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Margin optimization workshop for Food Businesses fcg

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Margin Optimization Presentation for the Food Consultant's Group, presented by Michel Algazi on April 18. 2013

Margin Optimization Presentation for the Food Consultant's Group, presented by Michel Algazi on April 18. 2013

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  • 1. Profit Margin Optimization©  2012,  Michel  Algazi.  All  rights  reserved.Michel Algazimichel@algazi.com
  • 2. Agenda1. Brand positioning and its importance for creatinga pricing strategy2. The 4 Cs3. Build your products’ pricing structure, allowing fornecessary margins for distributors and retailers4. Understand the financial impact of different typesof  promotions and discounts.©  2012,  Michel  Algazi.  All  rights  reserved.
  • 3. Brand PositioningAnd its importance in pricing a product©  2012,  Michel  Algazi.  All  rights  reserved.
  • 4. Brand positioning is important because,among other things, it substantiates therelative pricing level of a product orproduct line - it serves as a basis forcomparison.Brand Positioning©  2012,  Michel  Algazi.  All  rights  reserved.
  • 5. DefinitionsBrand Image Brand Identity Brand PositionHow the brand isnow perceivedHow we would liketo brand to beperceived (ideal)The part of thebrand identity andvalue propositionto be activelycommunicated toa target audience©  2012,  Michel  Algazi.  All  rights  reserved.
  • 6. Brand IdentityA unique set of brand associationsthat the brand owner aspires tocreate or maintain. Theseassociations represent what thebrand stands for and imply apromise to customers.Brand CustomerRelationshipCreated by thevalue propositionof the brandBenefits©  2012,  Michel  Algazi.  All  rights  reserved.
  • 7. Brand Associations•Anything that is linked in memory to a brand•Should be strong and positive•Becomes stronger when a customer is exposed to itmultiple times•Can create value by:•Helping to process info (facts and specs)•Creating differentiation•Generating a reason to buy•Creating positive attitudes and feelings•Creating a basis for extensions©  2012,  Michel  Algazi.  All  rights  reserved.
  • 8. Brand AssociationsBrandNameandSymbolProduct AttributesIntangibles(“Healthy”)CustomerBenefitsRelativePrice /CompetitorsPersonality /Lifestyle / CelebrityProduct ClassUser / CustomerCountry ofOrigin /Geography©  2012,  Michel  Algazi.  All  rights  reserved.
  • 9. Positioning Statement - Elements• What are you making?• For Whom?• Functional Benefit• Emotional Benefit• Self-expressive BenefitValue Proposition©  2012,  Michel  Algazi.  All  rights  reserved.
  • 10. The 4 CsAnd their importance in pricing a product©  2012,  Michel  Algazi.  All  rights  reserved.
  • 11. The 4 Cs• Cost•Understand your cost, then set pricing to achieve gross margin in the 30-40%range- shoot for 50-60% if you can.•Consumer•Strengthen marketing and sales capabilities to find consumers that will paythe price you need to make it, as a small scale food producer•Maximize profit, based on your understanding of consumer price elasticity ofdemand•Leverage direct-to-consumer options (eCommerce, farmers’markets)•Competition•Don’t compete with larger scale producers on price•Understand the pricing environment and motivation of retailers who carryyour product•Capacity•Capacity constraints and additions will create “pockets of profitability”foryou at various stages of growth”–understand them and adjust your pricingaccordingly
  • 12. (1) CostUnderstand your cost, then set pricingto achieve gross margin in the 50-60%rangeThe 4 Cs of PricingIt is risky to “overdesign” a product.
  • 13. Profitability Benchmarks byType of CompanySource: Robert Morris Associates, Annual Statement Studies, 2004-2005, all other misc food *55 companies, averaging $133 million revenue
  • 14. Profit Margin Analysis
  • 15. Runway
  • 16. Consumer•Not all consumers are equalThe 4 Cs
  • 17. (2) Consumer•Understand your consumerand her needs.
  • 18. Marketing ObjectiveBuild Perceived ValueBenefits a consumer expects togain from a product or service.• Is there something you can addto your current offering thatdoesn’t cost much but has highclient value?• Is there something you do betterthan anyone else that you canbundle with your currentofferings?Effective BrandPositioning©  2012,  Michel  Algazi.  All  rights  reserved.
  • 19. Value derived over time via experienceand prestige.• Excellent customer service• Endorsements fromconsumers, pundits and if youcan, celebrities.Marketing ObjectiveBuild Good Will©  2012,  Michel  Algazi.  All  rights  reserved.
  • 20. (2) Consumer•Maximize profit, based on yourunderstanding of consumerprice elasticity of demandThe 4 Cs
