Ep78: Distribution Pricing Strategies to Increase Profitability with Karl Petersson

Karl Petersson was the Director of Commercial Performance at Bacardi; he’d worked in the spirits industry on both the supplier and distributor side. He also has 12 years’ executive experience in commercial strategy development and people management.  

He held management responsibility in Finance and Pricing for a $300-million consumer packaged goods business, improving profit by +$6 million. He has 4 years’ experience managing the P&L of a consulting business and grew the revenue 50% with increased profitability, while expanding the organization to 25 project managers and engineers in both the US and Europe. He was responsible for initiatives optimizing $9 billion of revenue for Fortune Global 1000 companies, generating $400 million in profit improvement. 

In this episode, Karl shares how pricing is done in the spirits industry, taking into consideration the end retailers and distributor’s margin goal. 

 

Why you have to check out today’s podcast: 

  • Learn the factors to consider when building a distributor pricing strategy 
  • Find out the uniqueness of the spirits industry and how pricing decisions are made, taking into consideration all the concerned parties involved 
  • Discover the process of how the product in the spirits company travels through different distribution channels and is ultimately brought to end-consumers 

 

 

“If you want to really push pricing all the way through and make it hit your bottom line, work and coordinate across all players that are relevant for that decision.” 

 – Karl Petersson 

 

 

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Topics Covered: 

 

01:18 – Karl’s journey into Pricing. 

02:45 – What pricing looks like in the spirits industry – do they sell through a distributor? 

04:06 – How is pricing done at the consumer level, at the grocery store or at a nightclub? 

05:03 – Thoughts on treating the grocery stores and end-retailers as customers, Bacardi as a loss leader 

08:02 – What dictates the volume produced? 

08:30 – How do they get to influence pricing beyond the distributor? 

12:06 – Bacardi’s pricing strategy as they work with their retailers, taking into consideration the competitors 

13:57 – What’s interesting to know about the spirits industry when it comes to raising prices? 

15:01 – Can they set prices and sell directly to consumers in other countries outside the US? 

16:10 – How do they work with distributors on pricing when they have a margin to meet? 

19:07 – Taking a look at nightclub pricing 

21:13 – Do you pay for shelf space in an outlet if you are trying to build your brand? 

22:14 – Does it make sense to use price endings for drinks? 

23:49 – His pricing advice that would impact other people’s business 

24:33 – Does size matter when it comes to pricing when coordinating with other concerned players? 

 

Key Takeaways: 

 

 

“An interesting part of the negotiation is, do you have a brand that’s strong enough to make a chain compress on their own margin just to get that hot price point?” – Karl Petersson 

 

“In Europe, you can set the pricing to your customers, so you don’t have to sell for that distributor tier. You can go and sell directly to your customers, groceries, nightclubs, etc.” – Karl Petersson 

 

“Pricing with nightclubs, you will be bucketed on-premise on nightclubs, hotels, restaurants, bars. And for those accounts, you will see some interesting stuff like it’s not only about the price, and that comes with a super low acquisition cost, and then someone buying a ton based upon it.”  – Karl Petersson 

 

“When it comes to coordinating pricing with different channels it’s not that you’re a small company, it’s just that you might have a brand that doesn’t have a lot of value. That will change the kind of negotiation you can do.” – Karl Petersson 

 

Connect With Karl Petersson: 

 

Connect with Mark Stiving:    

  • Email: mark@impactpricing.com    
  • LinkedIn  

 

   

Full Interview Transcript  

(Note: This transcript was created an AI transcription service.  Please forgive any transcription or grammatical errors.  We probably sounded better in real life.)  

 

Karl Petersson   

If you want to really push pricing all the way through and make it hit your bottom line, work and coordinate across all players that are relevant for that decision. 

 

[Intro] 

 

Mark Stiving   

Welcome to Impact pricing, the Podcast where we discuss pricing, value, and the silver relationship between them. I’m Mark Stiving. Today, our guest is Karl Petersson. Here are three things you should learn about Karl before we start. He started out life as a commercial airline pilot. I’m jealous. He spent many years at Navetti pricing software firm before they were acquired by Vin Davo. And he is currently Director of Commercial Performance at Bacardi. Welcome, Karl. 

