Michael Adams Green Mountain Mustard and Gredio

Michael Adams, Owner
Green Mountain Mustard & Gredio

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price your food product

How to Price Your Food Product and Still Make Money

This is the blog post you need to calculate your food product cost and make sure you’re making money, too. You know, to stay in business. Super important. I’ll walk you through what’s included in your cost of goods sold, how to calculate it. etc. And then,  we’ll walk through how to price your product through the distribution channel. Oh, and examples. Because nothing with numbers makes any sense without examples.

Here we go.

What’s included in your cost of goods sold?

Simply put: Anything you do or use to produce a finished product goes into your final product cost. Some people include all the overhead of  a business in your cogs, but I won’t here because many of you are just starting out. Here’s a short list of what absolutely needs to be included:

  • Your ingredients (plus shipping)
  • Your packaging – plus shipping (jars, bags, boxes, labels, string, etc)
  • Your labor (even if you produce in your own house – more on that later)

Why include shipping?

It’s part of getting that ingredient to your kitchen. Here’s an example of how much shipping makes a difference. You order a 50# bag of flour for $50 – $1/pound. But, it costs you $25 to ship the flour. Your $1/pound flour skyrockets to $1.50/pound. That ultimately increases your product cost. That’s why manufacturers order enough raw materials to get free shipping or spread shipping across more items by increasing the order size.

Why include your own labor?

If you’re making products in your house, you have to include labor because, if you don’t, you’ll lose most of your gross margin when you you move to a shared-kitchen or co-packer.  For example, if it takes you an hour to make 12 jars of jam, and you “charge yourself” $15/hour, you’ve got $1.25 just in labor cost.

Pro Tip: Keep track of changes in your cost of goods sold (COGS). When your ingredients, packaging, and labor increase (or decrease, if you’re lucky). your total product cost changes, too. In some cases, you’ll swallow the increase. In other cases, you’ll have to increase your prices. And don’t be afraid to increase your prices.

Let’s look at an example, now. I’ll use Michael’s Lemon Blueberry Jam as an example:

Michael’s Lemon Blueberry Jam – Ingredient cost

(Note: I’m using fictitious numbers)

Ing (#) Price Grams /Gram Amt Cost
 Berry 50  $175.00  22,680  .008  200  1.54
 Zest  5  $57.90  2,268  .026  10  0.26
Pectin  5  $35.70  2,268  .015  25  0.39
 Sugar 25  $19.50  11,340  .001  350  0.60

The total cost of ingredients is $2.79/recipe. This recipe makes 12 jars of jam. That means your ingredient cost is $0.23/jar. Now, let’s look at packaging.

I’m packaging my Lemon Blueberry Jam in a glass jar with a silver lid and a label. Let’s look at each component.

Glass Jars:

  • 2,400 jars
  • $1,896.00 + $300 in shipping
  • Total cost = $2,196.00 / 2,400 jars
  • Cost/jar = $0.91

Lids:

  • 2,400 lids
  • $300 delivered
  • Total cost = $300 / 2,400 lids
  • Cost/lid = $0.13

Labels:

  • 5,000 labels
  • $250 printing
  • $75 in plates
  • Total cost = $325 / 5,000 labels
  • Cost/label = $0.07 (rounded)

TOTAL: $1.11/jar in packaging costs.

So far, our total product cost is $1.34/jar — and we haven’t even added labor yet! Pretty crazy, huh? Let’s look at labor:

Labor costs: Let’s take the example above, but increase your production capacity.

  • 250 jars
  • Produced in 4 hours
  • 1 person at $15/hour
  • Total labor: $60
  • Labor/unit: $0.24

Total Product Cost: $1.48/jar

Let’s review. If you held a jar of Michael’s Lemon Blueberry Jam in your hand, it would cost you $1.48. That includes ingredients, packaging, and labor. Now, you’ve got the fun part — pricing your product through distribution. That means broker (even if you don’t have one), distributor, retailer, and finally, the end consumer – the price on the shelf.

How much do you think your $1.48 jar of jam is going to be on the shelf? Let’s find out.

The food industry works on margin, not markup. You can read about the difference here. Before you send your jar of jam through distribution, you’re going to want a 40-60% margin. Here’s how to calculate your margin:

Price to distributors = COGS / (1 – margin %)

Here’s how your price changes with different margins:

  • 40% margin: $2.47
  • 50% margin: $2.96
  • 60% margin: $3.70

That’s a difference of $1.23, depending on which margin you choose. You want a high margin so you have room to fit a broker’s free of 5-7% into your cost structure. Plus, you want to have room for promotions when you start using larger distributors.

For simplicity’s sake, we’ll say you’re going to have a 50% margin. That means you’ll sell your jam to a distributor for $2.96/jar. Now, let’s look at what your distributor would sell your jam to their retail accounts for….

Distributors usually take another 30% margin.

  • Price to retailer = $2.96/ (1 – margin %)
  • Price to retailer = $2.96/(1-0.3)
  • Price to retailer = $2.96/0.7
  • Price to retailer = $4.23/jar

This means a couple things. This is the price a distributor sells your jam for to a retailer. And, more importantly, this is the price you sell your jam to a retailer. Don’t give them a special price. Give them the price your distributor would give them. Now, this cost goes up, if the distributor has to factor in shipping. Let’s take a look:

  • Price to distributor: $2.96
  • Shipping 1,000 units costs $200
  • Added shipping cost/unit: $0.20
  • Total cost to distributor: $3.16
  • 30% margin = $4.51 price to retailer

See how that adds $0.28 to your wholesale cost with some simple shipping? Pretty crazy. Now, let’s take the non-shipped cost to a retailer to see what price they’ll sell your product for.

Depending on the retailer, they’ll take another margin of between 30% (big grocery) – 50% (high-end gift shop). Here’s how all the margins play out:

  • Price to retailers: $4.23
  • 30% margin: $6.04 ($5.99 retail)
  • 40% margin: $7.05 ($6.99 retail)
  • 50% margin: $8.46 ($8.49 retail)

See how your jar can retail for anything between $6 and almost $9 depending on where your product is sold. That’s pretty wild, isn’t it? Your jar of jam that costs you just $1.48 retails for an average of $7.18?

Don’t think for one second that that’s too expensive. You make a super-premium product. It demands a higher price than everything else on the grocery store shelf. After all, you’ve got to make enough money to put food over the table, a roof over your head, and clothes on your kids. The more money you can make, the better. (Yes, it is about the money in the food industry).

