Sunday, March 2, 2014

4 Program Costs you should always factor into your product pricing!

Program costs can be considered any additional cost a retailer is going to ask you to be responsible for paying.  These costs should be built into your cost structure prior to quoting.  Not building in these costs prior to quoting a retailer is a a recipe for disaster.  Your company must be able to incur these costs and still produce a healthy margin for your overall long term retail strategy to work.  

Some common program costs that must be considered are:

  1. Returns - A retailer might ask for a % off invoice to cover any returns.  This % can range from 2%+ depending on the product and as an allowance can be agreed upon up front.  An allowance allows a retailer to deduct the same amount from all invoices irrespective of the actual returns percentage.  At times this may be a win for the retailer as the returns could come in lower than the agreed upon amount or at times this can be a win for the vendor as at times the returns can come in higher than the agreed upon amount.  If an allowance is not possible the retailer will generally ask the vendor to be responsible for all returns.  If this is the case you must accrue an amount on your own to ensure you are not left short when the retailer takes this deduction.
  2. Freight - At times retailers will ask for a “Delivered Cost”.  Delivered cost means that you will have to pay to deliver the product to the retailer therefor you must factor this cost into your pricing structure.  
  3. MDF - MDF stands for Marketing Development Fund.  This would be money your company would accrue for future promotional opportunities or a retailer will require that you contribute to a fund.  For example, when working with Amazon they will ask for 12% coop or MDF.
  4. Mark Downs - This is a fund you would accrue for use in liquidating slow moving inventory from a retailer.  Many times retailers will not mention this, but will come to you later asking for money to help move stagnate product.  It is best to accrue for this on your own so you have money when the time comes.  For example; some club stores do not transfer merchandise from warehouse to warehouse which means you might get an order from warehouse A, while getting a markdown request from warehouse B only 5 miles away.  So at the same time your product is growing nicely in one warehouse you are marking it down and clearing it out of another.

It is important to note that some retailers will negotiate program costs with you upfront and will deduct the negotiated percentage direct from the invoice when paying you.  Other retailers will not negotiate this upfront, but will still make deductions from your invoice when paying.  It is always the vendors responsibility to ensure the proper program costs are factored into pricing prior to quoting as it is very hard to go back to a retailer and increase their costs simply because this was missed the first time.

TLB Consulting has created several easy to use pricing templates for all types of retail.  These templates are completely fomulated and offer recommended program cost percentages for different retailer types.  Simply plug in your unique numbers and let the template price your product for you.  Click here for more information on the pricing templates.

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