 

Karl Petersson   

Thank you. 

 

Mark Stiving   

Okay, so I’m so excited to talk to you for many reasons. Number one, you know a lot about pricing. And number two, I’m always fascinated about pricing and my hobbies and drinking happens to be a hobby. Let’s see if we can talk about pricing spirits today. But before we do that, how did you get into pricing? 

 

Karl Petersson  

I got into pricing straight out of, after I had my master’s degree. I joined this startup company at that time, Navetti. I had other options but this was so interesting to use analytics and go out and build a company. We were only seven people at that time. It was amazing. 

 

Mark Stiving   

Nice. What did Navetti do? What was their claim to fame? 

 

Karl Petersson   

We start out by helping large international companies with their aftermarket pricing. That’s the niche we started out with. And we provided them solutions in the sense that we both came out as business consultants helping them figure out their pricing, and making it value-based – and we built our software tool price point. So we sold them the solution of transforming pricing and finding a home for a new strategy so you can run it. 

 

Mark Stiving   

Nice. And so did you fall in love with the concept of pricing and you kind of stuck with it, or how did that happen? 

 

Karl Petersson   

Yeah, yeah, you could say that like, I got into it. I love the pricing we did, I loved also pushing us out of our niche into other kinds of pricing. And when I moved over to the US, got into Bacardi, it was amazing to get into a very different kind of pricing. 

 

Mark Stiving   

Well, excellent. Let’s talk about this very different kind of pricing then. So describe pricing in the spirits industry, in a way I would understand it. What’s the high level? 

 

Karl Petersson   

High level in the US is, if you are a winery, distillery or brewery, you need to sell to a distributor. You cannot go out and sell directly to a restaurant. You can’t sell directly to grocery. They’ll sell to the distributor and then the distributor will sell it to nightclubs, hotels, etc, or grocery, and then you as a consumer can pick up the product, either on-premise or in the store. And these three levels create some complexities. 

 

Mark Stiving   

This is true in all 50 states? 

 

Karl Petersson   

No, then you get to the statewide difference. Every state is different, in some states, ever since prohibition, have been control states. So in control states, the state runs the liquor store for you. It’s not, you can go to a grocery store to pick it up. So you have some control states, you have some open states, and they also have franchise states, where distributor-franchisee and they hold on to that brand no matter what. 

 

Mark Stiving   

And so, it sounds like you guys always sell to a distributor. Is that right? In the US. 

 

Karl Petersson   

We always sell through a distributor. 

 

Mark Stiving   

And so do you even think about pricing at the consumer level, at the grocery store or at a nightclub, anything like that? 

 

Karl Petersson   

Well, that’s an interesting part – you could sit down and sell to a distributor, and then just, you know, let whatever happens happen. But that’s not how we want to do it. We want to be active and support the decisions that the distributor makes when they design their pricing. And also be active and help the grocery stores when they make their pricing decisions.  

We find the best outcomes when we all coordinate together. We can only recommend, but when we work very tightly across this whole chain, aligning all these different motives when we can align them, then we can do awesome pricing. But when they misalign we can get really big issues. 

 

Mark Stiving   

Right and so you have salespeople that go out and talk to the grocery store, or the end retailer, as well as to the distributor. So even though the grocery store isn’t buying from you, we’re treating them like a customer because they’re the pull through for our product. 

 

Karl Petersson   

Yeah, yes. 

 

Mark Stiving   

Yeah. And I guess that’s no different than advertising to an end customer. If I see a Bacardi ad you’re trying to sell to me so that I go to the store and buy it, who bought it from the distributor who bought it from you? 

 

Karl Petersson   

Yeah. Yeah. The challenge there is, if you’re a spirits company and you hold a bunch of brands, you want of course your brand to succeed, you’re investing so heavily behind these brands building value perception with the customer, with the consumer, and then you come to the groceries – they don’t have to be aligned with what you want.  

