reputable co-packer to make the products because they already
purchase many of the raw materials, containers, lids, boxes and
other raw materials required for production. Since a co-packer
buys items for several companies, it can buy larger volumes that
cost less per unit than an individual company could. In addition,
if a company uses its own production facility, there often are
costs not associated with using a co-packer, such as equipment,
insurance, utilities, building maintenance and other expenses.
The ultimate goal should be to have a quality product at the best
possible price to be competitive in the product category.
Additional Cost Considerations
Once a nal cost of goods is established, there are several
other components that also have to be dened. Listed below are
several additional costs that must be added to the nished cost to
ensure the prot structure is maintained. All of these factors have
an expense that will be added to the nished cost of goods.
1. Where will the product be stored prior to shipment, and
what is the cost of outside storage if it is required? That
cost has to be included for each case based on the total
cost for storage.
2. How will the product be delivered to the customer? If a
company decides to deliver the product, a cost per case
for fuel, mileage and time must be established. If the
product is delivered by an outside service, what is that
cost, and what is the minimum delivery charge?
3. Most warehouses and distribution centers require slot-
ting fees that can cost between $3,000 and $7,500 per
item to be inventoried. For example, if a company has
Oklahoma Cooperative Extension Service • Division of Agricultural Sciences and Natural Resources
Introduction
Many entrepreneurs and start-up companies do not consider
all the factors needed to establish a pricing structure for their
products. However, factors unique to different sectors of the food
industry can make a signicant difference when determining
bottom-line prot based on the target consumer for products.
For example, products targeted at retail consumers require more
money for packaging and presentation of the product to establish
brand recognition. Conversely, less money is required for packag-
ing if the product is focused toward the foodservice segment, as
most of those items are bulk packaged for further preparation in
the various kitchens of restaurants, country clubs, hospitals or in-
plant cafeterias. The gourmet market is yet another consideration,
as the product and presentation should be unique and emphasize
the quality that distinguishes it from the basic retail items. In most
instances, gourmet packaging is usually the most expensive of
the groups because more of the jars, lids, labels, boxes and other
packaging materials are specialized in design.
Cost of Goods
Whether a company decides to manufacture its own products
or have them co-packed by an existing company, the prot or
price structure process should begin with determining cost of
goods. Every recipe has to be analyzed for proportionate costs of
raw materials used to make the product to determine the actual
cost. This would include all ingredients, containers, lids, labels
and boxes, as each one of these components is reected in the
nished cost of goods. It is important to determine which method
provides the best opportunity to be competitive in a specic prod-
uct category, such as nding a co-packer versus manufacturing
the product in house. There usually is an advantage in nding a
Jim Brooks
FAPC Business and Marketing Services Manager
Are you making a prot on your products?
FAPC-154
Robert M. Kerr Food & Agricultural Products Center
FOOD TECHNOLOGY FACT SHEET
405-744-6071 •
www.fapc.biz
•
Adding Value to OKLAHOMA
154-2
three types of salsa – mild, medium and hot – the slot-
ting fee applies to each type.
4. How or who will represent the product to the buyers
and the various warehouses and distribution centers?
The vast majority of these buying departments require
some type of representation for products, and in most
instances they prefer an established food broker that
represents other product lines in their warehouses.
5. In the event a company is required to contract with a
food broker to represent its product, and the company
is not familiar with working with brokers, the buyer
may recommend two or three brokers who he or she
believes would be a t for the products.
6. Most reputable food brokers require a contract that
denes the geographic area of their responsibility and
species how the product will be introduced to the mar-
ket. The average monthly charge for food brokers can
range between 5 and 8 percent of sales for each order
shipped to the warehouse.
7. It is not uncommon for most new products being intro-
duced in the market to offer some type of promotional
incentive to stimulate sales. Some of the methods they
use could be in-store instant coupons, one free case for
every 10 purchased, buying a newspaper advertisement,
product demos or special introductory pricing.
8. Food service distribution warehouses are different than
retail in that there must be specic customer or chain of
restaurants that “spec” the products for purchase. It is
very rare that they will slot product in their warehouse
without a customer who will purchase a specied quan-
tity each week or month.
9. Food service distributors also will expect the company
or the company’s food broker to represent products
to end users as well as educate their sales force. It is
always better to use a broker if at all possible, as they
have a network of contacts in the geographic area, and
in most cases, they have established themselves through
the other products they represent.
10. Food service distributors rarely charge slotting fees
like the retail warehouses, but they will expect some
method of nancial support. In most cases they ask for
a salesman “spiff” for a certain amount of money per
case as an incentive for the rst 30 days. They also will
expect a company or its food broker to participate in
their food shows during the year, and some might require
a quarterly contribution based on sales to their annual
promotional fund for corporate promotions.
11. It also is important to interview brokers about how they
will represent the product and where they see the best
potential and application for sales and building a cus-
tomer base. Who in the brokerage will be responsible
for sampling the products to the end user, and will they
allow companies to participate in the process?
12. Always dene the expectations for the broker in the
very beginning to determine if the broker feels those
goals are realistic, and try to establish objectives for
each quarter of the year so adjustments can be made if
necessary. It is strongly recommended that a brokerage
agreement be signed by both parties so any issues can
be resolved by the contract.
Final Prot Analysis
There are many factors to consider and important decisions
to be made to ensure companies receive a prot for products. If
a company chooses to use a co-packer, representatives should
meet with several to see which one best ts the company and
can make it the most competitive in its category.
There also are subtle ways to keep the nal price in line with
the competition. For example, 16-ounce containers usually use
the same lids and are the same circumference as 18-ounce con-
tainers. However, the visual difference between the two sizes is
negligible. If a product costs .972 cents per ounce, an 18-ounce
jar would cost $1.75. Using a 16-ounce jar costs only $1.56 per
jar, which can save your company $2.28 for each 12-jar case. In
addition, using fewer colors for your labels may reduce the cost
from 5 cents to 4 cents per label, or 12 cents per 12-jar case.
Foodservice products that normally are bulk packaged often
do not require individual labels. Therefore, companies should uti-
lize a container that holds a large number of units because larger
boxes that hold 36 or 48 units are usually less expensive than
those that hold 12 or 24. On the other hand, gourmet products not
only require well-presented jars, labels and containers, but also
they command a higher price per unit to meet the competition in
the gourmet category. There are many ways to market products to
consumers, but every company should ensure it will prot from
its products by determining all the costs before starting.
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