279. Why Most CPG Brands Are Flying Blind on Costs

0:00Welcome to Day 7, the importance of knowing the true cost of your products. products. If you want to extend your runway, maximize your profitability, and build a brand that scales sustainably, there's one capability you cannot overlook. You must know the true cost of your products, down to the penny. Accuracy matters, precision matters, and clarity matters. And yet, across my career, from pre-revenue startups to multi-billion dollar CBG giants, I've seen the same mistake repeated over and over again. These brands don't actually know what their products cost. They estimate, they guess, they use round numbers, they rely on assumptions instead of facts.

0:38Ironically, many big brands don't even know the true cost of their promotions or retail execution, which means that they can't accurately measure their ROI or justify the dollars that they're throwing into trade. The problem is not intelligence. The problem is that no one teaches founders how to calculate the true cost accurately, strategically and consistently. That ends today. Why understanding cost gives you a strategic edge. In college, I studied to be a CPA, not because I wanted to be an accountant, because I wanted to understand how business really works. I wanted to know how to measure and manage the costs that drive sales and profitability.

1:16Those skills have served me throughout my entire career, whether working with global brands or mentoring an early stage founders. And here's the insight I want you to take at heart. When you know your true cost, you can make smart decisions. When you don't, every decision becomes a risk. Knowing your cost helps you price your products correctly, forecast accurately, plan promotions strategically, negotiate more confidently, prepare for supply chain fluctuations, protect your margins, increase your brand's valuation, but most importantly, it gives you control. You cannot scale what you can't measure, and you cannot manage what you cannot see.

1:56A founder story, the costing blind spot that almost broke a brand. Years ago, I worked with a young brand at the Boulder Innovation Center. They had passion, they had product market fit, and they had early traction, but they didn't know what it actually cost to put a product in their bag. They had a rough idea. They used assumptions. They didn't track seasonal ingredient prices, swings, or yields. And that meant they couldn't price correctly. They couldn't plan growth effectively and they couldn't evaluate promotions. They couldn't forecast cash flow. So I built a costing spreadsheet to uncover the exact cost of each batch, each bag, and each ingredient and each variable.

2:34What we uncovered changed everything. Once we isolated their cost, we were able to accurately build forecasts, improve margins, strengthen their price strategy, identify better ingredient suppliers, and extend their financial runway. Every founder I've worked with since has had a similar blind spot until we fixed it. Let me illustrate why this matters through a simple analogy. Hopefully that story helped. Now for a quick story about a big brand to illustrate how widespread this problem is. The point is not to shame anyone, but rather to encourage you to learn this valuable skill. This will set you apart from other brands and will give you a significant competitive advantage.

3:15Imagine knowing the true ROI from your promotion. A question most brands can't answer. The more efficient your trade promotions are, the more runway you have for future growth. In episode 271, I talked about how most trade spending is ineffective and wasted. While working with a big brand, I realized that there's no way to calculate the true ROI from a promotion. So I built a custom tool. I pulled it from multiple data sources, including brand shipment data and their sales data, along with some other resources. The two essentially track the cost of an item from our warehouse to the retailer and then through the register.

3:52This might sound easy, but this level of granularity is not possible in most cases, especially with all the variables, and we did not use an external shipper. This is even harder for small brands that rely on distribution companies. More recently, I was working with a big brand that did not know how much margin they lost between production and a retailer shelf. That was before calculating what it cost to promote an item that was at a retailer. Every retailer charged different fees, and that was after paying for the shipping. They, like most brands, are flying blind when it comes to effectively managing the trade marketing.

4:28This is even more problematic when you realize that trade marketing represents about 25 % of a brand's gross sales. Managing down to the penny might seem like small details, but small details compound over thousands or millions of units and they can determine where your company is profitable or operating at a loss. Now imagine scaling production. As you produce more ingredient costs may go down. You may get better pricing or packaging. Labor becomes more efficient. You can negotiate better rates of suppliers but you can only capture those efficiencies when you have a starting point. Knowing your cost gives you the ability to plan, negotiate, optimize and scale without it you're operating blind.

5:10To drive the issue home ingredient packaging and pricing volatility. Ingredient prices fluctuate seasonally regionally and globally. Packaging costs can shock you overnight. Lead times can stretch from four weeks to 16 weeks for reasons outside your control. If you don't know your cost per unit, your cost per batch, your cost per case, your cost per pallet, you cannot adjust quickly enough to protect margins or maintain retailer commitments. This is how brands lose money without realizing it. This is why founders feel like they're drowning in cash flow issues. This is why pricing strategies become guesswork instead of fact-based selling.

5:46The Overlooked Cost of Getting on a Shelf Most founders underestimate or completely overlook the true cost of retail execution. Slotting fees, free fills, MCBs, chargebacks, distributor deductions, broker commissions, distributor freight and fuel charges, overtime, labor to fill that last-minute order. promotional funding, merchandising costs. These two are real costs and they add up fast. If you want to optimize your margins, you need to understand every cost from raw materials, to manufacturing, to packaging, to freight, to distribution center, to retailer shelf. Every step is part of your cost structure.