So the amazing brand you have, might not be perceived amazingly in their eyes. 
And a big piece here is, sometimes a chain will go into margin compress, because if they have a hot price in this product, they can put it in an advert and people will walk into the store to buy this awesome deal on the spirit bottle, and then you get an amazing pull through without having to invest heavily yourself to get to a price point.  

So that’s an interesting part of the negotiation is, do you have a brand that’s strong enough to make a chain compress on their own margin just to get that hot price point? 

 

Mark Stiving   

So I assumed Bacardi’s a big enough brand in a lot of places that you could actually convince a grocery store or some retailer to say, if you give a big discount on Bacardi rum today, you’re going to bring people in and they’re going to buy more groceries, or more of your other products. So it’s almost like a loss leader, and you’re trying to convince them to take your product as a loss leader. 

 

Karl Petersson   

Yeah, and I should mention also, Bacardi has a portfolio across all different spirits types. So some of our products can be used by our groceries as a loss leader. Some of them can be used like that, and some other products, like your cordials, or your liquors, they will always have that full margin. 
And you’ll see them on the shelf and will never do anything, you know, interesting. They’ll just be there. But the interesting part is these more hot brands, how can you optimize them? 

 

Mark Stiving   

Yeah. Does Bacardi have any Bourbon lines? 

 

Karl Petersson   

Yeah. Angel’s Envy. Yep. And when you get into Bourbon and aged spirits, it’s another interesting trick as well, you might have a brand that’s booming. And there’s a ton of demand for it. But, you don’t have enough liquid. 
And you can’t just turn it on, you need it to age in the barrels properly. So then you get into this interesting concept where, if I have, if I only have a little amount I can sell now, do I go out and sell that at Costco, club, retail? And then boom it’s gone? 
Or do I try to put it into the right restaurants, bars, nightclubs, so it maintains a presence in the minds of the customer until that day when I have more, more liquid to sell them? 

 

Mark Stiving   

And so if you’re gonna age it for 12 years, then the decisions you made 12 years ago dictate how much volume you have today? 

 

Karl Petersson   

Right? Exactly. 

 

Mark Stiving   

That’s pretty neat. 

 

Karl Petersson   

Yeah, and a sales team might want to just get it sold to make their life easy, so they can go on and work on the next product; but a marketing team will, of course, want to put it in the right venues, the right spots to maintain that brand value.  

 

Mark Stiving   

Nice. I know that you don’t get to set pricing beyond the distributor, but how do you influence pricing beyond the distributor? 

 

Karl Petersson   

It’s a little bit different by state. So, some states you can influence by giving coupons or scans to the end consumer. So when you go into a store, you might see a hot price point and that price point could be driven off of a scan. 
So when you scan the item for the register, you get an additional discount and that comes directly or could come from the supplier; but in other cases like the general case, how do you work with the retail – this chain retail. 

The best way I’d say it is to build a strong plan together, build a strong plan, far into the future, many months into the future. If you hit these brackets, you can run these price points, you’ll have this pull through, you’ll make this GP, and you settle the customer and the whole trade into a stable way of working with hot price points. 

That to me is the best practice. You can also come in and you want to close your year and you’re desperate and you throw in discounts, and you load up the chains heavily with a bunch of products they will sit on for many months, and then you need to sprinkle scans to get that inventory down. Those are two extremes. If I can do it. 

 

Mark Stiving   

Yeah. And so it almost sounds like what you’re doing is playing the role of, almost like a category manager, but you’re going out and watching. Here’s what the retailer’s neighborhood looks like, here’s what the volume is that you should be moving. If you behave in the following ways, then we’ll probably be able to move this much at these price points. 

 

Karl Petersson   

Yeah. Yeah, that’s right there is – there’s so much data on this side of the business in the grocery side of the business, so much data. So we can predict very, with high accuracy that if this chain runs this price point this week, we should get this unit pull, give or take. 
And then we set as a target. And we work together with the sales team to keep the chain at that price point. And we look at how reality comes in and matches our prediction. 

