Establishing Retail Pricing Before DRTVIn their infancy, many DRTV companies today think that when they go to retail they must get the big-name, mass merchandisers behind their new products as the route to instant name recognition and abounding profits. This is a major misconception. A company using its research and development can actually commit new-product suicide by engaging the mass merchandiser right out of the chute.
First and foremost, mass merchandisers do not sell their products at the suggested retail structure from whatever vendor they are purchasing goods for resale. They make unreasonable demands for fulfillment on new companies and for new product lines from established companies. It goes without saying manufacturing companies must be in a position to finance a new product from their existing product lines, but they unknowingly end up financing their customers' ability to sell the product by paying for it later, in some instances much later.
Typically the vendor enters into an agreement with the merchandiser, giving its best shot. Many times they have carved out a percentage of advertising, new store discounts or initial promotional monies. The unsuspecting vendor is not aware of the rules of the game. The merchandiser does not show its hand, while it simply throws product on the wall to see what sticks. This process is called "in and out," and there is no long-term commitment on the part of the merchandiser, regardless of what the vendor was told.
In many cases, the vendor has dropped or severed relationships with small dealers which individually were not providing large profit dollars for the vendor. The vendor sees shipping to and getting paid by one large account vs. several small accounts as a time-saving strategy - saving time is perceived, like money, as justifying the action taken. If the new product or service sticks to the wall, the merchandiser will change buyers with whom the vendor is dealing under the guise of going from a small-scale to large-scale buying program.
The vendor is now faced with giving more discounts in the form of slotting fees taken on invoice as credits against what is actually owed, additional area and regional allowances under a myriad of names. By the time all these new credits are agreed to, the vendor has many times not calculated the bottom line.
The real bottom line for the vendor is a now-smaller margin, an increase in infrastructure and longer payment of receipts, regardless of terms called for, which translate to the beginning of the demise of the relationship. Once the relationship is destroyed, the vendor is almost out of business, if not already, and has become a statistic - another failed start-up.
The solution is realized when proven foundational approaches are taken in the beginning. There are various avenues where consumer purchase goods every day where discounted pricing is not the reason for the purchase. The first step is to identify as many markets as possible where people purchase goods on a retail basis. This may even cause one to resort to some research into the concepts that developed the U.S. economy in a capitalistic society. These are foundational building blocks that should never be overlooked.
When we learn to drive a car, we are taught not to run stop signs. We begin to recognize areas and indications where stop signs are going to appear before we actually see the sign itself. So as it is with marketing, accessible concepts that built economic giants like Procter & Gamble should not be overlooked.
In order to establish a retail price, making sure every expense item possible is included, determine your cost of goods. This should include any override commitments that may exist, royalties; consideration given for increased personnel, facilities and expenses; or the possibility of any cost occurrences on seasonal ingredients or petrochemically produced ingredients. With all of these issues taken into consideration, figure in a percentage for executive compensation based on the goal-directed but achievable sales projections. When this adjusted cost of goods is calculated, then (double) keystone your figure to establish the retail price.
At this point go back to those markets that were identified when the developmental ideas for the product occurred. Determine what emotions can be tapped to cause someone to purchase the product. Then begin to draw mind pictures pertaining to why someone would want to purchase your product. This is referred to as "creating the need." The greatest user of needs selling is the insurance industry. One example would be the picture of a car wreck, referring to the need for auto insurance. Another example is visualizing the funeral of a parent leaving behind several small children, highlighting the need for life insurance. While looking at a hospital and the results of major surgery due to catastrophic illness or accident, you highlight the need for medical and disability insurance.
Therefore, when you show a consumer a potential need and you can emotionally present the possibility of solving that need, you have a consumer sale. Various venues exist today where this concept can be utilized. Grocery stores and convenience stores operate with different, larger margins than do the discounters.
With the profitability in the pricing schematic established by double keystone of cost of goods sold, a wholesale price can be established that will allow the store to make its margins. From the wholesale price you have commissions figured so you can fit your product within the product brokers' network. Also established in the pricing is an allowance for slotting fees to be taken as a credit on a per-unit-purchased basis. An additional corporate allowance, similar to the one for slotting, should also be figured.
Once you have taken all these issues into consideration, the vendor has a margin that allows for profitability. These same criteria can be used for catalog sales. The key is to find catalogs which have a distribution to define (a need already established) for your product's design.
Now you can go into direct response television to visually demonstrate your product. If you do so, you can really begin to establish a large number of sales at your given price. DRTV purchasing is impulse driven, and price is not an issue as long as the price is one of the magic numbers.
You can also throw in today the idea of e-commerce, for which there are not any real phenomena yet. The potential of Internet sales presents very exciting opportunities and projections for sales.
If a company can be successful at building the retail basis and product recognition, mass merchandisers will then come to the vendor, and it is now a whole different story.