  • 21. Price Elasticity of Demand(PEoD)It is the percentage change in consumerdemand relative to percentage change inproduct pricing.The higher the price elasticity, the more sensitive consumers are to price changes. Avery high price elasticity suggests that when the price of a good goes up, consumerswill buy a great deal less of it and when the price of that good goes down, consumerswill buy a great deal more.A very low price elasticity implies just the opposite, that changes in price have littleinfluence on demand.©  2012,  Michel  Algazi.  All  rights  reserved.
  • 22. Price Elasticity of Demand(PEoD)( Q2 - Q1 ) / Q1( P2 - P1 ) / P1• Large consumer goods companies have researchdepartments to figure this out, smaller firms useexperimentation• Price elasticity of demand for a given food product willdepend on how essential it is, availability of substitutes, etc.PEoD =• If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes)• If PEoD = 1 then Demand is Unit Elastic• If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)©  2012,  Michel  Algazi.  All  rights  reserved.
  • 23. (2) Consumer•Leverage direct-to-consumeroptions (eCommerce, pop-upstores, own retail,farmers’markets)The 4 Cs of Pricing
  • 24. (3) Competition• Don’t compete on price with larger scaleproducers• You can’t match their scale economics or purchasingclout• They may be able to lower price in just the local market inwhich you compete• Understand the pricing environment andmotivation of retailers who carry your product
  • 25. (4) CapacityCapacity constraints and additions will create“pockets of profitability” for you at variousstages of growth–understand them and adjustyour pricing accordinglyThe 4 Cs
  • 26. Pricing - CapacityTraditional Break-Even Chart$UnitsRevenueCostBreakevenVolumeLossProfit
  • 27. Pricing - CapacityPockets of Profitability$UnitsRevenueCostPocket of Profitability• Businesses run more profitably at 80 –90%utilization of plant capacity• Adding new capacity can push a profitablebusiness back into the red• Try to find the “pocket of profitability”for thestage you are at right now
  • 28. Not every sale is aprofitable sale!
  • 29. The 4 CsConclusions• Appropriate Pricing Strategy will be a function of:• Aggressive cost containment• Consumer Demand• Competitive Products• Uptimum capacity utilization• If your product has some unique and valuedcharacteristics, it may give you more pricing latitudethan you realize• Set a price that gives you the best chance to beprofitable at your current stage of development• Look for the channels / customers that allow you tokeep more of your pricing, and avoid those where youwill get squeezed due to retailers’need to compete onprice
  • 30. Profit LeversRaise Prices(if PEoD permits)FluctuateCapacity(optimizePockets ofProfitability)ReduceOverheadGenerate Good Will /Increase PerceivedValueImproveCustomer orProduct MixA Couple of Additional Ideas©  2012,  Michel  Algazi.  All  rights  reserved.
  • 31. The Fifth C: CustomerAcquisitionRetentionPROFITCustomer LifecycleLifetime Value (LTV)(loyalty)Profit-centric Model(Ideal)A Couple of Additional Ideas©  2012,  Michel  Algazi.  All  rights  reserved.
  • 32. SettingYour PricingStructure©  2012,  Michel  Algazi.  All  rights  reserved.
  • 33. Rules of Pricing• Never underestimate your cost of goods (the fallacyof economies of scale)• Allocate costs appropriately• Always define your pricing based on the maximumnumber of possible intermediary relationships• Make a realistic assessment of the “Cost of Sale”• Clearly understand discount / promotionalmechanics• Run pricing scenarios for every major account youopen.• Understand that not every sale is profitable sale©  2012,  Michel  Algazi.  All  rights  reserved.
  • 34. Promotional Discounts• Performance based (based on units sold)• Scan-downs (discount on SRP)• Coupons (discount on SRP)•Non-performance based (fixed or time delimited)• Slotting (fixed price - evaluate customer profitability)• Free-fills (on cost of goods - evaluate customer profitability)• Off-invoice distributor (eg Intro or seasonal) (on distributorprice)• Off-invoice retailer (eg Intro or seasonal) (on wholesaleprice)• Chargebacks (eg marketing) - variable• TPR (on SRP)✴ Note timing of cost impact©  2012,  Michel  Algazi.  All  rights  reserved.
  • 35. Review1. Brand positioning and its importance forcreating a pricing strategy2. The 4 Cs3. Build your products’ pricing structure,allowing for necessary margins fordistributors and retailers4. Understand the financial impact of differenttypes of  promotions and discounts.©  2012,  Michel  Algazi.  All  rights  reserved.
  • 36. Q&A©  2012,  Michel  Algazi.  All  rights  reserved.

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