by 2%.
The problem is, then your retailers have to decide what to do with the retail prices they charge customers, and your retailers can’t talk to one another and coordinate how to increase prices. (In fact, if they did so, it would be illegal in the US. Do not engage in criminal price fixing!)
Imagine that you have three products and they’re priced as follows in stores:
Product A: $9.99
Product B: $14.99
Product C: $19.99
Your retailers don’t want to increase all three of those by 2% and end up with:
Product A: $10.19
Product B: $15.29
Product C: $20.39
They would be rolling past significant price points on all three products. So your retailers have to make their own decisions.
The first retailer takes Product A to $10.99 and leaves the other two alone. The second retailer takes Product B to $16.49 and leaves the other two products alone. The third retailer increases the prides of Product C to $21.99 and leaves the other two prices unchanged.
Then the next week, all three retailers look at each other’s prices and price match whoever is lowest on each price. Now all their prices are back to where they were before, but their margins are lower because your wholesale prices are 2% higher.
Next thing you know, you get a call from all three buyers. Each one feels cheated because retail prices have not moved up. They threaten to replace you on the shelves with your competitor if you don’t roll back the increase and credit them for the higher price they paid on their initial inventory load-in at the beginning of the season.
Your mistake was not providing your retailers with a clear signal on how they should manage their retail prices on your products. You left them to manage your brand’s price positioning, and as a result your margins are now in danger.
Instead, what you want to do in this situation is send the retailer a clear message on how retails should move. Words or MSRPs (manufacturer suggested retail price) are not enough, you need to send this message in wholesale pricing.
Instead of taking all your prices up 2%, take a look at your product lines and how price sensitive they are. Prick a few specific products you believe will do well even at a higher price — perhaps products where you’re introducing innovation this year or have advertising support — and take the MSRPs for those products up to the next significant price point, while increasing your wholesale price by the same amount.
Say that out of that three product lineup, you decide that Product B is the one you should move. Your wholesale price is $7.50 and the current retail price is $14.99. Increase the wholesale price to $8.00 and the MSRP to $15.99 (a 6.6% increase.)
Leave your other prices unchanged. Those will be the pricing opportunities you will turn to in another year.
Now when you go to your retailers, you’re coming with a clear message: We believe that Product B can sell successfully at $15.99. We’re supporting the product, and we’re increasing everyone’s wholesale price by 6.6% in order to coordinate the price move.
This tells your retailers clearly what they should do, and it also makes it hard for them to try to decide to do something else. Sure, they could try to ignore your $0.50 wholesale price increase and keep their prices where they were before, but then their profit on that product would go down to 50% to 43%. They don’t want to experience that!
And since you know that you’ve sent all your retailers the same message, and put their margins under significant pressure if they don’t go along with the move, you can be prepared to hang tight and refuse to make concessions if they come back to you.
If you’re shifting from the broad, flat price increase approach to this one, your retailers may at first complain that it’s too complicated. But in the end, this will take better care of your brand and their margins. They will thank you for it in the long run.
This is the process that I developed and implemented at Scotts Miracle-Gro. Rather than taking a broad price increase on all our products, my pricing team would analyze which products we believed we could take a significant price increase on without losing significant share or volume. Then we’d list out all those pricing opportunities and how much they would be worth if we took them, and go into a pricing meeting with the Brand and Sales directors and VPs. We’d review each pricing opportunity and decide which ones to take.
At the end of the process, we had a list of clear price moves we were prepared to defend when meeting with the buyers at the retail chains, and which would move retails in a way which would protect all of our retailers’ margins.