---
title: "Retail Prices of 2, 3, 5 Yuan Drinks Have Little to Do with Costs..."
description: "Recently, Nongfu Spring initiated its IPO, becoming industry news. One point of heated discussion was the 60.2% gross margin for packaged drinking water disclosed in its prospectus. Additionally, Six Walnut's prospectus showed that a 5-yuan can costs about 1 yuan to produce, with the can itself accounting for over half the cost."
author: "潘利华"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2020-05-26"
language: "en"
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# Retail Prices of 2, 3, 5 Yuan Drinks Have Little to Do with Costs...

> Recently, Nongfu Spring initiated its IPO, becoming industry news. One point of heated discussion was the 60.2% gross margin for packaged drinking water disclosed in its prospectus. Additionally, Six Walnut's prospectus showed that a 5-yuan can costs about 1 yuan to produce, with the can itself accounting for over half the cost.

Recently, Nongfu Spring initiated its IPO, becoming industry news. One point of heated discussion was the 60.2% gross margin for packaged drinking water disclosed in its prospectus. Many onlookers lamented: "These profits are too high." Additionally, Six Walnut's prospectus showed that a 5-yuan can costs about 1 yuan to produce, with the can at 0.57 yuan, walnut kernels at 0.25 yuan, sugar at 0.05 yuan, and other raw materials at 0.13 yuan. The can alone accounts for over half the cost. These two cases illustrate that the gap between cost and selling price can be several-fold. **Many people instinctively think of cost plus margin equals retail price, but in reality, price has almost nothing to do with cost.** If there is a relationship, it's only that cost is part of the price, but is there a positive or negative correlation? Almost none. It's not that high-cost products necessarily have high prices, nor that low-cost products have low prices. When Didi Chuxing first entered the market, rides were cheap, maybe just five or six yuan. Luckin Coffee often runs buy-one-get-one-free promotions; are they really making money? They're losing money. So, cost and price have little to do with each other. From an economic perspective, price reflects market supply and demand. But in the FMCG sector?

**-01- What does price really relate to?** In the FMCG field, if a product is mature, price is more related to a company's management capabilities.
For example, a beverage company sets a price for a product; whether it can sell more or at a higher price depends more on the company's management ability, market control, and team management, which ultimately reflect in the price. Coca-Cola sells over a billion cases a year. Some mid-tier companies sell tens of millions or over a hundred million cases. If each case goes up by 0.5 yuan, that's 50 million in net profit. Why not do it? Why are so many companies afraid to raise prices, and even when they do, they do so cautiously? From a normal perspective, a 0.5 yuan increase is nothing; people might not even pick up that amount if dropped on the ground. But I believe no company can easily earn that price increase because price reflects not only market supply and demand but also a company's management capability. For instance, many years ago, Xurisheng Iced Tea was popular nationwide, and demand exceeded supply. According to supply-demand logic, they could have raised prices; customers were begging for shipments. Yet why didn't they raise prices and eventually went bankrupt? Because whether you can raise prices depends on your management ability, not supply and demand. At that time, Xurisheng had many distributors but expanded rapidly without the ability to manage them, or even their own salespeople. Price increases or decreases never reflected in the market; perhaps they could lower prices by 2 yuan per case, but the difference was pocketed by frontline salespeople. Or the company wanted to raise prices by 2 yuan, but salespeople said no one would buy if prices went up. **Therefore, in the FMCG industry, control over the market is paramount. Only by continuously improving management capabilities, sales team management, and market building, and solidifying market foundations, can an effective price system be established and implemented down to the last link.** Since price management is so important, how should it be managed specifically?

**-02- How should prices be managed?** FMCG products have a characteristic: business sources are concentrated in a few SKUs. For example, Coca-Cola's annual revenue in China is 40-50 billion yuan, but most comes from Coca-Cola, Sprite, and Fanta. Master Kong's main source is iced tea, Nongfu Spring's is mineral water, and Six Walnut, Red Bull, and Coconut Palm are similar. With concentrated SKUs, fast turnover, and multi-channel sales, cross-channel and cross-region channel conflict can easily occur. If not managed well, not only are profits lost, but survival may be at stake.

**1. Regional Price Difference Management**
**Managing prices requires a platform mindset, not linear thinking.**
Setting a single price for one SKU is often unrealistic. First, consider regional price differences. Many FMCG companies operate nationwide but cannot set up production bases everywhere. Even Coca-Cola only has bottling plants in each province or adjacent provinces. The cost differences from factory coverage distance are significant, and FMCG products are low-value, with logistics costs typically accounting for 5-10%. For example, shipping a case of Coca-Cola from Beijing to Guangdong costs at least 2-3 yuan per case, and that's only with sufficient volume. Therefore, companies build factories to balance logistics costs, but building factories isn't just about capital; there are also policy regulations, management personnel, fire safety, and security. Companies need to balance factory construction and logistics costs. At this point, setting a "regional price difference" is necessary to offset some logistics costs; otherwise, selling to distant markets yields almost no profit.

