The 40/25/10 Rule: A Simple Framework for Modeling Retail Economics
Key Takeaways
The 40/25/10 rule offers a simple retail pricing framework, allocating 40% to the retailer, 25% to the distributor, 10% to promotions, and leaving just 25% of the shelf price for the brand.
In a real-world example, a $24.99 rosé nets the winery only $1.87 in gross profit per bottle—highlighting how quickly margin can vanish if costs aren't tightly controlled.
The rule must be adapted based on channel strategy, with DTC, national chains, and self-distribution each introducing different cost and margin dynamics that affect net revenue.
Founders who price without modeling often overlook promo budgets and partner cuts, risking unsustainable margins and missed opportunities to build a profitable brand.
You probably didn’t get into this business to become a master of spreadsheets. Chances are, you got into it for the love of the land, the magic of fermentation, the satisfying heft of a bottle in hand, and the story you get to tell with every vintage. The art of winemaking is your passion, but retail economics for CPG is just as important.
Before your wine ever reaches a customer’s glass via a retail store, its price will be shaped by the unwritten rules of the supply chain. Overlooking this financial challenge is the single most common reason I see passionate founders struggle. They create a world-class product but fail to build a sustainable business around it because their pricing was based on hope, not math.
That’s why we need to talk about the 40/25/10 rule. Think of it as a foundational framework, a set of guardrails for your pricing strategy. This isn’t just an academic exercise; it’s the litmus test that determines whether your hard work in the vineyard and cellar will translate to a healthy business on the shelf.
What Is the 40/25/10 Rule—and Why It Matters
The 40/25/10 rule is a CPG pricing model that gives you a quick, industry-standard snapshot of your retail economics. It’s a shorthand for how the suggested retail price of your bottle gets carved up before a single dollar makes it back to your winery.
Let’s look at the classic breakdown of the retail margin stacking:
40% for the retailer: This is the margin for the independent bottle shop or fine grocery store that dedicates shelf space, educates its staff, and hand-sells your wine to a curious customer.
25% for the distributor: This is the distributor’s share for taking on your inventory, managing the logistics, placing your wine in their accounts, and collecting payments.
10% for promotions: This is the portion you must reserve for all the activities that help your wine move off the shelf. Think of it as your budget for depletion allowances, staff trainings, in-store tastings, or sales promotions.
25% for you: This final slice is what is left for your winery. From this, you have to pay for your grapes, glass, corks, capsules, labels, labour, freight, and overhead, all before you can take a profit.
Adhering to this framework matters for four critical reasons. It instills financial discipline, prevents catastrophic margin erosion, exposes cost issues early in your process, and forces strategic conversations about how to price a CPG product for long-term success.
Too many founders underestimate the distributor margin that food and beverage brands require. Or, more commonly, they forget to budget for promotions entirely, leaving them with a product that stalls on the shelf and a P&L that bleeds red ink.
A Real-World Example: The $24.99 Bottle of Rosé
Let’s put this framework to work with a real-world scenario. Imagine you’ve crafted a stunning Provencal-style rosé. You’ve run the numbers on your COGS, you’ve seen similar bottles on the shelf, and you’ve decided the perfect SRP is $24.99.
Now, let's see how the 40/25/10 rule deconstructs that price, working backwards from the shelf to your winery:
The retailer’s cut: The retailer’s 40% margin comes right off the top. They buy your wine for roughly $15.00, giving them a $10.00 margin on the $24.99 sale.
The distributor’s cut: The distributor’s 25% margin gets carved out next. They take their percentage from the price they sell to the retailer, meaning they need to buy the wine from you for $11.25 ($15.00 x 0.75).
The promotional budget: That crucial 10% for CPG promo budgets is based on your sale price to the distributor. This reserves about $1.13 per bottle ($11.25 x 0.10) to fuel sales programs.
Your net revenue: After all partners and programs are accounted for, your net revenue per bottle is $10.12.
This is the number that matters. Is it enough? Let’s assume your finished cost of goods sold—everything that goes into the bottle and the bottle itself—is $7.50. Shipping that case to the distributor’s warehouse adds another $0.75 in freight per bottle:
Your net revenue: $10.12
Your total cost: $8.25
Your gross profit: $1.87 per bottle
A gross margin of just over 18% is not a foundation for a scalable business. That $1.87 is what’s left to pay your salary, reinvest in new barrels, hire a tasting room associate, and build a brand. It’s a simple exercise you can complete in minutes, but it proves that a $24.99 retail price is unsustainable with your current cost structure. You either need to raise the price or ruthlessly cut costs.
When and How to Adjust the Rule
Of course, the 40/25/10 rule pricing is only a benchmark for a particular channel, and savvy founders know how to adjust the model based on their strategy:
Direct-to-consumer: Selling directly from your tasting room or wine club is the dream for a reason. You reclaim that 65% in partner margins, but you inherit a new set of costs—the payroll for your tasting room staff, the FedEx shipping contract, the e-commerce platform fees, and the digital marketing budget needed to acquire those customers in the first place.
National chains: Walking into a pricing conversation with a buyer from a national chain is a different game. They leverage their immense volume to negotiate. The retailer margin might shrink to 30-35%, but they'll likely demand a larger promotional budget—your 10% might need to become 15% or even 20%—to fund their aggressive promotional calendar.
Self-distribution: In states where it’s allowed, taking on the role of the distributor can be transformative. You absorb that 25% margin, which is a powerful boost to your P&L. Be warned, though. You're now in the business of logistics, fleet management, accounts receivable, and sales route planning. You must model carefully to ensure that 25% is enough to cover your new, complex operational costs.
Allocated and fine wine: If you’re producing a highly sought-after, small-lot cabernet that collectors chase, the rules can be bent. A fine wine shop may accept a lower margin because the prestige and scarcity of your bottle alone are enough to draw customers into their store. Rarity becomes its own form of marketing.
Don’t Price Blind—Price With a Plan
Pricing your wine is much like blending it. You wouldn't guess at the final percentages of a blend, right? You’d run meticulous trials until the balance is perfect. Your approach to retail economics must be just as disciplined.
The 40/25/10 rule provides direction and acts as a safeguard against wishful thinking. It allows you to enter negotiations with distributors and retailers from a position of strength, armed with a deep understanding of what you need to build a profitable, enduring brand. Your passion deserves a business model that can sustain it.
If you’re preparing to launch in retail and need to build a pricing architecture that protects your margin, let’s talk. Our finance and accounting teams can help you model the numbers, stress-test your assumptions, and make sure the price on the shelf is one you can afford.
Let us help you build your pricing strategy. Contact BBG today.
