From your price to the shelf price: margins that stack

Between your price and the shelf price, every middleman keeps a margin worked out on their own selling price. That is why margins do not add up: they apply one after the other. If a shop needs 40% and a distributor 25%, you receive 0.60 × 0.75 = 45% of the shelf price, not 35%. The useful sum runs backwards: start from the price you want the product to sell at, take off each margin, and what is left is what you will be paid. If that does not cover your loaded cost with a profit you can live on, change something before you deliver the first order.

Each step charges on its own price

A packaged product can pass through three pairs of hands before a shopper picks it up:

1. You, selling to the distributor.
2. The distributor, who buys, stores, delivers and sells to shops.
3. The shop, café or deli, which puts it on the shelf or the counter and sells it to the customer.

Each one sets their margin on the price they sell at, not on what they paid. If the distributor wants a 25% margin and pays you $2.20, they need to sell at $2.93, because $0.73 is 25% of $2.93. If they sell at $2.75 instead (adding 25% to what they paid you), their real margin is 0.55 ÷ 2.75 = 20%. That gap between adding to cost and calculating on price is the same one explained in the guide on markup vs margin.

Margins multiply, they do not add

What reaches you is the shelf price multiplied by what each step leaves. These combinations are example numbers to show how the sum works, not typical margins for any channel:

The percentages in the third column are of the shelf price before tax. Notice that "40 plus 25" is not 65: it is 55. And in the last row you receive less than half.

Forwards: from your price to the shelf price

If you already have your price and want to know where it ends up:

• Distributor's price = your price ÷ (1 − distributor margin)
• Shelf price before tax = distributor's price ÷ (1 − shop margin)

Work the chain on prices before any sales tax or VAT, then add tax at the end if your market shows prices with tax included. How tax is charged between you, the distributor and the shop depends on where you are, so check your local tax rules or ask an accountant.

This direction tells you whether your price lands on a sensible number on the shelf. It does not tell you what price to charge.

Backwards: from the shelf price to your price

This is the sum that matters. Start from a shelf price your product has a real chance of selling at, by looking at what sits on the same shelf, and work down:

• What the shop pays = shelf price before tax × (1 − shop margin)
• What the distributor pays you = what the shop pays × (1 − distributor margin)
• What you keep = what the distributor pays you − your loaded cost per unit

If what you keep is small or negative, you know something has to move before you sign. The guide on wholesale and retail prices for the same product uses the same logic for selling straight to shops, with no distributor.

Watch out for markup

Plenty of buyers say "we work on 40%" without saying whether that is margin or markup. Always ask: "40% on what you pay me, or on your selling price?" A 40% markup is a margin of 0.40 ÷ 1.40 = 28.6%. A 67% markup is a margin of 0.67 ÷ 1.67 = 40%. If you are given markups, convert them with the markup and margin calculator before you build the chain.

Worked example: individually wrapped brownies

You bake fudge brownies, wrap them one by one and want to sell them to cafés and delis through a distributor. Your loaded cost is $1.45 per brownie: chocolate, butter, eggs, flour, sugar, the wrapper and label, your time, oven energy and waste. The distributor needs a 25% margin and says the cafés it supplies want 40% on their selling price.

Forwards, with your price of $2.20:

• Distributor's price: 2.20 ÷ 0.75 = $2.93 (they make $0.73, which is 25% of 2.93)
• Café price: 2.93 ÷ 0.60 = $4.88 (they make $1.95, which is 40% of 4.88)

The café will probably round it to $4.95 or $4.99. That extra is the café's.

Backwards, from $3.99. You have looked at the counters and wrapped brownies there sit around $3.99. Work down from there:

What you would need. If you want $0.75 a brownie, your price has to be 1.45 + 0.75 = $2.20, which is exactly the forwards example. And that price ends up at $4.88 on the counter. Between $3.99 and $4.88 there is almost a dollar: with this recipe, this wrapper and this chain, the product does not land where you want it.

When the chain does not leave enough

• Skip a step. If you deliver to the cafés yourself, you are paid what the café would pay: $2.39 instead of $1.79. But the driving, the time and the invoicing are yours. The guide on selling wholesale to shops and cafés covers the terms to agree.
• Change the format. A smaller bar or a two-pack lands at a different shelf price. Work out the loaded cost of the new format; wrapping time and packaging do not shrink in proportion.
• Lower the cost. Buying chocolate and wrappers in bulk, or baking bigger batches, can move a few cents, and in this chain a few cents weigh a lot.
• Negotiate with numbers. If the distributor moves real volume for you, you can ask them to look at their margin. Bring the sum.
• Pick another channel. Put your channels side by side, as in the guide on comparing profit by channel, and decide where it is worth being.

Supermarkets add another layer: besides the margin, there can be listing costs, promotions, merchandising and returns, and long payment terms. Before you go in, read what selling to supermarkets really costs. For the full method from batch to shelf, see the guide on how to price a packaged food product.

Do it with the calculator

In the cost calculator you get your loaded cost per unit. With that number and the margins you are asked for, you can work the chain backwards and know what you keep before you accept the first order.