And the high price tag is what you charge your customers when you do a farmer’s market, fair, or event. That’s why events are so great – your margins are sky high and it’s great marketing – a win-win, if you will. Where else can you make $5.52 per jar in gross profit (that’s profit before operating expenses)?

Let’s look at how different it would be if you took a 60% margin, your distributor took 30% and high-end retailers took 50%. In that scenario, your jar of jam would retail for a whopping $10.57! Whoa, baby!

A quick note about testing your price…..

Will consumers pay for a $12 jar of jam? Maybe. You’ll have to find out. Or, does 4x the jam move when it’s $3.99? No one will know until you test your pricing. And if you find consumers will pay less, you might want to see if you can cut your costs down. With that being said, you still need to make money. A higher price point may be the only option for now.

A little tweak goes a long way……

After you’ve established pricing, you should focus on decreasing costs. That usually means buying more ingredients in bulk, glass by the pallet, or increasing the number of units you can produce in the same amount of time.

Let’s look at how much more profit you’ll make if you decrease your cost just $0.10/unit.

  • Cases sold per month: 400
  • Units per case: 12
  • Total units per month: 4,800
  • Monthly savings: $480
  • Yearly savings: $5,760

This examples shows how important it is to literally pinch every penny. But, it’s also important to hold your prices where they are. A decrease in costs doesn’t mean a decrease in price. Let’s pass the $0.10 decrease in COGS through the distribution channel:

  • New product cost: $1.38
  • New price to distributor (50%): $2.76
  • New price to retailer (30%): $3.94
  • New price on the shelf (40%): $6.56

So, the price comes down significantly, but a retailer will likely round up to $6.99 to increase their margin. They may go to $6.59 or $6.79 to make it a more “familiar” price to the consumer, but I wouldn’t stretch your luck. (Side note: does pricing blow your mind, too?)

There’s so much math! What does this all come down to?

It comes down to this…..how much money do you want to make? Do you want to make $60k a year from your food business? Maybe $100k? Whatever the number, you can use your pricing to figure out how many units you need to sell every week/month/year. Let’s see what it would take to make $60k a year – that’s a net profit of $5,000/month.

All through distribution:

  • COGS: $1.48
  • Price to distributor: $2.96
  • Gross Profit Margin: $1.48
  • Operating expenses (30%): ($0.44)
  • Net profit margin: $1.04
  • $5k profit = 4,807 units (401 cases)

All through direct-to-retail sale:

  • COGS: $1.48
  • Price to distributor: $4.23
  • Gross Profit Margin: $2.75
  • Operating expenses (30%): ($0.82)
  • Net profit margin: $1.93
  • $5k profit = 2,591 units (216 cases)

All through direct-to-consumer sale:

  • COGS: $1.48
  • Price to customer: $7.00
  • Gross Profit Margin: $5.52
  • Operating expenses (40%*): ($2.21)
  • Net profit margin: $3.31
  • $5k profit = 1,510 units (126 cases)

* Operating margin is higher due to the high cost of direct events

Now, most companies use a blend of all three channels – distribution, retail, and direct – to grow their business. But, you can see how going direct to retail – or to the consumer – is the way to increased profits. This shows you how much product you need to produce and sell every month to sustain a profitable food business.

Pricing is not simple. It’s a complex animal that is constantly evolving. You have to stay on top of it, scrutinize every penny, and make changes where you see fit. That may mean changing your business model, increasing/decreasing your pricing, or cutting down on your operating expenses.

If you leave this blog article learning one thing, it’s this:

You are in business to make money.

If you make jam that costs you $2.00 and sell it for $3.00 at a farmer’s market, you won’t make any money when you sell your product through the distribution channel. If you have dreams of selling your product in stores, all of this pricing has to be taken into account. And if you use broker’s, make sure to add in that extra 5-7%.

Business is tough. Pricing your product right helps alleviate some of the risk because now you know you’ll be making enough money when you sell your jar of jam to customers.

Have questions? This video course will help you figure out your COGS and how to price your food product – for only $5!

How to price your food product and still make money

 

 

 

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103 Comments on this post

  1. AUTHORJ. R.. Klein

    on August 1, 2014 at 11:53 am - Reply

    Thanks Mike, Very informative.

    • AUTHORmichael

      on August 4, 2014 at 12:44 pm - Reply

      Thanks, J.R. Happy you found it helpful!

  2. AUTHORVal Dantzler

    on August 2, 2014 at 2:26 am - Reply

    Thanks so much for this article! You don’t know how much this helps me!!! I love the way you break down the numbers!! You just made this so easy for me to understand!!!

    • AUTHORmichael

      on August 4, 2014 at 12:44 pm - Reply

      Awesome, Val — glad you found it helpful!

  3. AUTHORPër's Smoked of Vermont

    on August 3, 2014 at 5:01 pm - Reply

    Thanks so much! This is the clearest, most understandable explanation of this subject that I’ve ever read. We’ve needed to review our prices & this will be SO helpful.

    • AUTHORmichael

      on August 4, 2014 at 12:41 pm - Reply

      Awesome! So glad you guys found it helpful!

  4. AUTHORjon whaley

    on August 6, 2014 at 3:52 pm - Reply

    GREAT post! very informative and well written.

    • AUTHORmichael

      on August 13, 2014 at 3:46 pm - Reply

      Thanks, Jon – glad you found it helpful!

  5. AUTHORharold

    on August 16, 2014 at 3:20 pm - Reply

    I understand what you are saying.With your pricing method you must also look at what the market will bear..

    • AUTHORmichael

      on August 17, 2014 at 8:51 pm - Reply

      Yes, Harold — good point. Only so many people will buy $16 salad dressing….

  6. AUTHORDenise

    on September 1, 2014 at 4:16 am - Reply

    This is great Mike. I’m going to use this to revisit my pricing strategy. You are right it is all about the numbers and it is so daunting. One of my goals is to get to where I’m really comfortable with my pricing so it doesn’t seem like such a task.

    • AUTHORmichael

      on September 6, 2014 at 11:52 pm - Reply

      Awesome, Denise! Make sure you review your costs every once in a while, though!

