Key Pricing Metrics for The Food & Beverage Industry
March 29th, 2022 (Updated 03/10/2023) | 7 min. read
By John Gilbo
In an era defined by the unexpected, it’s more important than ever that companies in food and beverage make agility a key business goal. With change being the only constant, adaptability is the only means of survival.
At Pricefx, we’ve dedicated the last decade to supporting companies in every industry in developing effective pricing plans and strategies while arming them with the tools and know-how to adapt swiftly and fittingly to the ever-more frequent “unexpected”.
In this article, we’ll explore some of the key challenges food and beverage companies are currently facing, and the key pricing metrics they should be focusing on to ensure continued profitability and growth.
Setting the Scene: The Food & Beverage Industry
The last few years have been a whirlwind of unsettling events that have not just disrupted the status quo in the food and beverage industry, but rewritten some of its code.
Major supply chain instability followed by a spike in demand, the meeting of which was hampered by severe logistics backlogs created a strain on food manufacturers. Everyday ingredients increased in price, resulting in margin compression. Labor shortages required simplified operations. Shifting customer demands resulted in the need for greater R&D investments. And a new competitor (in the form of local shops and farmers markets) crept out of the woodwork, putting competitive pressure on lead times and delivery turnarounds.
The customer (from producer to retailer, from restaurateur to home chef) has a new-found expectation of convenience, wanting the same experience from you as they get from Amazon.
More than ever, companies in the food and beverage industry will have to understand the challenges they face and focus in on key essential metrics to help them navigate an ever-more complex and competitive landscape.
Key Pricing Metrics in Food & Beverage
In order to keep your business thriving you need a coordinated pricing strategy built around flexibility, agility, and granularity.
Challenge: Ever-Fluctuating Costs Are Eating Into Margins
Pricing Metric: Revenue Dollars & Gross Margin Percentage
Sudden increases in demands and raw material shortages are resulting in commodity price increases and fluctuations that are increasingly difficult to pass on to customers, meaning margin erosion is part of everyday business for many food and beverage companies. A key pricing strategy, therefore, should be dynamic pricing.
You need to be able to track the prices of materials and ingredients in real time to ensure they are reflected in your portfolio. By accelerating your speed of repricing, you can pass cost increases on to your customers rather than having to swallow them in your margin. And you’ll be ahead of the competition in reducing prices when the time comes too.
Pricing tools like Pricefx enable automated price changes that dynamically respond to real-time indices inputs, so you’re never giving money away or unwittingly failing to pass on price advantages to loyal and greatly-valued customers.
Challenge: Time Inefficiencies Are Slowing You Down
Pricing Metrics: Lead Time
Many food service companies are losing millions of dollars due to margin compression because of how often (or, rather, infrequently) they measure lead times (how long it takes you to produce one of your products). You need to be able to understand, calculate and react quickly to lead times in order to prevent losses, maximize profit, and remain competitive in the “speed of fulfilment” arena.
The more granular you can get with lead times (with monthly, even weekly recalculations), the better prepared you are to keep pace with near-constant price fluctuations.
Challenge: Dropping Prices In Response To Increased Competition
Pricing Metric: Margin Dollars and Unit Volume
With certain segments seeing an increase in competition, the pressure to discount your prices is fierce. But don’t rush in. If demand for your organic fair-trade coffee is high, is there really a need to discount? Could it be smarter to help customers see it as a premium product?
Pricing software can help you find weaknesses and opportunities in your offering and take a more considered, appropriate, and profitable approach to meeting competition in the market, like with smart product mixes, clever bundling, and win-win rebate incentives.
Challenge: Lack Of True-Cost Awareness
Pricing Metric: Net Margin
List price – promotional discounts – volume discounts – inventory rebates – special customer terms – annual bonuses…. How well are you able to keep track of and accurately calculate your pocket price? Without full visibility down the waterfall, it’s nearly impossible to work out an accurate figure of how much you are going to earn from a transaction.
A key pricing metric for food and beverage companies, therefore, is cost to serve; calculating the total amount it costs you to serve your customers, from order, through fulfilment, to aftersales services, once all discounts, promotions, rebates, and any other benefits have been applied.
If you’re not keeping track of every dollar, it could well be impacting your bottom line.
Challenge: Shifting Consumer Demands
Pricing Metric: Share of Wallet
As nutritional demands change across geographies and generations, evolving toward and more health- and planet-conscious diet, the food and beverage industry is having to go back to the kitchen and boost R&D activity to ensure continued relevance among its existing customers.
You need a sandbox in which you can safely test your new strategies and products to see how they’ll likely impact the rest of your portfolio, your competition, customer purchase behavior, and the market at large, so you’re able to make smart decisions for the year ahead.
Challenge: Channel Diversification
Pricing Metric: Market Share
Additionally, competitive push for companies in the food and beverage industry to shift from wholesale to retail is presenting a whole new set of challenges and a greater need for rapid digital transformation. However it could also present an opportunity to potentially increase your prices.
Your costs, however, will differ from sector to sector, so you need pricing software support in converting the price of your wholesale 22lb bag of sugar into 10 x 2.2lb bags for retail… (taking granularity to a whole other level!).
Challenge: Across-The-Board Pricing
Pricing Metric: Willingness to Pay
The more industry sector-specific your pricing can be in the year ahead, the smoother your pathway to success.
Value-based selling helps you work out the perceived value of your offering to your various segments, and to price according to the willingness to pay of each. You’ll require the tools that help you understand where the value in your offering lies and enables customer profile and segmentation.
Employing a value-based approach to pricing allows you to optimize pricing for each of our segments while considering things like market demand, capacity, supply and other strategic value drivers; ensuring you’re not losing customers below price thresholds, or leaving money on the table when customers are willing to pay more.
Key Takeaway For The Year Ahead: Get Granular
While the best food and beverage industry pricing metrics for your business to focus on in the coming year will be specific to your organization, offering, and objectives, there are three priorities that hold true for all food and beverage companies:
By eradicating lag time with real-time cost inputs, calculating and minimizing lead times, leveraging willingness to pay to maximize profitability on every deal, employing price-supportive competitive tactics, understanding true cost-to-serve figures, and being able to test new prices and strategies with accurate what-if simulations, you’ll be winning during this highly unpredictable time.
Of all the changes we’ve seen in recent years, and all those yet to come, perhaps the biggest you’ll face will be in how your business operates and how it prices.
For those looking to learn more on how quickly you can make lasting positive profit changes to your Food & Beverage business with the granularity that pricing software provides, check out our recent blog article: