FOB vs. Delivered Pricing: Why the Choice Gets Harder as You Scale
Back in May, I asked Fred Schroeder if an emerging brand should default to FOB or delivered pricing. Fred said most brands can start FOB, then move to delivered later provided they give distributors enough lead time. He also said it’s one of the key decisions a brand makes during an early growth phase.
In one or two markets, both pricing models work out around the same because your warehouse is nearby and freight is small. It’s growth that pulls them apart. Further down in this piece, I explain how a brand can lose $0.75 on every case through freight it never sees as a line item, plus how a Walmart deal that looks $1.00 off is in fact $5.50 off. Both come down to two formulas and one short comparison, and they’re exactly the kind of problems I love to solve.
I’m Pedro, CEO of Cultivar and angel investor. Fred worked at Procter & Gamble and in Coca-Cola's Minute Maid division, then led two trade promotion software companies. Today he's a fractional trade manager for small brands, analyzing their trade spend retailer by retailer. He covered both pricing models during this summer’s trade spend webinars.
FOB vs. Delivered Pricing: What Each Term Means With UNFI and KeHE
You've already made this choice in miniature every time you quoted one price to a retailer that picks up at your warehouse and a different one to a distributor that wants it delivered. Delivered pricing and FOB pricing are two different answers to who pays the freight.
Delivered pricing means you quote one price for a case landed in the distributor's warehouse, with freight already built in. If the distributor sends its own truck, you give it a pickup allowance, a per-case credit for doing the hauling.
FOB pricing, short for free on board, means your price covers product at your dock. The distributor picks it up or pays your standard freight rates to its warehouse, and those rates change with distance.
Freight-in, in Fred's usage, is the freight you build into a delivered price.
Freight-out is what you actually pay the carrier. Fred's chart assumes the two offset each other, and any gap between them lands on your margin.
Cornell Law's free on board definition adds the legal side. Under FOB shipping point terms, title and risk of loss pass to the buyer at the carrier, so the pallet is the distributor's responsibility once it leaves your dock.
How Delivered Pricing Puts the Brand in Control of the Shelf Price
Your delivered price becomes the published number UNFI or KeHE starts from, and every retailer downstream can see it. Sell a case to UNFI at $40 delivered, Fred's example from May 6, and $40 is the base for the roughly 8% delivery upcharge a retailer like Whole Foods pays and for every promotion you later fund. With delivered pricing you shape the wholesale pricing retailers see and can predict what trade does to the shelf price, the strongest argument in the FOB vs. delivered pricing decision.
Under FOB, Fred explained on August 19, UNFI and KeHE set your price market by market based on how they internalize their own freight when they pick up, so the starting price in Denver can differ from Atlanta's without you deciding either. FOB swaps that control for geographic flexibility, a fair swap in two markets and a harder one in 12.
For what a brand-new market asks of your pricing and your books, read the UNDONE U.S. expansion story, a launch that was up and running in under three months.
Where Freight and Distributor Discounts Live on the Gross-to-Net P&L
Freight sits near the top of your gross-to-net P&L, the statement that walks a case from its published price down to what you net, and it's where the FOB vs. delivered choice first shows up in dollars. The two formulas below are built to match Fred's description, and the numbers are illustrative.
Delivered price = FOB price + freight-in per case
Fully loaded case rate = delivered price − freight-in per case − trade spend per case − distributor discount (if any)
Your fully loaded case rate is what a case nets you on an FOB basis, which is the footing every account has to share before you can compare them.
One 12-count case Per case
FOB price $32.00
Freight-in, the freight you build
into the price +$4.50
Delivered price, UNFI's published
starting point $36.50
Freight-out, what the carrier
actually charges on that lane $5.25
Gap that comes out of your
margin on every case $0.75
Give freight-out its own line and you'll see that $0.75 in a week. Fold both into one freight line and it can hide for a year.
Fred flagged one more line on August 19. Some older brands give a distributor a percentage discount to bring its retailers level with what a direct-buying retailer in another channel pays, and that discount comes straight off revenue before any trade is counted.