  7. AUTHORDave

    on September 4, 2014 at 3:15 am - Reply

    Hi Michael, thanks for the informative article. Our problem is one of what people will pay as well. We make gourmet nuts, and there is only so much people will pay for nuts. If I have a COGS of $1 for a 3oz bag of nuts that I sell for $4, have I pretty much screwed myself in terms of distribution profit?

    • AUTHORmichael

      on September 7, 2014 at 12:08 am - Reply

      Not necessarily. Is that $4 direct to the consumer? That’s a good price – and you do have enough room for a distributor and retailer margin.

      For example, if you sold through a distributor (30% margin) and retailer (40% margin) at a $1 COGS, your nuts would retail for $2.49 (most likely). That means you have a little more room if you want a $2.99 MSRP. Ultimately up to you! But, keep in mind what your competition is charging and what people are willing to pay.

      My favorite nuts (Squirrel Stash Nuts) are 4ox for $6. And they’re awesome. But, I don’t buy them all the time.

      Hope that helps!

      Michael

  8. AUTHORYemi Raiwe

    on December 4, 2014 at 10:21 am - Reply

    This is a really valuable article. I would pin it up on the wall for a minimum monthly review!

    • AUTHORmichael

      on December 11, 2014 at 1:37 am - Reply

      Thanks, Yemi! Glad you got something out of it! — Michael

  9. AUTHORJennifer

    on March 9, 2015 at 10:43 am - Reply

    Hi Michael,

    I am a raw food chef and want to offer a $10-$12 raw food sandwich at farmers market.

    My COGS are $4-$5. This is only the cost of food not labor. Is it worth my while to make and earn a profit?

    Thank you,
    Jennifer

    • AUTHORmichael

      on March 9, 2015 at 11:32 am - Reply

      Hi Jennifer,

      If it’s just you making the sandwich, it’s probably worth it. You sell 100 sandwiches at a market, you’ll make on average $750 – or $3,000 a month. However, I’d add labor in because you’re bound to become successful and hire people to make the sandwich for you. Let’s say it takes 5 minutes a sandwich and you hire someone at $12/hour. They make 12 sandwiches an hour which is $1 a sandwich – and you can be out growing your business.

      I’d say go for it. Nothing ventured, nothing gained. What’s the worst that could happen?

  10. AUTHORKaren L

    on April 20, 2015 at 7:46 pm - Reply

    I am a brand new food entrepreneur in the pre-start up phase. I just wanted to say THANK YOU for posting such a helpful and informative article, and for reinforcing the fact that the end goal is to make money. By reading this, I can price correctly from the start, and avoid some early pitfalls I may have had. The simple example using layman’s terms is much appreciated! Thanks so much for sharing!

    • AUTHORmichael

      on May 19, 2015 at 4:42 pm - Reply

      Hi Karen,

      You’re so welcome! Glad many of the posts have been of value to you!

      Michael

  11. AUTHORJenny

    on May 24, 2015 at 12:39 pm - Reply

    It really helps a lot! I’m starting a small food entrepreneur hope you give me new tips and tricks of yours

    • AUTHORmichael

      on May 31, 2015 at 3:21 pm - Reply

      Thanks, Jenny – best of luck!

  12. AUTHORpeaksupplements

    on June 23, 2015 at 7:44 am - Reply

    Thanks…for sharing food products and Ingredient prices in blog. i find it long times…..

    • AUTHORmichael

      on June 23, 2015 at 10:31 pm - Reply

      You’re welcome! Glad it was useful to you!

  13. AUTHORChris

    on July 21, 2015 at 7:27 pm - Reply

    Thank you so much for your awesome insights! We manufacture a specialty dough mix through a co-packer because of the need for our product to be certified gluten-free. That being said we are relatively new to the game, just over a year and a half, and have a very high manufacturing costs simply because we don’t have the sales yet to make bigger runs of product. (1000lbs yields us around 1600 boxes, about 260 cases) Currently our cost is $4.01 out the door with freight etc. The problem that we have found is that the market is only willing to bear a retail price of around $6.49-$6.79. When we launched we did so at $12.99/box which sells well enough on Amazon but in a retail scenario we found that a $13 box next to a $6.49 box loses every time, even though we are a unique premium product. As a trial we dropped the price to $9.99 but still not many sales. Then in desperation, we dropped it meet that $6.49-$6.79 threshold for all the other “like” products and voila we started to sell a good amount of dough mix at local stores and farmers markets. I guess the question is this: How would you go about increasing margins and make money in this scenario? I have been racking my brain since we launched. The gluten-free crowd is a tough one and none too willing to try new and expensive items unless it has a proven track record… which we are slowly getting through our Amazon reviews. Thoughts?

    • AUTHORmichael

      on July 22, 2015 at 12:40 pm - Reply

      Hey Chris — thanks for the comment. So happy you found value in the post.

      You have an interesting problem here, but it isn’t the end of the world. Right now, you don’t have enough of a margin to cover the majority of your operational costs. But, it is worth experimenting to see what happens.

      $4.01 is pretty high for costs, but there are a couple ways you could potentially reduce them:

      – Can you reduce packaging costs in your box or bag?
      – Can you buy equipment to speed up your co-packer?
      – Can you reduce your package size to one crust and lower the price point?

      One final question to think about is, are you communicating the value to your customers well enough to where they don’t have to think twice about spending a premium on your crust mixes.

      Hope this helps — good luck!

      Michael

  14. AUTHORTwain

    on September 1, 2015 at 5:13 pm - Reply

    Hi,
    I have one product and I am sturggling on pricing wholesale. The product is a 3 oz jar of pain cream, my cost is 4.37 a unit. Can you please advise me on how to price to sell to a grocery store?
    Thank you

    • AUTHORmichael

      on September 2, 2015 at 11:36 am - Reply

      Hi Twain,

      Thanks for reading! In general, you can multiply your COGS by 4 to arrive at a rough retail price. $4.37 x 4 = $17.48 – this means, your product will likely retail for $19.99. Since it’s a cream, I’d imagine you could get away with that price point. Here’s your rough pricing, assuming you give yourself a 50% margin, your distributor takes 30% and your retailer takes 35% margins.

      Your price to a distributor (50% margin): $8.74
      Distributors price to retailer (30% margin): $12.48
      Retailer’s price on the shelf (35% margin): $19.20

      This would round up to $19.99 I’m imagining. It also means, you’d sell direct to a store for $12.48/unit.

      I hope this helps — good luck with launching your product!

