Re-thinking Price Bracket Structure

Posted by Dave On July 25th

its over iStock 000016457044XSmall Re thinking Price Bracket Structure

This is the fourth installment of Straight Talk About Foodservice Pricing, which can be downloaded for FREE from our eBook library.

Over the years, we’ve helped a lot of manufacturers get their arms around their cost to serve various order sizes. Often, this work is to support development of a new price bracket structure, and/or to provide backup information for a financially sound redistribution program.

Traditionally, foodservice manufacturers have established price brackets which approximate the utilization of trailer capacity, and attempted to use price premiums which reflect the additional costs of managing and shipping small orders. At the very least, the price premiums should reflect the high freight cost associated with shipping small orders.

But when we look below the surface, we see that there is a lot more than transportation driving the cost-to-serve equation.

For example, the time spent picking cases proves to be a significant driver of warehousing costs, vs. loading full pallets on trucks. But this cost is buried so deep in your P&L (especially if you use 3d party warehousing providers) that it can’t be found with both hands, a shovel and a flashlight! It takes a lot of work to break out this cost and allocate it to individual order types.

Likewise, the time spent in your Customer Service department keying in faxed orders, reconciling prices and communicating with customers can be much greater for manual orders than for EDI orders. Again, it is possible to break down the time and cost for both order types, and assign them accordingly; but few if any manufacturers do it.

So it brings a few questions:

Should price brackets be based on more than freight premiums and a “best guess” at order management costs?
Should manufacturers take another look at order policies, and establish new allowances for customers who provide easy-to-process, easy-to-fill orders?
Should target customers for redistributor service be defined by more than just order size?

To me, the answers are obvious. Properly designed, your price bracket structure will provide incentives for your customers to order the way you want them to, or pay for the inefficiencies they force on you. And with costs being what they are, maybe it’s time to take a new approach to your prices and policies.