Margin optimization workshop for Food Businesses fcg
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Margin Optimization Presentation for the Food Consultant's Group, presented by Michel Algazi on April 18. 2013
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Margin optimization workshop for Food Businesses fcg
- 1. Profit Margin Optimization © 2012, Michel Algazi. All rights reserved. Michel Algazi michel@algazi.com
- 2. Agenda 1. Brand positioning and its importance for creating a pricing strategy 2. The 4 Cs 3. Build your products’ pricing structure, allowing for necessary margins for distributors and retailers 4. Understand the financial impact of different types of promotions and discounts. © 2012, Michel Algazi. All rights reserved.
- 3. Brand Positioning And its importance in pricing a product © 2012, Michel Algazi. All rights reserved.
- 4. Brand positioning is important because, among other things, it substantiates the relative pricing level of a product or product line - it serves as a basis for comparison. Brand Positioning © 2012, Michel Algazi. All rights reserved.
- 5. Definitions Brand Image Brand Identity Brand Position How the brand is now perceived How we would like to brand to be perceived (ideal) The part of the brand identity and value proposition to be actively communicated to a target audience © 2012, Michel Algazi. All rights reserved.
- 6. Brand Identity A unique set of brand associations that the brand owner aspires to create or maintain. These associations represent what the brand stands for and imply a promise to customers. Brand Customer Relationship Created by the value proposition of the brand Benefits © 2012, Michel Algazi. All rights reserved.
- 7. Brand Associations •Anything that is linked in memory to a brand •Should be strong and positive •Becomes stronger when a customer is exposed to it multiple times •Can create value by: •Helping to process info (facts and specs) •Creating differentiation •Generating a reason to buy •Creating positive attitudes and feelings •Creating a basis for extensions © 2012, Michel Algazi. All rights reserved.
- 8. Brand Associations Brand Name and Symbol Product Attributes Intangibles (“Healthy”) Customer Benefits Relative Price / Competitors Personality / Lifestyle / Celebrity Product Class User / Customer Country of Origin / Geography © 2012, Michel Algazi. All rights reserved.
- 9. Positioning Statement - Elements • What are you making? • For Whom? • Functional Benefit • Emotional Benefit • Self-expressive Benefit Value Proposition © 2012, Michel Algazi. All rights reserved.
- 10. The 4 Cs And their importance in pricing a product © 2012, Michel Algazi. All rights reserved.
- 11. The 4 Cs • Cost •Understand your cost, then set pricing to achieve gross margin in the 30-40% range- shoot for 50-60% if you can. •Consumer •Strengthen marketing and sales capabilities to find consumers that will pay the price you need to make it, as a small scale food producer •Maximize profit, based on your understanding of consumer price elasticity of demand •Leverage direct-to-consumer options (eCommerce, farmers’markets) •Competition •Don’t compete with larger scale producers on price •Understand the pricing environment and motivation of retailers who carry your product •Capacity •Capacity constraints and additions will create “pockets of profitability”for you at various stages of growth”–understand them and adjust your pricing accordingly
- 12. (1) Cost Understand your cost, then set pricing to achieve gross margin in the 50-60% range The 4 Cs of Pricing It is risky to “overdesign” a product.
- 13. Profitability Benchmarks by Type of Company Source: Robert Morris Associates, Annual Statement Studies, 2004-2005, all other misc food *55 companies, averaging $133 million revenue
- 15. Runway
- 16. Consumer •Not all consumers are equal The 4 Cs
- 17. (2) Consumer •Understand your consumer and her needs.
- 18. Marketing Objective Build Perceived Value Benefits a consumer expects to gain from a product or service. • Is there something you can add to your current offering that doesn’t cost much but has high client value? • Is there something you do better than anyone else that you can bundle with your current offerings? Effective Brand Positioning© 2012, Michel Algazi. All rights reserved.
- 19. Value derived over time via experience and prestige. • Excellent customer service • Endorsements from consumers, pundits and if you can, celebrities. Marketing Objective Build Good Will © 2012, Michel Algazi. All rights reserved.
