Demystifying Distributor Margins: How to Price for Retail Success
When Elizabeth launched her line of gourmet snack mix, she calculated her production costs and added 20%, assuming it would be enough to earn a tidy profit. A few months later, she landed what seemed like the deal of a lifetime with a national retailer. Her excitement was short-lived once she found out how much the retailer and distributor would earn. Her "deal of a lifetime" quickly turned into an expensive mistake, leaving her wishing she'd done more research on distributor margins.
Does this sound familiar? If so, you're not alone. Many CPG business owners panicked when they realized they would be earning very little profit from a major deal. Too many owners set prices based on gut feelings or outdated advice, leaving them scrambling to stabilize their businesses. I've spent more than a decade helping wineries and CPG businesses optimize their financial performance, so I'm happy to report it doesn't have to be this way.
At Balanced Business Group, we're committed to helping business owners avoid financial pitfalls. Use our roadmap to create a pricing strategy that makes sense — and cents — for your company.
How Distributor Margins Actually Work
One of the most common mistakes owners make in CPG product pricing for retail is mixing up margin with markup. Markup is how much extra you charge based on your production costs, while margin is the percentage of the final selling price that you get to keep as profit.
Here's an example to make the difference even clearer:
Assume it costs you $4 to produce a bag of trail mix. If you sell the trail mix for $8, your markup is 100%. In other words, you doubled your production costs. However, your margin is only 50%. You get to keep $4 of every sale, which is 50% of the $8 selling price.
Many business owners focus on markup, but you should be focusing on margin, as that's how United Natural Foods (UNFI) and KeHE do business. UNFI's margin averages 13%-14%, but it ranges from 6% to as much as 30% depending on the size of the retailer. Independent brands often pay more than nationally known brands, as they don't have the same amount of negotiating power. In the CPG industry, the typical distributor margin ranges from 15% to 25%.
In addition to the distributor margins, you need to think about retailer margins, which usually range from 30% to 50%. Margin stacking refers to how these costs "stack" up to reduce your profit margin.
Margin Stacking Example
Here's how margin stacking works in the real world. Assume your product has a manufacturer's standard retail price (MSRP) of $8. If the retailer wants to make $3.20 (40% of the MSRP), they'll have to pay the distributor $4.80 (60% of the MSRP). To make 20% on the $4.80 resale price of the product, the distributor has to buy it from you for $3.84.
This makes your ex-factory price, or the price at which you agree to sell goods from the factory, $3.84, a far cry from the $8 MSRP. The other $4.16 is all margin stack, and you haven't even considered your cost of goods sold (COGS) yet.
Work Backward From Your Target MSRP
When determining CPG and winery product margins, setting a realistic retail price is critical. The link between retail pricing and COGS is extremely important. If you get it wrong, the best-case scenario is that you have to redo the pricing on every product you sell. In the worst-case scenario, your business fails because you don't generate enough profit to sustain the operation.
It's hard to get pricing right when you're first starting out, but here's how I'd approach it.
Make sure you understand the rules of the game. On average, retailers require a 40% margin, while distributors require a 25% margin. The revenue you receive (distributor price) will be 45% of the price of the product on the shelf.
Ensure you're planning for a healthy margin. Trade spend will be around 9% of your gross revenue (9% of your retail price. Investors will also want a minimum 40% contribution margin at scale, or 18% of retail price. The bottom line? You must be able to produce, store, and ship your product for 40% of your distributor price or 18% of your retail price.
Check your competitors' selling prices. How can you position your brand as competitive when it's on the shelf with these other products? CPG brands are often price takers. In simple terms, a price taker is a company that sets prices based on prevailing market rates due to a lack of influence. Whole Foods has the resources to negotiate substantial discounts, but a brand-new CPG business doesn't.
Try to get your unit cost, including freight, to 18%. If you sell at $2.99, is it possible to produce, store, and ship for $0.54 per unit?
You don't have to get your unit cost to 18% on Day 1, as the cost of ingredients, packaging, and freight will be higher up front. Once you scale, however, it's critical to keep your production costs below 18%. In short, find a price that attracts consumers, and try to get your costs down to 18% of this price.
Wholesale-to-Retail Margin Calculator for CPG Brands and Wineries
Use this worksheet from BBG to determine what you need to charge to reach your financial goals.
Finding Your Ex-Factory Price
Here's how to find your ex-factory price based on your MSRP. Assume an item has an MSRP of $4.99. If the retailer margin is 40%, they'll want $2 ($1.996 to be exact), leaving $2.99 for the distributor. Now assume the distributor has a margin of 20%. In this scenario, they'll want to earn $0.60 ($0.598) per unit, leaving you with an ex-factory price of $2.39. Your margin shrinks even further when you pay your marketing and freight costs.
Set Realistic COGS Goals for Retail Viability
Now that you know your ex-factory price, you can determine how much you can afford to spend making your product. If your ex-factory price is $2.39, as it was in the previous example, you'd need to keep your costs at $1.19 (rounded down from $1.195) to achieve a 50% gross margin.
That's not just the cost of your ingredients. It covers manufacturing, packaging materials, and freight. If you own a winery, you also have to account for excise taxes and higher packaging costs. For example, glass bottles and corks are more expensive than cellophane bags and adhesive labels.
Let's say you sell a bottle of wine for $20. If the retailer takes 40%, they'll have to pay the distributor $12. Assuming a distributor margin of 20%, you have to invoice the distributor $9.60. To achieve a 50% margin, your COGS must be no more than $4.80, which includes the wine, bottle, cork, label, box, and other packaging materials.
Reducing COGS Without Reducing Quality
You don't have to produce a subpar product to reduce your COGS. Here are a few tips we give to CPG and wine brands:
Engage in strategic ingredient sourcing (e.g., purchase in bulk to qualify for volume-based discounts).
Negotiate better rates with your suppliers.
Balance quality with cost-effectiveness when choosing packaging materials.
Streamline your production processes to minimize waste.
Monitor key performance indicators (KPIs) to determine what changes are likely to have the biggest impact.
Common Mistakes Founders Make With Margins
One of the most common mistakes is choosing a price based on gut feelings. Your pricing strategy should account for the mathematical realities of running a winery or CPG business. Some business owners forget to include certain promo costs in their budgets, don't notice the free fills and payment terms buried in their distributor agreements, or forget to consider the effects of freight costs.
Here's an example of how these mistakes can hurt your business.
This is unsustainable unless you can reduce your COGS significantly, raise your MSRP, or gain scale to negotiate better freight and promo terms.
Before you commit to a distributor, run the numbers to determine how the margin stack is likely to affect your pricing strategy. Test a few worst-case scenarios to determine if you can still be profitable in the face of extra promo costs or unexpected chargebacks. Make sure you read the fine print and understand all the terms in the distributor's agreement.
BBG can help you optimize your COGS and model real-world scenarios before you sign a contract, making it easier to avoid unpleasant surprises.
Price Proactively, Not Emotionally
When it comes to pricing, math doesn't care about your gut feelings. It's not personal — it's just how the business works. Once you understand the math, you can price your products to succeed in retail, not just launch into it. Lasting brands model carefully, plan ahead, and adjust when necessary.
BBG can help you refine your marketing strategy and set prices that help your brand turn a profit. Contact us today for personalized support with your winery or CPG business.