      Michael

  15. AUTHORJesse

    on October 8, 2015 at 10:13 pm - Reply

    Hey Mike
    AMAZING Article. Thank you so much. Using your advice, I am thinking of starting a beverage that retailers may price along the lines of $2.99 SRP
    Just a few questions I had that I am hoping you can explain.
    • COGS – would an organic or kosher certification, be part of COGS calculation? I ask because even if you factor the costs to create the product above, you still need to pay for the certification before it gets to be sold. In addition, how about the freight out to a warehouse once goods are produced? Is that considered COGS?
    • How do you determine your wholesale cost and what do you tell a retailer that wants to go direct? As per your example, would it be $4.23? What if a big box retailer with 100’s of stores? Would you give them the distributor price of $2.96 or maybe a discount/”special pricing”off from the $4.23? Alternatively what if someone overseas wanted to purchase a possible large volume (ie a container)? What discount would be possibly given or price to start negotiations?
    • Do manufacturers ever provide different distributor costs to different distributors? For example Distributor A will work with you for $2.90 a unit and Distributor B will work with you for $2.96?
    • Special Price/Volume Discounts – Where do you ever start negotiations when going direct to retailers and at what price points? For instance do you give retailer a price of $4.50 and negotiate anywhere above $4.23? Or start at $4.23 and negotiate as close as possible? Does the same when looking for a distributor?

    • AUTHORmichael

      on October 18, 2015 at 9:00 pm - Reply

      Hey Jesse – thanks for the note. Sorry it’s taken me so long to get back to your questions – I’ve been at a lot of festivals. Here we go!

      1. COGS: I would count certification as part of your start-up costs. This means your break-even is going to be more to accommodate this extra cost. Shipping to get it to a warehouse would be a cost because it transports your finished goods to their final destination.
      2. Wholesale cost is the price your distributor would charge a retailer – that way you’re not undercutting your distributor. Going direct is simply eliminating the distributor. In the example, it is $4.23. Don’t go down on price unless you have to. Your wholesale cost is what it is so you can cover your operating expenses. For large container orders, I wouldn’t go too much more than 10-15% off your distributor price. You still need to make money.
      3. Distributors: don’t provide different pricing. Just don’t do it.
      4. Special Discounts: Keep your pricing simple. Don’t pull anyone’s leg. Give it to them straight. I don’t go below a certain price because I need to make money. This is called dead net.

      Hope this all helps!

      Michael

  16. AUTHORTerry Coughlan

    on November 5, 2015 at 2:43 pm - Reply

    Hey Michael,
    We are doing a start up business for jelly.We are more interested in the marketing and distribution aspect so we are looking at a co-packer to produce our product.Do you have any sources in the Peterborough area that you would recommend
    Thanks

    • AUTHORmichael

      on November 6, 2015 at 4:13 pm - Reply

      Hi Terry,

      Congrats on starting a jelly biz! I’m assuming Peterborough is in England. If that’s true, I don’t have too much to offer up for suggestions. I’m US-based – in New England and know a lot of resources here. best of luck on your search across the pond!

      — Michael

  17. AUTHORRene

    on November 11, 2015 at 4:31 am - Reply

    Hi Michael, great article! I am struggling with pricing right now for a beverage product I am making. I just started a specialty food business in New England and I will be adding new products next year…this article helped me because right now I am selling directly to consumer as my retail and wholesale licenses are pending making about a 40% margin…so would I have to lower my price to sell to distributors, making less margin?

    • AUTHORmichael

      on November 11, 2015 at 2:16 pm - Reply

      Hi Rene,

      Thanks for reading! You’re selling to the consumer at a 40% margin? If you are, honestly, you’re going to burn through cash and go out of business. You need to be selling direct to the consumer at a 70%+ margin. That way you have enough margin to integrate a retailer and distributor into your sales channel. I’d re-evaluate your pricing before moving forward.

  18. AUTHORRene

    on November 11, 2015 at 9:24 pm - Reply

    Ok, so then I will have to double my price…what about 60%? Is that still too low…I’m just struggling with doubling my price I guess…but you are right, I was already feeling the strain…that’s going to be a hard sell since my COGS is kind of high right now…but I will try.

  19. AUTHORTricia

    on November 16, 2015 at 2:43 pm - Reply

    Hi Michael,

    Firstly, really love your breakdown that makes it a little easier for people like myself that have difficulty with figures!
    Hope you don’t mind, could you kindly advise on the following:
    1. I reside in Europe, and planning to sell jam online. Do I include the 19% when I quote prices to distributors / retailers? 19% makes hell of a difference my jam which averages about €1.10(30g) and €2.00(130g). I don’t really know where to fit in this tax portion in my calculation!
    2. To verify what you shared, the price I quote customers online, should it be the same price a retailer would sell it for? Or cheaper on my website? Really sorry, rather confused on this part about setting the price for distributor, retailer, and selling online directly to consumers. Wouldn’t want to over price and be out of the game.
    3. For an online business selling jam, could you kindly guide me a little on what operating expenses may include?
    Really appreciate your time and help Michael! You are a saint 🙂 All the best for your business.
    Warmest regards,
    Tricia

    • AUTHORmichael

      on November 16, 2015 at 9:16 pm - Reply

      Hi Tricia,

      Thanks for reading my blog — so happy you’re getting value from it! Here are the answers to your questions:

      1. If the 19% is a tax, it would be included on your invoices to retailers and distributors. If it’s a tax charged to consumers online and they know about it already, I wouldn’t worry too much about it. I’m just not familiar with business in Europe as I am in the states.

      2. Your online price should be the price a retailer would sell it for – or higher. You want the highest margin possible when selling directly to your consumers.

      3. Operating costs for online businesses have the following costs: online ecommerce platform, credit card processing, freight costs, packaging materials, printed materials, labor to pack the order, and online marketing expenses. Of course, you’d also have to work in insurance and other general business expenses.

      Hope that helps — good luck selling your jam!

      Michael

      • AUTHORTricia

        on November 30, 2015 at 12:37 pm - Reply

        Thanks a million Michael 🙂 Really appreciate the advice! Thank you for your time. Have a great day!

        • AUTHORmichael

          on December 8, 2015 at 1:08 am - Reply

          Hey Tricia,

          You’re welcome! Thanks so much for reading! — Michael

  20. AUTHORKevin

    on November 18, 2015 at 6:06 am - Reply

    Great article. Are your example margins for manufacturers, distributors, and retailers based on nationwide data? I manage a food business in CA, and I’ve never encountered a distribution company that expects a 30% margin. Also, most distributors speak in terms of markups instead of margins, and even the pricier distributors only markup 30% (with the bigger distributors using a markup as low as 8%).