- 20. (2) Consumer •Maximize profit, based on your understanding of consumer price elasticity of demand The 4 Cs
- 21. Price Elasticity of Demand (PEoD) It is the percentage change in consumer demand relative to percentage change in product pricing. The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand. © 2012, Michel Algazi. All rights reserved.
- 22. Price Elasticity of Demand (PEoD) ( Q2 - Q1 ) / Q1 ( P2 - P1 ) / P1 • Large consumer goods companies have research departments to figure this out, smaller firms use experimentation • Price elasticity of demand for a given food product will depend on how essential it is, availability of substitutes, etc. PEoD = • If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes) • If PEoD = 1 then Demand is Unit Elastic • If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes) © 2012, Michel Algazi. All rights reserved.
- 23. (2) Consumer •Leverage direct-to-consumer options (eCommerce, pop-up stores, own retail, farmers’markets) The 4 Cs of Pricing
- 24. (3) Competition • Don’t compete on price with larger scale producers • You can’t match their scale economics or purchasing clout • They may be able to lower price in just the local market in which you compete • Understand the pricing environment and motivation of retailers who carry your product
- 25. (4) Capacity Capacity constraints and additions will create “pockets of profitability” for you at various stages of growth–understand them and adjust your pricing accordingly The 4 Cs
- 26. Pricing - Capacity Traditional Break-Even Chart $ Units Revenue Cost BreakevenVolume Loss Profit
- 27. Pricing - Capacity Pockets of Profitability $ Units Revenue Cost Pocket of Profitability • Businesses run more profitably at 80 –90% utilization of plant capacity • Adding new capacity can push a profitable business back into the red • Try to find the “pocket of profitability”for the stage you are at right now
- 28. Not every sale is a profitable sale!
- 29. The 4 Cs Conclusions • Appropriate Pricing Strategy will be a function of: • Aggressive cost containment • Consumer Demand • Competitive Products • Uptimum capacity utilization • If your product has some unique and valued characteristics, it may give you more pricing latitude than you realize • Set a price that gives you the best chance to be profitable at your current stage of development • Look for the channels / customers that allow you to keep more of your pricing, and avoid those where you will get squeezed due to retailers’need to compete on price
- 30. Profit Levers Raise Prices (if PEoD permits) Fluctuate Capacity (optimize Pockets of Profitability) Reduce Overhead Generate Good Will / Increase Perceived Value Improve Customer or Product Mix A Couple of Additional Ideas © 2012, Michel Algazi. All rights reserved.
- 31. The Fifth C: Customer Acquisition Retention PROFIT Customer Lifecycle Lifetime Value (LTV) (loyalty) Profit-centric Model (Ideal) A Couple of Additional Ideas © 2012, Michel Algazi. All rights reserved.
- 32. SettingYour Pricing Structure © 2012, Michel Algazi. All rights reserved.
- 33. Rules of Pricing • Never underestimate your cost of goods (the fallacy of economies of scale) • Allocate costs appropriately • Always define your pricing based on the maximum number of possible intermediary relationships • Make a realistic assessment of the “Cost of Sale” • Clearly understand discount / promotional mechanics • Run pricing scenarios for every major account you open. • Understand that not every sale is profitable sale © 2012, Michel Algazi. All rights reserved.
- 34. Promotional Discounts • Performance based (based on units sold) • Scan-downs (discount on SRP) • Coupons (discount on SRP) •Non-performance based (fixed or time delimited) • Slotting (fixed price - evaluate customer profitability) • Free-fills (on cost of goods - evaluate customer profitability) • Off-invoice distributor (eg Intro or seasonal) (on distributor price) • Off-invoice retailer (eg Intro or seasonal) (on wholesale price) • Chargebacks (eg marketing) - variable • TPR (on SRP) ✴ Note timing of cost impact © 2012, Michel Algazi. All rights reserved.
- 35. Review 1. Brand positioning and its importance for creating a pricing strategy 2. The 4 Cs 3. Build your products’ pricing structure, allowing for necessary margins for distributors and retailers 4. Understand the financial impact of different types of promotions and discounts. © 2012, Michel Algazi. All rights reserved.
- 36. Q&A © 2012, Michel Algazi. All rights reserved.