Setting the pricing model takes an afternoon. Checking every deduction against it for the next 12 months is the part that slips when four people are also running sales, and it's the part our trade spend management service takes off your plate, line by line, with mismatched chargebacks disputed before they eat the margin you just protected. Our take on why software alone won't protect margins explains the difference a person makes in that process.
The Walmart Parity Rule That Changes at National Scale
On August 19, Fred described a large retailer in Arkansas that found out what a growing brand's case rate came to at Whole Foods. Walmart doesn't care that you reach Whole Foods through UNFI. When product leaves your facility, Walmart expects its deal, with every trade dollar loaded in, to be equal to or better than anyone else's, and in Fred's words "it definitely should be equal to."
Compare both accounts on the same freight basis.
Whole Foods through UNFI starts at $36.50 delivered. Strip out the $4.50 freight you built in and the case sits at $32.00 on an FOB basis.
Subtract $5.50 of trade per case for Whole Foods promotions and you net $26.50.
Walmart, buying direct on FOB terms at $33.00 with $1.00 of trade, nets you $32.00.
Whole Foods gets a $5.50-per-case better deal, which is the gap Walmart will ask you to close.
Compare delivered price to quoted price without stripping freight and the gap looks like $1.00, which understates it by $4.50. That comparison is where FOB vs. delivered pricing carries its highest stakes. The FTC's Robinson-Patman Act guide adds a legal reason for care, because the law restricts charging competing buyers different prices for the same product unless the difference is cost-justified or made to meet a competitor's offer. Talk with your attorney, and plan parity in before Walmart raises it.
Make the Pricing Choice With the Full Picture in View
Pricing, freight, trade, and cash flow are one decision wearing four names, so you gotta make it once, with all four in view. Fred's last slide in August named two things to watch as you grow, distributor pricing and making sure trade stays "fair and equitable," and the spreadsheet that covers both is the one with two freight lines on it.
If you're about to sign terms with a new distributor, y'all should run the pricing math first, and I'd love to do it with you. Build your pricing model with Cultivar and we'll put freight-in, freight-out, trade, and every retailer's case rate on one gross-to-net P&L, so the number you quote UNFI or KeHE is one your margin can live with at 10x the volume.
FAQs About FOB vs. Delivered Pricing
Does UNFI Charge More for FOB or Delivered Pricing?
UNFI's cost to you under either model is the freight, so the real question is who pays it and who sets the price. Under delivered pricing, you pay freight to UNFI's warehouse and your one case price becomes UNFI's published starting point. Under FOB pricing, UNFI covers the freight from your dock and builds its own cost into prices that can vary by market.
How Do I Calculate a Pickup Allowance for KeHE?
Start with your freight-in, the per-case freight you built into your delivered price for that KeHE warehouse, because the allowance is the credit you give KeHE when it sends its own truck and you no longer pay that freight. Build in $4.50 a case, and a $4.50 allowance leaves you at your FOB price.
Does Walmart Require the Same Case Price as Whole Foods Gets Through UNFI?
In practice, yes, Walmart expects parity. It measures your fully loaded case rate, the price of a case with every trade dollar included, and expects its deal to be equal to or better than the one Whole Foods gets through UNFI, compared from the moment product leaves your facility. Fred Schroeder's words were that it "definitely should be equal to."
How Much Lead Time Do I Need to Switch from FOB to Delivered Pricing with a Distributor?
Fred says you can change "down the road with enough lead time," and he gave no fixed number of weeks. Treat the switch as a scheduled project with each distributor, with a start date, a new price sheet, and enough notice to update published prices and any promotions already booked against the old ones.
Related Resources
CPG financial forecasting service models a pricing change across every distributor and region before you commit to it.
What a deduction dispute is worth converts each recovered deduction into days of cash runway.
Build GTM channels into your financial model gives every sales channel its own freight, trade, and margin lines.