    • AUTHORmichael

      on November 18, 2015 at 11:52 am - Reply

      Hi Kevin,

      These numbers are not based on national data. I’m basing the numbers on my 12 years of selling food products in the Northeast. All five of my distributors work on margin – and all take 25-30%. While UNFI and Kehe may take a lower margin, they tack on added costs like case-splitting fees, mandatory advertising, and other fees. Other manufacturer’s may have different experiences, however, this is how I’ve been pricing a food product for years – and how you’re taught it you took a class with the National Specialty Food Association.

      Thank you for reading my blog — best of luck in your food business!

      — Michael

  21. AUTHORIsac

    on January 8, 2016 at 10:35 pm - Reply

    Hi Michael

    Thank you for this. It’s very specific and so helpful. I am working on a beverage and figuring out my distributor cost. Being on the east coast, I have estimated that my delivered cost to a local distributor would be approximately $1.45. However will this price need to change for a distributor out in California? Meaning would I pass through the cost to the West Coast distributor and charge for example $1.60 a unit (Assuming $0.15 per unit extra to deliver) ? Or do I reduce it from my costs making only $1.30? Or alternatively share the cost and charge $1.52 per unit delivered? My fear is that if I provide a delivered cost of $1.60 per unit to a distributor in California, this will for sure be unattractive with thinner margins for everyone involved especially if trying to keep the same SRP with all retailers. Lastly would you know the industry gross margin % standard to be considered a healthy business? I have heard gross margins should be at 40-45% but not sure if that is correct. Thanks again!

    • AUTHORmichael

      on February 10, 2016 at 12:03 pm - Reply

      Hi Isac,

      Thanks for reading the blog. Sorry for my late reply. For some reason I wasn’t getting the comments in my email. You will have different pricing given geographic proximity. They may pay shipping because they have brokered freight deals. You might not have to worry about it. Or, you just give them a delivered cost. Either way. For success, regardless of channel or product, you want a 40-60% GPM to cover your operating expenses. Obviously, the better the margin, the more money you make.

      Good luck!

  22. AUTHORglenn

    on January 13, 2016 at 5:13 am - Reply

    how do you one find a good broker who help new product get in major grocery

    • AUTHORmichael

      on February 10, 2016 at 11:59 am - Reply

      Hi Glenn,

      Apologies for a late reply – I’ve been slammed at our kitchen. Finding a broker for a brand new food product is tough. You need to have a little bit of traction, at least regionally before pitching a product. A quick google search in your specific industry should yield options. See if they’ll take a quick meeting with you!

  23. AUTHORVida

    on January 28, 2016 at 5:19 pm - Reply

    Hi, I am so concerned about my product, can you help me to figure out if it’s worth to go to distributors and retail shops or it’s a dead thing. I have a recipe of healthy organic granola, manufacturers would make it for 3.50$ at the best scenario, but might be 4$. Distributors take 30% and they offer 30% for retail shops. The max price on the shelves in the shops should be no more than 6.99$. If I add on each product just 20-30 penny for myself. Would that work? Is it possible to earn enough money per month if I get just peanuts from one pack sold? I do not have experience in food market and not sure if I start this business or just stay online/close it?

    • AUTHORmichael

      on February 10, 2016 at 11:54 am - Reply

      Hi Vida,

      Sorry for my late reply – it’s been crazy at the kitchen. I woudl not pursue your granola. Something made for max $4 is going to hit the shelf for $12-16 and you’ll price yourself right out of the market. You could sell direct to consumer as a side gig, but I wouldn’t pursue this much further. Thanks for reading the blog!

  24. AUTHORRaquel de Antonio

    on January 28, 2016 at 9:42 pm - Reply

    Hi Michael,

    I am so glad I found your article as I was doing all of my pricing wrong. I am about to launch a new super food product to market. I manufacture my product abroad and my import and shipping costs are high. Doing all the correct math I just learned with you, my MSRP is average with other super food products out there.

    I would love to know about your experience with UNFI and other distributors, did you made the deal yourself or with the help of a broker?

    Also to have a reference, around how many cases do you sell per store per week? Do you ship full pallets to your distributors? When selling directly to retailers, do you ship to their own distributor centers? You ship pallets or cases to them?

    Thanks!

    • AUTHORmichael

      on February 10, 2016 at 11:52 am - Reply

      Hi Raquel,

      Happy to help with the pricing – it’s a complicated subject and can spell doom for many startup businesses. I have not worked with UNFI because I don’t have the margin to justify it. I would imagine a broker would be your best route.

      In my best stores, I’m moving about 3 cases a week. I ship and do direct delivery. Distributors pick up what they need from my kitchen – or get a pallet. Thanks for reading!

  25. AUTHORRaquel de Antonio

    on January 28, 2016 at 9:56 pm - Reply

    Also do you know what margin online stores get? What would be the pricing structure for them? Should I give them wholesale price?

    • AUTHORmichael

      on February 10, 2016 at 11:50 am - Reply

      Hi Raquel,

      Online stores, if they are reselling your product, would get wholesale rates and then mark it up as much as they want.

  26. AUTHORLiza Yong

    on March 1, 2016 at 2:28 pm - Reply

    Thank you for sharing. It is very helpful.

    • AUTHORmichael

      on March 4, 2016 at 11:44 pm - Reply

      You’re welcome, Liza — glad you find it helpful! Good luck with your food business! — Michael

  27. AUTHORmichael

    on April 22, 2016 at 3:08 pm - Reply

    Hi Maria – sorry for the delayed reply. You’re likely looking at 25-50%, but it depends on the product. Know what your cost is and know how to hammer down your COGS if you’re trying to hit a certain price on the shelf. But, you can also chalk up the price increase to an opportunity to sell your product instead of make it.