**How to set regional price differences?**
**One is logistics costs, using social logistics rather than self-operated logistics.** Self-operated logistics involves return trip costs, invoices, management fees, and credit risks. Social logistics is relatively lower cost and flexible. Fully utilize social resources to solve logistics costs.
**Another is to fully consider local market competition.** For example, to capture the local market, you might not raise prices, or even lower them slightly; if you already have a large market share, prices can be higher. Match market prices according to your own market strategy.

**2. Channel Price Difference Management**
Under the current premise of intensive market cultivation, many FMCG manufacturers are doing full-channel integration, not just one or two channels. In this process, channel price difference management becomes particularly important.
Since each channel has different characteristics—for example, wholesale channels care most about the "bottom price," no gimmicks, just the bottom price! Supermarket channels involve display fees, barcode fees, ground promotion fees, anniversary celebration fees, etc. Entertainment venues like nightclubs may require commission points. So, one price set won't work for all channels.
**FMCG manufacturers, when setting channel prices, fully consider each channel's unique characteristics and the costs the company will invest in each channel.** Because prices differ by channel, a relatively applicable method is the "retail price deduction method" to derive supply prices. For example, from the overall retail landscape, convenience stores have the highest retail prices. Based on retail prices, calculate their required margins and related cost investments, then deduce the supply price. Currently, convenience stores, especially chain stores, often have high entry fees; a single barcode might cost 50-100 yuan just to enter. If entering 10,000 stores at 70 yuan per barcode, the entry fee alone would be 700,000 yuan. This doesn't include various promotional activities that convenience stores periodically require. Therefore, many FMCG manufacturers used to have simple two price lists—wholesale and non-wholesale—but now they have refined to seventeen or eighteen price lists, using different ones for different channels.

**3. Special Channel Price Management**
Besides channel price lists, there are also special channel customers who may be in a specific channel or not in any channel.
For example, a customer in a closed venue or a super-large factory. They purchase products for employee benefits or gifts, not for resale. They typically demand lower prices because they buy for consumption, not profit. Manufacturers also prefer such customers because there's no middleman; products go directly to consumers, so they offer special prices.
At this point, a separate price list is needed. No investment costs, and these businesses bring good marginal effects, spreading overall marketing costs, with relatively good gross margins.
But this also faces a problem: if not controlled, there's a risk of channel conflict. Some people take advantage of the preferential prices to sell externally, engaging in cross-channel selling to profit from the price difference.
This is a headache for many manufacturers; they want to do it but fear doing it. For price management of special channel customers, there are three paths for reference.

**First, when drafting contracts, clearly and specifically define the product's intended use and penalties for cross-channel selling. Establish mechanisms at the source to prevent problems before they occur.**
**Second, establish an internal price control system, conducting year-over-year and month-over-month analysis for such special channel customers monthly, and set up an early warning mechanism.**
For example, if this customer's monthly fluctuation is around 10-15%, you can set a 20-30% month-over-month warning threshold.
**Third, implement product control using technology, recording production batch numbers in the system for these customers' purchases, making them exclusive products. If these goods flow out, trace them back to the source.**
In summary, companies must establish a comprehensive control system to manage these customers. If not managed well, they won't earn the marginal price difference and may even have profits eaten by special channel customers. For example, if a special channel customer sells at 35 yuan per case to other channels, they'll naturally take fewer cases from you at 40 yuan. In the end, you lose 5 yuan.

The above are the three conventional mainstream price management dimensions, but how should prices be designed specifically?

**-03- What is the pricing logic for new product launches?**
When a product comes out, the first step is setting the price chain, and behind that is a set of logic. For a new sparkling water, the previous pricing might have been simple cost-plus-margin, but now it's not that simple.
Typically, two levels are considered: **First, the external market environment, i.e., the mainstream price of sparkling water; second, how we enter the market—as a follower, a disruptor, or an innovator.** This involves the company's positioning for the product.
If a follower, the regular market price is 5 yuan per bottle, then combined with the company's brand premium, for example, if it's Coca-Cola, it would also be priced at 5 yuan. Then work backwards: small shops need to earn 1-1.5 yuan per bottle, plus new product display fees, wholesalers deliver to shops at 5 yuan per case, and work backwards to set the price chain to meet different channels' margin requirements.
If a disruptor, the product's launch purpose might be to suppress competitors, not to sell a certain volume. Then the price chain design will be different.
Given current production capabilities, in fact, most FMCG raw material and logistics costs are low. If volume can be achieved, the intermediate profits can fully cover personnel, promotion, and other expenses.
**FMCG products are items where "volume and price move together" to make money, unlike other durable goods. Only after reaching a certain scale can price have a significant leverage effect on profits.**
Therefore, FMCG pricing is a super complex topic, involving external market environment, internal positioning, intermediate cost allocation, market management, brand premium, and social logistics costs.

About the author: Pan Lihua, Sales Operations Manager at Swire Coca-Cola, a student of Dedao University's 0th cohort. Over 15 years of Coca-Cola sales management experience, familiar with FMCG market layout, strategy formulation, and team management. Skilled in market insight and team motivation.


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