6:25Let me give you a simple example. A tracking hack that saved a brand thousands. One company I work with had no idea how much they were spending on shipping. They weren't tracking freight per unit. The truck delivered the product one way and they returned empty. Empty trucks are wasted money. Once we analyzed the data, they negotiated a contract with a furniture company to fill the outbound truck on return trips. That single move covered fuel, labor, wear and tear, and dramatically reduced their overall logistics cost. This is the power of understanding cost. You start seeing opportunities that were invisible before.

7:02The The promotion problem, where most brands lose money. Did you know that about 25 % of our brand's gross sales goes toward trade spend? Over 70 % of those dollars deliver little or no sustainable lift. Most promotional spending is wasted, not because founders are careless, but because they don't know what the true cost of promotions are. They don't know how to measure ROI. They don't know how to evaluate incrementality. They don't understand retailer margin expectations. and they don't know how to analyze baseline versus lift. We'll go deeper into trade spending later in the series. But for now, understand this.

7:38You cannot have a profitable business if you do not understand the cost of every promotion. Your brand deserves better than guesswork. Knowing your numbers builds investor confidence. Look at what happens on Shark Tank. The sharks always ask, what does it cost to make one unit? What is your landed cost? What is your wholesale price? What is your margin? What is your promotional plan? What are your true cash needs? Founders who know their numbers get better offers. Founders who guess lose credibility instantly. If you need a refresher, go back to day one, episode 273. Your numbers tell a story.

8:16Your numbers reveal whether you're ready to scale. Your numbers determine whether investors trust you. More importantly, your numbers determine whether your business survive. Day seven action item. Build your true cost model. Today take one SKU, just one, and build a complete cost breakdown. Include ingredients, packaging, labor, overhead, freight to co-packer, manufacturing costs, freight to distributor, distribution margin, retailer margin, all marketing and trade spend, cost of free fills, sampling and swag, cost of inventory waste and shrink then ask yourself am I priced correctly how much margin do I really have what happens if cost increased 10 % what happens if I run a TPR what if rate spikes how long is my runway of sales double this is how you take control of your business and closing accuracy is your competitive advantage today's lesson is not glamorous but it's essential.

9:15When you know the true cost of your products, you forecast more accurately, you plan more strategically, you negotiate with confidence, you protect your margins, you extend your runway, you build a business at scales. Knowing your numbers is the foundation for building an operational discipline, the hidden engine of your CPG scale, and why this one capability separates the brands that survive from the brands that dominate. Tomorrow on episode 280, we'll talk Talk about how to build a retail-ready pricing and margin architecture so you can walk into any retailer meeting confident that your pricing strategy supports your growth without putting your brand at risk.

9:54Subscribe so you don't miss it. Share this episode with a founder who needs more clarity in their numbers and download the series guide to go deeper in today's topic. Your brand's success depends on this and now you have the tools to take control. For additional inspiration, listen to follow podcast episodes. Episode 82, Know Your Brand Health for Long-Term Success. In this episode, I talk about how you need to focus on contribution, not velocity. Velocity does not tell the entire story when it comes to your brand performance. Big brands with deep pockets can buy velocity with deep discounting.

10:29That pulls profitable dollars from the category. Better for your brands contribute more category growth. This is what retailers take to the bank. And then listen to episode 271, Why Trade Spin Fails and How to Fix It. In this episode, I go deeper into how to maximize your trade marketing. Trade marketing is your brand's growth engine. This is also where you leak the most cash flow. And then listen to episode 149, Sustainable Brand Growth Strategies for Success with Katie with Real Food Brands. Explore the secrets of sustainable brand growth. Learn how successful brands align products with customer needs for lasting success.

11:06Katie from Real Food Brands discusses her journey from big food to natural food and beverage to make a difference in our food system. She emphasizes the importance of aligning brand strategy with consumer needs and preferences, highlighting the interconnectedness of branding, marketing, and sales. Tip of the day, accuracy matters. Know the true cost to your products. Thank you for listening. This episode has accompanied video with illustrations and additional information I can't share in an audio podcast. You can watch it at retailsolved.com slash 30daychallenge. You can get the show notes for this episode by going to retailsolved.com slash session 279.

11:45Tomorrow's episode is how to master your why and connect with customers. This episode will build on today's conversation. Want more sales? How to profitably scale a food business today, tomorrow, and beyond. Here's this week's free downloadable guide. The 30-Day to Prosperity Workbook is a companion to the 30-Day Challenge. This Retail Solve Blueprint will teach you what you need to know to confidently grow and scale your brand, build a connected community of loyal evangelists, and multiply your brand's impact, sales, and profits. Every slight improvement means more runway for sales growth, higher brand evaluations, better terms when negotiating with investors, fuel for more innovation, greater support for mission-based causes, and much more.

12:24Thanks for joining us today. Please reach out and share your most pressing questions, and I'll do my best to get you the answers that you need on future episodes, including expert advice from CEOs and industry thought leaders. Comment, leave your questions, and get this week's free downloadable guide and the show notes at retailsolve.com slash session 279.