    Good luck! — Michael

  28. AUTHORRONALD ALLBEE

    on April 24, 2016 at 6:21 pm - Reply

    MICHAEL…THANKS FOR WONDERFUL INFORMATION AND ARTICLE…I AM HELPING A FRIEND WITH HIS PASTA SAUCE..HE CURRENTLY SELLS IT TO A DISTRIBUTOR FOR $3.79…..AND HIS COST OF PRODUCTION IS $3.59…GIVING HIM A 5.28% MARGIN…NOTED THAT YOU SUGGEST A 40 TO 60% MARGIN FOR MANUFACTURER….WHILE HE IS LOW, DO YOU THINK A 40% MARGIN FOR A PASTA SAUCE MANUFACTURER IS REALISTIC …THANKS

    • AUTHORmichael

      on May 9, 2016 at 6:52 pm - Reply

      Hi Ronald,

      40% is certainly realistic. You definitely do not have enough margin built-in to keep running. I’m assuming your cost is mostly labor. You may want to look into co-packing to get your unit cost down. Good luck!

      — Michael

  29. AUTHORMarie

    on May 12, 2016 at 2:08 am - Reply

    Hello Michael,

    Thank you very much for all this information.
    I was wondering if we always have to add our labor cost since the beginning. I have done my calculations by figuring out my cost (everything that goes in the product and leaves with the product – no labor included since it stays in the kitchen) and then add 250%-300% plus my cost.
    Is this correct?
    I am too doing my own distribution but it is getting harder to do as a get more stores.

    Thanks for your help,

    • AUTHORmichael

      on May 12, 2016 at 5:05 pm - Reply

      Hi Marie,

      You don’t have to add it in from the beginning if you never plan to hire anyone. But, if you take yourself out of the manufacturing part of your business, you’re paying someone to make your product. That cost has to be added into your total COGS. The way you’re pricing is risky because it doesn’t add in the whole distribution channel. As a rough idea, your COGS x 4 is your retail price – sell there. But, if your labor cost ends up being $0.60/unit you didn’t account for, that’s an extra $2.40 on the shelf you’ll need to go up to account for your increased cost. Hope that helps — best of luck! — Michael

  30. AUTHORSofia

    on May 18, 2016 at 1:32 am - Reply

    Hi Michael, thank you so much for this tremendous blog! It’s sooo incredibly helpful! 🙂 I just have a question – how do companies like Morton’s selling Iodized salt at like $1.50 per pound make any money? Is it just pure volume of sales? I can’t imagine they make much money per salt canister.

    Also, have you taken your product directly to restaurants? I’m wondering what differences may exist as compared to selling retail. And how to pitch to them….

    • AUTHORmichael

      on May 18, 2016 at 10:59 am - Reply

      Hi Sophia,

      Happy you found the blog and you’re getting value from it to use to build your business! Morton’s is able to do what they can because of volume and because of contracted rates with their suppliers. Your goal should not be to focus on the huge guys, but your own company and how you can differentiate away from Morton’s.

      We are just starting to feel out the restaurant industry. The majority of our current line can’t be made into food service, but we’re launching a separate food service line to try and grow our sales. As for sales tactics, owners are price sensitive. You have to add value where you can. For example, if you can sell a product to restaurants that is a pain to make in-house you may have an in. Pitch a few local restaurants and see what feedback they give. Don’t ask for the sale immediately, but listen to them to see what their pain points are and how you can address them.

      Good luck!

      Michael

  31. AUTHORNancy

    on May 19, 2016 at 4:58 pm - Reply

    Hi Michael,
    Just wanted to say thank you for providing this real world information. I work with Entrepreneur students at Fresno State and many of them are interested in the food business. I was looking for an easy way to explain to them pricing strategies in the food industry and this blog is spot-on. Kudos!

    • AUTHORmichael

      on May 20, 2016 at 11:41 am - Reply

      Hey Nancy — glad you like it and thanks for using it as a resource in your business class at Fresno State – that’s awesome!

      Michael

  32. AUTHORSara

    on June 11, 2016 at 5:47 am - Reply

    Hi Michael,

    Thanks so much for all of this info! So valuable!

    I’m starting a granola company and am trying to figure out my pricing. It’s a premium product – no preservatives, no skimping on fruits and nuts, homemade ingredients like candied lemon peel and candied peanuts, etc. At this point I’m going to be selling at the farmers market and to a few local stores. Right now, my COGS is $4.50 per 8 oz. jar of granola (it will decrease soon with bulk pricing that I’m going to be getting, but for now it’s $4.50). What should I charge at the farmers market, and what to the local stores?

    Thanks!
    Sara

    • AUTHORmichael

      on June 11, 2016 at 10:59 pm - Reply

      Hi Sara,

      Congrats on starting your granola business! Your COGS is very high right now. I’d recommend that you charge the following:

      Distributor: $7.50
      Retailer: $10.70
      Consumer: $18.00

      But first, you need to reduce your costs. Otherwise, you’re going to have a tough time selling granola at $18 for 8 ounces. This also gives you a 40% margin into a distributor — it should be closer to 50%. With that being said, if all you want to do is sell direct to consumer, you could get away with $9/jar — still pricey.

      Best of luck!

      Michael

  33. AUTHORWilfredo Lehrian

    on June 20, 2016 at 9:11 am - Reply

    nice post keep it up realy enjoyed your post

    • AUTHORmichael

      on June 21, 2016 at 5:20 pm - Reply

      Thanks for the love, Wildredo! Appreciate you reading my blog! — Michael

  34. AUTHORRussell

    on July 10, 2016 at 3:22 pm - Reply

    Hi Michael,
    great info on your blog.I am about to start our own spicy sauce biz, luckily I have done these similar exercises with 2 partners I had in a nother biz and they were Mckinsey company partners/consultants.even so, your content is very informative.
    A question, although we are going to produce from a small commercial kitchen which is ours here in Portugal, we are getting costs from copackers in the UK to produce for the Uk Market as well as logistics and export costs should be reduced this way don’t you think?Also as our Branding and marketing is hot and our contacts are excellent on the possability of a large order this type of set up is better as our production unit as a start up is manual filled etc.Look forward to your feedback, Thanks..Russell

    • AUTHORmichael

      on July 15, 2016 at 3:37 pm - Reply

      Hi Russell,

      Thanks for the comment. You can get decreased costs depending on if you have a lot of customers there. If you don’t it doesn’t make any sense to produce there. If you do get a large order, it’s nice to know that you have the production to back it up instead of scrambling to fill the order.

      Best of luck!

      Michael

  35. AUTHORAinesh

    on July 19, 2016 at 3:33 pm - Reply

    Very nice information up here good job nice knowledge.

