WATCH OUT! Customers think any price reductions are permanent!
Especially now, CPG producers must feature a price reduction on their retail shelves. But if they want to do that, producers need to temporarily reduce their FOB prices to their distributor, then get their distributor to reduce their wholesale prices to the retailer, and finally, the retailer must reduce the retail price to their customers. If the producer sells directly to retailers, the retailer must cooperate in cutting prices for the customer.
Temporary Price Reductions
Temporary Price Reductions, or TPRs, can draw attention to your products, help you negotiate for retail displays, and score those customers who passed on your products many times before. But debuting a new product at retail with an immediate price reduction is an awful idea. Why? Because, any change back to everyday pricing would be viewed by the customer as an “increase”. They would be discouraged to continue buying your brand. So, before you employ TPR tactics, it’s essential that everyday pricing is already established for at least a month in that location.
Of course, you need periodic TPRs to bring some more attention to your products, but it’s all about how you do it. Things become more complicated when you try to affect retail shelf price reduction. For example, if you lower you FOB pricing in order to get a lower retail price, both the distributor and the retailer won’t be happy when the price returns to normal. They’ll think it’s an increase!
Protect Your Price
So how can you do all this without messing with your everyday pricing? The answer is simple: NEVER lower the price! On your invoices, always charge full price. Then, you can offer a one-time credit that’s only good under certain limitations. When you do send an invoice, do so for the full price and display the credit (if applicable). In other words, the credit could be based on volume, time, a performance factor, or a combination of any of these. For example, perhaps you’d offer a program to a retailer or distributor for their purchase during any given month, on the stipulation that they must reduce their margins that month in order to achieve 1 or 2 dollars less on the shelf. You might also require that they buy a certain amount of your products at a time, like a 5-case minimum for example. This encourages a floor display!
Protect Your Sales
Make sure to have seasonal promotion materials ready when you sell this program. This shows retailers how you’ll support your products’ displays. It’s crucial that they understand the credit you’ve given them is only available when they purchase products under your program. Be careful–don’t present your program too much longer before your promotional event, or else the retailer will wait and you might lose sales during the month before the event. This becomes tricky when you rely on the distributor’s rep to create the presentation. We suggest your salespeople, or better yet, you, do the presentations and get the buy-in from the retailer.
When you sell directly to the retailer, the credit will be seen as a one-time allowance under limited circumstances for a certain period of time. But when you offer this credit to the distributor, the retailer may think of it as a permanent price reduction. That is, unless you control the lines of communication and get your distributor to make the TPR and its conditions clear to the retailer. The last thing you want to hear is, “I paid less last month, and now you’re raising your price?!” Giving away money is not easy!
For more, read on: http://c-suitenetworkadvisors.com/advisor/michael-houlihan-and-bonnie-harvey/
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