Preview: Impact on the success of a vendor’s product is Shelf Space
You might think a retail chain’s business model is pretty straightforward. Most dispensaries don’t sell their own products – they don’t cultivate or manufacture products that produce the items that go on their shelves. No, they rely on a supply chain with numerous third parties involved. They negotiate bulk purchases of products and act as the point of contact between that supply chain and the consumer.
Essentially, most retail stores function as a middleman.
Earn the maximum profit point for each product
So, how should a middleman build its business model? Intuition tells us it should purchase products from suppliers as cheaply as possible and sell them to consumers at the highest price they can. That way they earn the maximum profit point for each product.
The concept here is called a ‘markup’ – the amount that stores add to the cost of products in order to cover their own overhead and turn a profit.
What is essential for vendors looking to sell their products
While this is all conceptually simple, there are a few mechanisms to retail pricing that most consumers don’t know about. However, it is essential for any new vendors looking to sell their products in retail to understand these mechanisms.
Let’s talk about how new products acquire shelf space and uncover the true cost of retail selling.
Dispensaries stores don’t just earn profits from markups on suppliers’ products alone. They also negotiate deals with suppliers for certain amounts of shelf space in retail aisles. The shelf space products enjoy isn’t just determined by what the retailer thinks is best – it’s also determined by the negotiations that suppliers cut with those establishments.
Typical shelf space negotiations involve a few different moving parts:
- Slotting fees – These are the fees a supplier will pay just to be on the shelf. The deal the retailer cuts for a slotting fee will determine the product’s location on the shelf and the amount of space it receives. Higher slotting fees are sold for better real estate at the store, which in turn will lead to higher sales. If the product is poised to be a good seller, higher slotting fees are generally worth paying.
- Pay-to-stay fees – These are fees suppliers pay to retailers once the terms of their original slotting negotiations have expired. They’re opportunities to evaluate the performance of products and re-assess the position they have in the store. Even if a product is set to be pulled from a prime location in the store, the supplier can often pay a high fee and retain their position.
- Promotional fees – Have you ever wondered why a certain brand gets its own display in a store? Like when you walk into Safeway and see a stack of Coca-Cola intricately arranged with a giant advertisement above it? That’s where these fees come in. Suppliers can pay hefty fees to have special promotional displays built for their products and placed prominently in high foot-traffic locations in stores.
These pricing models are a core feature of most dispensaries’ business models
These pricing models are a core feature of most dispensaries’ business models, but they have also received criticism for being anti-competitive.
Some wonder why stores don’t just let the bestselling products have the most prominent displays. Others have more pointed concerns – what if consumer behavior is affected by slotting fees such that the company that pays the highest fee becomes the bestseller when it otherwise wouldn’t enjoy as many sales?
Are consumers being manipulated? As some have put it, these pricing schemes allow “backroom deals” between retailers and suppliers to determine which products get the best shelf spaces.
Regardless of one’s view on the issue at large – whether slotting fees are just or unjust – they represent an important reality about pricing in dispensaries that new vendors entering the scene need to know about.
Retail is still one of the best ways to reach customers
Anyone thinking about distributing their product will surely consider retail. It’s one of the best ways to reach customers. However, be careful – the costs of selling at retail locations will be high and will likely run up your costs before they lead to long-term profits. Pricing schemes for shelf space make it so that vendors should only consider retail for a long-term distribution plan.
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