 

Mark Stiving   

And this is just fascinating, isn’t it? 

 

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Mark Stiving   

So the thing we haven’t talked about, which probably has a big impact as well, is your competitors’ pricing. And so how do you take that into consideration as you’re working with the retailers? As you’re thinking through the right price points? 

 

Karl Petersson   

It’s, you can think about it, different levels of sophistication, the classical one is to say, ‘Oh, this other brand, they’re doing a $14.99 and we’re at $19.99 We’re dying, come on, we need to drop our price.’ Like you can always talk about your competitors with the latest hot move they’re doing. And the sales team might come with that information to you and tell you like oh, we’re dying and we’re not going to make our goal.  

That’s a low, low sophistication of using competitor intelligence. Then you can use, in many markets you have, Nielsen data, and you can see the sales and volume pulls of your competitors. So, the analysis you do on your own brands, you can look at similar competitor brands as well.  

You can typically can find a profile of how these suppliers… How are they working, how are they finding their pricing strategy. Many times when we’ve done this, we’ve found that it looks kind of chaotic, some suppliers will have a very tight, clean strategy. You can see Wow, these guys, they have a tight idea what they want to do – other ones more chaotic.  

And often we need to find our own strategy. We build our own path of, ‘Okay, this is how I want to push our brand. These are the key moments throughout the year we want to come down in price.’ And we will look at competition but, we won’t necessarily follow them. 

 

Mark Stiving   

Yeah, do you track whether your competitors respond to your price changes or not? 

 

Karl Petersson   

Yeah, we can tell like, if we change our strategy, we will want to look at it. Every week it’s in the market. And we’ll look at what competitors are doing as well. So yeah, we’ll look at that. 

 

Mark Stiving   

Yeah, coz I always find it interesting that if, let’s say that we lower our price and the competition says okay, now I have to lower my price to go follow. Would they follow if we raised our prices?  

 

Karl Petersson   

Yeah.  

 

Mark Stiving   

And I always find that fascinating. 

 

Karl Petersson   

Yeah, and I’d say that an interesting part about this business is, if you go out and raise a price, you typically want to do a big increase. So it’s not that another supplier might not detect it, and it can go many months before they see it.  

And then it will take them many months to figure out, ‘Okay, if they’re doing a price increase, maybe we’ll do a price increase.’ So, many times, you might see a decision you’ve made, a little bit in isolation – you don’t really detect in a big herd mentality. 

 

Mark Stiving   

So what that says to me is that your competitors aren’t closely watching your prices to see what you’re doing. 

 

Karl Petersson   

Yeah, you could say that.  

 

Mark Stiving   

I once worked for a firm where we were tracking competitors prices regularly. Right? We would know when they changed prices so that we could decide what we wanted to do, if we wanted to make a move, or we could see if they were following us or not.  

So it was pretty interesting. What’s it like then – you can only set distribution prices here, in the rest of the world, can you set other prices? 

 

Karl Petersson   

Yeah in Europe, you can set the pricing to your customers, so you don’t have to sell for that distributor tier. So you can go and sell directly to your customers, groceries, nightclubs, etc. 

 

Mark Stiving   

Can you sell direct to consumers there as well? 

 

Karl Petersson   

No. I don’t know of an example of selling direct. 

 

Mark Stiving   

Okay, so we’re selling direct to the end retailer, essentially. To the end reseller. Nice. And so that means you have more influence over the end customer price, but you still don’t control that price. 

 

Karl Petersson   

Yeah, you’re still selling it to someone who will in turn sell it to the customer.  

 

Mark Stiving   

Okay. Cool. And so, whether it’s in the US or Europe, do the resellers have a consistent margin, that they say, ‘Hey, this is the margin I have to hit. This is the price I want to charge for it’, or how does that conversation go with a reseller? 

 

Karl Petersson   

So reselling meaning, distributors, or like the grocery or nightclubs?  