    • AUTHORmichael

      on July 25, 2016 at 9:56 pm - Reply

      Thanks, Ainesh! Glad you enjoyed the information!

  36. AUTHORSuzana

    on July 31, 2016 at 5:28 pm - Reply

    Right on point, direct and clear. Love it! Thank a lot for sharing this information.

    • AUTHORmichael

      on August 5, 2016 at 11:56 am - Reply

      You’re welcome, Suzana! Glad you found the article helpful! — Michael

  37. AUTHORRob Vital

    on August 11, 2016 at 2:10 pm - Reply

    Michael,

    Thank you for your kind support for a lot of us in need for a helping hand. Great guidance thru the costing process.

    God Bless

    • AUTHORmichael

      on August 12, 2016 at 12:29 pm - Reply

      Hey Rob — glad you liked the information. Thanks for reading the blog!

  38. AUTHORAllen

    on August 28, 2016 at 2:43 pm - Reply

    What will be a good profit margin range to each of the sales channel?

    • AUTHORmichael

      on August 28, 2016 at 3:57 pm - Reply

      Hi Allen,

      You want to have between a 40-60% margin into any of these sales channels. Ideally, you want that margin before you sell to a distributor but sometimes that isn’t possible. Good luck!

      — Michael

  39. AUTHORnoni

    on September 11, 2016 at 11:10 pm - Reply

    Hi Michael,
    Thank you so much for this great article!! It helped me greatly on determining the price for my cream. I was charging initially $25 and after I utilized your wonderful math breakdown I have raised the price to $29.99.
    However, I do have a question regarding the overhead cost.
    You mentioned above 30% for operating cost. Is that the food/cosmetic industry average?
    I just want to make sure that down the line when a facility or other expenses arise I can cover them and not be in negative.
    Thank you so much!! Please continue writing these awesome articles!
    Noni

    • AUTHORmichael

      on September 16, 2016 at 4:33 pm - Reply

      Hi Noni,

      Thank you for your comment! I’m glad you raised your prices – always a good thing! As for overhead, 30% is typically what I’ve seen in the food business, but it depends on what you have for overhead. For example, my overhead this year is 20%, but it has been as high as 35%. Always plan for more overhead than you think you’ll have! Hope that helps – best of luck growing your business!

      Michael

  40. AUTHORLuke

    on September 14, 2016 at 9:00 pm - Reply

    Wow! What a great article. Thank you so much for this. I’m starting a hot sauce company and my cost is around 75 cents per bottle. Most sauces like mine are around 5-7 dollars at markets and stores. I figured I could sell at farmers markets around 5 dollars a bottle but still am a little confused on how much I should expect to sell to a distributor or retailers. Is my price too high?

    • AUTHORmichael

      on September 16, 2016 at 4:36 pm - Reply

      Hey Luke, thank you for your comments. I’ll answer both in this one. I don’t think your price is too high when you’re selling direct to consumer. This is when you want to get your highest margin. 5 bucks is a great margin if your cost is that low. Conversely, you could sell a ton of hot sauce if you level with the competition and push volume. As for your other restaurant question, I’d aim for $3.00 – $3.50/bottle. Hope that helps. Good luck with your business and thanks so much for reading! — Michael

  41. AUTHORSanthoshi Radhakrishnan

    on September 16, 2016 at 12:44 am - Reply

    That was a Great Article. Thank you! I am planning to start a small business to make tomato Chutney. This is an Indian recipe. Everything seems so overwhelming, I have an additional expense which was not mentioned in this article. I am planning to rent a shared commercial kitchen. So that adds up to the price too. Do you have any advice for me?

    • AUTHORmichael

      on September 16, 2016 at 4:39 pm - Reply

      Hi Santhoshi,

      Thanks for your comment! I do not mention a shared kitchen because the costs vary from kitchen to kitchen. You would ass that cost in as follows:

      Hours renting kitchen: 8
      Cost per hour: $45
      Kitchen help (8 hours @ $20): $160
      Total cost to rent kitchen: $520
      Units produced: 1,500
      Cost/Unit to Produce in the Kitchen: $0.35.

      This number is added to your ingredients and packaging costs. Hope that helps! Good luck with your chutney business!

      — Michael

  42. AUTHORLuke

    on September 16, 2016 at 4:28 pm - Reply

    Hi Michael,

    I’m starting a small hot sauce company and I will be selling directly to bars and restaurants. What would be a good price to sell to them since they won’t be reselling it? My cost is around .80 per bottle?

  43. AUTHORRenee

    on September 22, 2016 at 7:41 pm - Reply

    Hi Michael! If I am importing product, how would you factor in the various importing costs? I purchase and import a final product (from small organic manufacturers in East Africa), and then package, brand, and resell for the US market. It seems obvious to include the air freight shipping rate per kg in COGS, but what about pick up fees, customs fees, or freight forwarding? Would you consider those to be more operational costs as opposed to cost of goods sold? I was thinking of including any per kg rates (i.e. freight forwarding) but not the more flat rates. Any advice?

    Also, as a start up, you would recommend printing labels ourselves? I gather that from your post on labeling. How much would you factor in for that?

    Thanks so much for your time!

    • AUTHORmichael

      on September 22, 2016 at 9:22 pm - Reply

      Hi Renee,

      All of those costs should be incorporated into your COGS. Your COGS includes any costs that takes you from raw material costs all the way through to the finished, shelf-ready product, in it’s packaging and ready to ship out. It’s just like importers to foreign countries. They account for product, shipping, tariffs, taxes, and more. Then, they price from there. It’s why the prices they demand are so low — because they have to incorporate all of those costs.

      I would get your labels professionally printed. This is your product and you want it to look AWESOME. At-home inkjet labels are not going to cut it. Pricing depends on how many you order. If you’re talking 1,000 labels, you’re looking at $0.15-$0.25 (size might make it different, too).

      Hope that helps you! Good luck!

      Michael

      • AUTHORRenee

        on October 26, 2016 at 4:41 pm - Reply

        Hi Michael! Thank you for your reply. I’m now trying to figure out the whole concept of “cases”.

        I’ve received advice on selling according to case size, but I also know certain retailers (and online customers) appreciate when you can break the 12-unit case size. Do you have any thoughts or ideas on costs associated with cases? If I am packaging myself, where can I order “case” packaging? Can I use standard USPS shipping boxes and just put in 12 units or is that frowned upon?

