Properly pricing CPG products early on sets entrepreneurs on the path to success but most of the pricing models available are based on mass-produced foods and focus solely on costs. Drawing from the Innovation Adoption Lifecycle methodology, food business expert Jim Verzino demonstrates the importance of taking into account the target market and volume when costing products.

Couldn’t make it to this session? Access the recording here for more questions from the participants and more detailed answers from Jim. The slide deck used in the presentation deck can be accessed here.

About Jim Verzino

Jim Verzino, president of Food Creators Financial, has worked directly with over 100 startup food companies regarding pricing. He shared the methodology he learned from pricing in the high-tech industry and applied it to the food world to provide individualized advice for attendees. 

Main points of discussion:

• Why profit grows and falls as businesses move through the reinvestment lifecycle

• Stages of the Innovation Adoption Lifecycle

• How to manage finances as a company grows

Main takeaways

According to Jim, some of the reasons why food startups fail are because they fail to understand the reinvestment lifecycle as well as their position in the Innovation Adoption Lifecycle. Naturally, there are many more reasons why startups fail, but Jim chose to focus on these two reasons, which are quite common. 

• Financial planning is key
  It is often wrongly assumed that once the volume of a product increases, the costs of production will decrease, and profit will be made. However, as volume increases, the costs of production increase too. In fact, the more orders come in, the more units you need to produce, which means that you have to invest in production (shared kitchen space or co-packing for example, depending on the stage of the startup) to accommodate for this increase in demand. The problem is that during this period, sales are not higher, meaning that you will need to find the capital (raise funds or reinvest their profits for example) to increase your production and accommodate for the increase in demand. This happens over and over again as your startup grows, which is why financial planning is key.  

Innovation Adoption Lifecycle
The Innovation Adoption Lifecycle model, which emerged in the high-tech field, applies to food businesses. Essentially, any new product or technology has an early market that consists of innovators and early adopters. At this stage, demand is low; the product/technology caters to the needs of few individuals in the market, is expensive, and not optimized. But innovators and early adopters are willing to absorb these costs, accept a sub-optimal product/technology, and share their valuable feedback with the founder so they further optimize the product/technology and start tapping into the mainstream market. As the product/technology becomes more popular, it becomes widely available and hence accessible by a larger set of consumers.

• At the early market stage, try to leverage farmers markets, specialty grocery stores, and ethnic markets whenever possible, to market your products. Forging strategic partnerships with other entrepreneurs to support each other's goals and collaborating with social media influencers are great ways to increase your visibility in the early market. Leverage social media as much as possible for it is an efficient marketing channel to further raise awareness about your products.
  Pro tip: define your focus. Don’t try to market to both the early and mainstream markets at the beginning of your journey. Each market has different needs that you’ll need to accomodate for as you go.

• As your product becomes more and more popular, you’d enter retail and start moving from stores such as WFM, Trader Joe’s, and Wegmans to Publix, Price Chopper, Shaws, and eventually to Dollar Tree and the like. At this stage, your target customers are very different from those in your early market and your product (including its attributes, packaging, branding, etc.) has probably undergone many rounds of iteration to be optimized to this specific audience. According to Jim, most food entrepreneurs seek retail presence early on when their product is not ready for retail and their infrastructure is not optimized to accommodate for the high volumes (see the reinvestment lifecycle above). Instead of focusing on the early market and achieving the profits needed to invest in the infrastructure that would enable them to enter the mainstream market (retail), entrepreneurs end up spending a lot of effort, money, and time to break into the mainstream market, jeopardizing their ability to succeed in the long-term.  

How to price CPG products and what should and should not be included in COGS (cost of goods sold)? What about the types of ingredients used, location of origin of the product/raw materials, or the ethics of the manufacturing process?
Ingredients and packaging are always included in the COGS (cost of goods sold). When looking at COGS, be careful with labor and rent, which depend on your production process (shared kitchen space, co-packing, etc.). Be sure to factor in brokerage fees and distribution costs, separately from personnel costs and salaries. If you’re choosing to source sustainably/ethically sourced ingredients, definitely factor this cost in. PS COGS are different from overhead, which are indirect costs that must be paid on an ongoing basis, regardless of whether you are selling your products or not.

Is it better to focus on fewer products with larger stock or multiple products with fewer stock when you are trying to introduce a new product line to the market when you are focusing on the Early Adopter Market? 
When you’re small it’s all about focus so in general fewer products are better. Finding your audience is the hard part but once you find it, find out what their specific needs are and focus on addressing them.

Can you talk about pricing for e-commerce vs. retail?
In general, you’d want to achieve a 20-25% COGS of your total retail sales price (or list price). If you’re selling on shelves, you don’t want to have a lower price online than in retail. Determine the price you can make a good profit on and have that as your list price, and always take into account your costs of shipping if you’re fulfilling the delivery yourself. 

What is the % margin that entrepreneurs should set aside for distributors and retailers?
Typically, distributors receive a 20-30% margin and retailers expect around 40% of margin. The stronger your brand is, the more leverage you have on both distributors and retailers and you’d be able to bring these numbers down. Keep in mind that distributors are good at logistics and holding inventory but they’re not your sales person. They won’t push your brand out there unless you have a strong brand. Also, they are your customers, so make sure you’re finding ways to deliver value to them to reduce their prices. And lastly, distributors are in competition with each other, so if you are a small brand, you might be better off selling D2C. When it comes to retailers, focus on the relationship in the long-term.

How to calculate nutritional information and estimate costs of recipes?
Check out ReciPal for labeling and packaging information. 

Would you recommend co-packing (or outsourcing production) as a way to avoid capital costs?
At the early stages, unless you have a simple product, it is very challenging for co-packers to provide you with the level of quality that you need at a low volume. When you’re small, co-packers are too expensive or impossible to find. 

​How effective is sampling vs coupons in customer acquisition? And do you typically price this into your retail price or take a one time hit?
Sampling is an essential strategy to increase your brand’s visibility in the marketplace. Sampling costs should be included in the costs of sales (even if you’re the one standing in the store and sampling because eventually you will have to hire someone to do that). 

Watch our sampling session here featuring speakers Monica Watrous, Managing Editor of Food Business News; Marie Chevrier Schwartz, Founder & CEO of Sampler; Jon Spear, VP Marketing of Brave Robot; and Chris Murphy, VP Sales & Marketing of Ancient Harvest & Pamela’s Brands. 

When selling a premium product is it more important to gain brand recognition/adoption and then raise prices or should you start out with high prices and simply focus on adoption at that price?
The market typically tells you how much you can charge for your products. So in this case, the question is how long can you last trying to figure out your price point. Keep in mind that it’s very challenging to raise prices later so you’d want to start high and then eventually reduce your price, if you can, as more consumers adopt your product.