 

Mark Stiving 

All three would be great.  

 

Karl Petersson   

If we work on distributors, they want to of course, like anyone else want to make money, and they’re in demand in the middle and they could easily get squeezed.  

So, they’ll look at trying to make moves that will allow them to be profitable, even in strange, like configurations where you need to go deep or etc, they’ll need to protect their margins, and there’ll be a good partner with you when you understand their needs, and you can make them comfortable from their business perspective.  

 

Mark Stiving   

Let’s pause it for just a second. Back when I worked with distributors, they said to us, essentially, look, we need 20 points, 24 points a margin depending on the product, and what we were going to go do.  

And they essentially dictated to us what their margin was going to be. And so we would set their price, so that the price they sold out at, that would be the price we wanted the next level to see.  Do you guys think of it that way too? Or does it behave differently in your distribution channel? 

 

Karl Petersson   

It’s not, there’s a lot of discussion, like, you can’t really say, ‘Okay, if I have my price is x, I know, I’m gonna get y out of the distributor.’ There’s a lot of talk in between there. If you want to run a hot deal, you typically can’t just say, ‘Okay, now this is gonna be my price for two months’, and then you can predict that automatically, they’re gonna run something based upon them.  

So, today, there’s a lot of discussion and negotiation on that. And many times when you come with a hotter price, since the supplier and distributor work tightly, this will also change the sales goals. So if you want to run something hot, everyone wants a lift as well.  

And sales goals – so now you’re talking to sales as well. So it’s many time is kind of involved when you want to change anything, you need a lot of people aligned with your change. 

Mark Stiving   

Okay, so you don’t control the prices that the distributor sells out at. But you try to negotiate with them on those prices, and so you give them price points. And it’s almost exactly like the retailer conversation we had earlier, where you’re trying to build the best business for the distributor, and for you at the same time. 

 

Karl Petersson   

Right. Yeah, exactly. And so you have that conversation with a distributor, and you have a similar one with the retailer. And you synchronize across all of those for it to be effective. 

 

Mark Stiving   

And so it sounds like you guys are essentially modeling the entire industry, based on what we think consumers are going to do at the end when they see certain price points at certain times of year. That is just fascinating! 

And so now you have to coordinate all of the different players. We haven’t talked about nightclubs at all. Tell me about nightclub pricing. How do they do this? What are they thinking? 

 

Karl Petersson   

So nightclubs, we bucket it on premise so, nightclubs, hotels, restaurants, bars. And for those accounts, you will see some interesting stuff – like you won’t, it’s not only about the price, and that comes with a super low acquisition cost, and then someone buying a ton based upon it.  

There are other things as well as… if you can come in with a cool product, and you can also drive some interesting events or partnerships together with an account, that can make things happen. So if, from a suppliers perspective, you want to build your brands, you want to build the right places, the right restaurants, the right venues.  

And if you come in and do events, together with an account, then they’ll also want to use your product. And then it’s not necessarily about exact product cost. It’s more about the partnership of building a brand together. 

 

Mark Stiving   

And so once you do the events and you build the brand, does the brand live on in that retail outlet or in that on premises outlet spot? 

 

Karl Petersson   

Well, you can find both examples there. So if you have, if you build a real partnership with accounts, and you have a salesperson that comes back and nurtures that partnership, yes, then they’ll keep on using the product.  

And it will be successful. But there are other cases where for instance, if you want a menu placement on a drink list – you come into a bar and see a menu of drinks and you select one drink. Sometimes those drinks flip super fast, like they’re going around super fast, because they can get small partnerships out of just flipping a drink.  

And that doesn’t really build brands over time. So, that’s something to look at from a pricing perspective. If we’re investing into these accounts, is it for a sustainable partnership, or is it just for the next two weeks and then they’re off to something else? 

 

Mark Stiving   

So are we just going to get a big hit, or are we going to actually try to build a brand that lasts, in those locations. And so those menu items, is that almost like paying for shelf space at a retail outlet? You’re paying to be at the top item on the drink list? 