  44. AUTHORSheila Davis

    on September 25, 2016 at 1:55 am - Reply

    I Would Like To Know How Much I Should Charge For A 32 Oz Jar Of Home Made Cinnamon Jelly,
    It Takes
    (3) 5.5 Oz bags of 1Type of candy @ $1.00 each bag
    (1) 3.8 Oz of another candy per bag
    (11) Cups Sugar @$7.99 for 10lbs
    (6) Cups Water /Water Cost per Month is $ 33.00
    (2) 6oz Packets Of Certo@ $4.89 for 2

    • AUTHORmichael

      on September 26, 2016 at 10:49 am - Reply

      Hi Sheila,

      Your best bet is to weigh everything out so you can convert the weight and price per pound to USD ($). I’m happy to help you figure out your cost, but would need to know the weights. The cost for recipe pricing is $125/recipe. You can email me at michael@gredio.com if you’d like to move forward.

      Thanks!

      Michael

  45. AUTHORWaleed

    on October 6, 2016 at 9:20 pm - Reply

    I loved the clarity of your explanation, and the clarity of the typography. Great article. Thank you very much.

    In other countries, particularly Saudi Arabia, would the margins to retailers, and distributors be the same?

    • AUTHORmichael

      on October 6, 2016 at 11:30 pm - Reply

      Hi Waleed,

      Glad you liked the article! I just emailed you, but I would assume this pricing strategy is somewhat similar to other countries abroad. — Michael

  46. AUTHORMarc

    on November 30, 2016 at 6:31 pm - Reply

    Informative article, Michael! I would be oh so grateful if you could clarify a few things about logistics, though 🙂

    1. Who typically pays for shipping to the distributor? Also, is shipping usually through private carriers (fedex, ups, etc.) or USPS?

    2. Why don’t you factor in shipping cost from the distributor to the retailer when arriving at your price to end user?

    3. Who typically pays for shipping if I sell directly to grocery stores?

    Do you have any general tips around how to manage shipping costs?

    Thanks so much,

    Marc

    • AUTHORmichael

      on December 1, 2016 at 12:01 am - Reply

      Hi Marc,

      Here are the answers to your questions:

      1. Who typically pays for shipping to the distributor? Also, is shipping usually through private carriers (fedex, ups, etc.) or USPS?

      It depends. I have our out-of-state retailers pay for shipping. Some local retailers I wave shipping. Online orders are through USPS for the most part. Wholesale orders are FedEx unless the store requires UPS.

      2. Why don’t you factor in shipping cost from the distributor to the retailer when arriving at your price to end user?

      This is a cost of doing business for the distributor — not the manufacturer.

      3. Who typically pays for shipping if I sell directly to grocery stores?

      You pay for shipping (most of the time) as a delivered price to large retailers.

      Do you have any general tips around how to manage shipping costs?

      Negotiate rates with freight brokers if you’re shipping 1+ pallet. Small orders, you can call UPS or FedEx directly.

      Good luck!

      Michael

  47. AUTHORMarine Bastain

    on January 8, 2017 at 7:40 am - Reply

    Many thanks really handy. Will share site with my good friends.|

    • AUTHORmichael

      on January 8, 2017 at 1:09 pm - Reply

      Glad you enjoyed the post and got some value! — Michael

  48. AUTHORTom Dubowski

    on January 12, 2017 at 10:18 pm - Reply

    Michael … i wonder about your Op Exp on your goods.

    I’ve read other blogs which say you should add 30% to your COGS first before adding a wholesale margin.

    That would make your calculations a lot different.

    Example 1
    COGS: $1.48
    Price to distributor: $2.96
    Gross Profit Margin: $1.48
    Operating expenses (30%): ($0.44)
    Net profit margin: $1.04

    Example 2
    COGS: $1.48
    Add Operating expenses (30%): ($0.44)
    Price to distributor: $3.84
    Net Profit Margin: $1.92

    Which way is preferable ?

    • AUTHORmichael

      on January 13, 2017 at 11:26 am - Reply

      Hi Tom,

      From an numbers perspective, operating costs come out of your gross profit margin, not your net profit. You can make your margins whatever you want them to be, but know that when you’re selling to a distributor or retailer, your margin is already built in, by increasing our price 40% – 60%. Hope that helps — good luck!

      • AUTHORTom Dubowski

        on January 13, 2017 at 5:12 pm - Reply

        Thanks for clarifying. Right now our margins are 44% so we can keep our retail price under $10. It leaves us with a small amount of wiggle room, and at present time are looking at cutting costs on ingredients and bottles/labels, ect.

  49. AUTHORLisa

    on February 18, 2017 at 2:43 am - Reply

    WOW! Really appreciate this post. I recently started my hot pepper vinegar business. My COGS is $2.49 and I’ve been selling direct to consumer for $5.00. Had a few people tell me that I was charging way too little and that it should be approx $7-$9. I was going to go up to $6.99 but felt so greedy that I went back down to $5.99. Now it’s so clear to me that $7 is a fair price because if I get big enough to sell wholesale it would end up being that much. Thank you so much for this, I really learned a lot! 🙂

    • AUTHORmichael

      on February 18, 2017 at 11:59 am - Reply

      Hi Lisa,

      Thank you so much for the comment 🙂 — Yes, for many people this is an eye-opening post. If it were me, you should really be selling your products for $10 with a cost of $2.49, but if your goal is to sell direct and then maybe wholesale, $7 isn’t a bad margin. Plus, don’t feel greedy, You have to make enough margin to be able to produce more product and cover your expenses. Plus, make a profit. Good luck with your biz!

      – Michael

  50. AUTHORJeff

    on March 10, 2017 at 6:18 pm - Reply

    Recipal has a great tool for this. Enter your ingredients and costs + shipping then add in your output and the app calculates everything automatically.

    • AUTHORmichael

      on March 14, 2017 at 8:30 pm - Reply

      Yes – Recipal is great for this! Thanks for the reminder for Gredio readers!

  51. AUTHORRami kassem

    on March 15, 2017 at 7:39 am - Reply

    Hi Michael.
    Thank you for your amazing post, it is very helpful. I have a question. I have a coffee shop and want to sell an item that cost me 4.5$ including delivery. How much I should sell it to my customers to be on the safe side. Thank you in advance

    • AUTHORmichael

      on March 15, 2017 at 10:59 am - Reply

      Hi Rami — if you’re paying $4.50, I’d sell it to your customers for $9.

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