 

Karl Petersson   

Yeah, there is no pay to play. But, like if you have a cool cocktail, you’ve you come up with your mixologist and your brand team and the account likes it. They have a cost of reprinting their menus, so you can cover those things, but there’s no pay to play per se. 

 

Mark Stiving   

Oh, it’s illegal. That’s the impression I’m getting. 

 

Karl Petersson   

Yeah, you can’t do that. You can’t. You can’t pay an account to use your products. But you can, you can work together to have good events. 

 

Mark Stiving   

Hmm. I did not know that. It’s always cool learning new things. Yeah. Okay, so I’m a huge fan of understanding price endings. My dissertation was actually in price endings so 99 cents or, $1 even. And I’m just curious, in a bar, do they use price endings for drinks? And does it make sense to use price endings for drinks? 

 

Karl Petersson   

Typically, I haven’t researched that, specifically, but typically you wouldn’t see price endings. I mean, you’d see even numbers. Yeah. Oh, 13, 14. That’s the most common I’ve seen. I don’t – I think it’s just like an industry kind of practice. Do you have any ideas like could it be a better way of doing it?  

 

Mark Stiving   

Maybe it’s not better. The reason 99 cents typically works is because people think it’s a lower price. And because we’re lazy subtractors. So if I were to compare something that was $7.99 to something that was $10, I’d probably think that was a $3 difference. 

 

Karl Petersson   

Yeah. And in the retail space we always almost always try to hit even 99’s. So on the shelf, we’re always talking about 99’s. 

And we’re also talking about how, you could run – you could have a product at, like a $20.99 is sort of like a no man’s land, versus like, if you run something 99 that could pick up a lot more interest and pull, compared to $20.99. And if you wanted to $20.99, you could just as well go up to 2$1.99 because it’s not a really attractive price point. 

 

Mark Stiving   

Isn’t that fascinating? How people don’t see the difference? The way people make decisions? 

 

Karl Petersson   

Yeah.  

 

Mark Stiving   

This is just so incredibly fun. Karl, I’m gonna have to wrap this up. But I gotta ask you this one question. What’s one piece of pricing advice that you would give our listeners that you think could have a big impact on their business? 

 

Karl Petersson   

I would pull out a piece of advice from what we just talked about – how I have all these different players need to coordinate to make things happen. And in my past life as a consultant as well, I would say if you want to really push pricing all the way through, and make it hit your bottom line, work and coordinate across all players that are relevant for that decision. 

 

Mark Stiving   

And I think that’s crucial. And actually, there was another question I wanted to ask. And I’m going to jump backwards for a second. Do you think that smaller spirits companies are able to do what Bacardi can do? 
I mean, can you do that coordinating all these players because you’re a decent size? And do you think it takes that size to make that happen? 

 

Karl Petersson   

Yeah, there’s definitely a size component to it. Just by having a small brand, by virtue, a chain or retail accounts, if they put in an ad, some people will come into the store because this new liquor is happening. 
So it’s not that you’re a small company, it’s just that you might have a brand that doesn’t have a lot of value. That will change the kind of negotiation you can do. It’s not really the size of the company is more of value behind your brands. 

 

Mark Stiving Fascinating. Carl, thank you so much for your time today. I’ve just enjoyed this. If anybody wants to contact you, how can they do that? 

 

Karl Petersson   

I’m on LinkedIn. Karl Petersson. 

 

Mark Stiving   

All right, and that’ll be in the show notes as well, so you’re able to find it. Episode 78 is all done. Thank you guys for listening. Every week I asked you for a review. So if you wouldn’t mind please, if you enjoyed this, give us a five-star review. These are very valuable to us.  

Don’t forget, we also have a free community at championsofvalue.com, and at that site, you’ll be able to get access to all of the things that I publish – my memes my blogs, my videos, my podcasts. And if you have any questions or comments about pricing, or the podcast, feel free to email me mark@impactpricingcom. Now, go make an impact! 

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