FOB Pricing Explained

FOB stands for "Free On Board" and represents the price a supplier charges a distributor for one case of product at the point of origin. It is the single most important number in your pricing strategy because every downstream price — landed cost, distributor sell-in, and retail shelf price — flows directly from it.

What does FOB actually mean?

In its original logistics context, FOB designates the point at which ownership and risk transfer from seller to buyer. In the beverage industry, FOB pricing means the supplier is responsible for the product until it is loaded at their warehouse dock or fulfillment center. From that point forward, the distributor bears the cost of freight, insurance, and delivery.

This distinction matters because it clearly separates the supplier's price from the additional costs that affect the distributor's landed cost. A $80 FOB case that requires $4 in freight is very different from a $84 delivered case — even though the distributor's total outlay is the same. The FOB model gives distributors transparency into the true product cost versus logistics cost, and it allows suppliers to quote consistent pricing regardless of where a distributor is located.

How to set your FOB price

Setting FOB is both a financial calculation and a strategic decision. You need to cover your costs and generate sufficient margin, but you also need to land at a retail shelf price that consumers will pay.

Start with your cost of goods

Your COGS per case includes raw materials (liquid, cans or bottles, packaging, labels), production labor, quality control, and any co-packing fees if you outsource production. For a typical craft beverage brand producing a 6×4 case of 12oz cans, COGS might range from $20 to $45 per case depending on ingredients, production scale, and packaging quality. For a detailed look at every line item, see our guide to cost of goods sold in beverage production.

Factor in your operating costs

Beyond COGS, your FOB needs to cover (or contribute to) overhead: rent, salaries, marketing, insurance, compliance, and the cost of capital. Many emerging brands underestimate these costs and set FOB too low, leaving themselves unable to invest in the brand-building activities that drive distributor and retailer support.

Work backwards from the shelf

The most effective FOB-setting approach starts with the consumer. Research what competitive products sell for at retail in your target markets, then work backwards through the margin stack to determine what FOB supports that shelf price.

Step	Calculation	Example
Target retail (4-pack)	Start here	$12.99
Retailer cost per pack	$12.99 × (1 − 0.35)	$8.44
Dist. sell-in per case	$8.44 × 6 packs	$50.66
Landed cost per case	$50.66 × (1 − 0.30)	$35.46
FOB per case	$35.46 − $2.00 freight	$33.46

If your COGS is $28 per case and you need an FOB of $33.46 to hit a $12.99 shelf price, you have $5.46 per case to cover overhead and profit. That may or may not be viable — but at least you know the math before you commit to a price point.

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How FOB flows through the three tiers

Once you set your FOB, the three-tier system applies its margins at each handoff. Understanding this cascade is critical because small changes in FOB are amplified as they pass through the chain.

The amplification effect

A $1 increase in FOB does not result in a $1 increase at retail. Because each tier applies a percentage-based margin, a $1 FOB increase becomes roughly $1.43 more at the distributor level (at 30% margin) and roughly $2.20 more at the retail level (at 35% margin on top). This amplification effect means that precision in FOB pricing is essential — even small rounding errors compound through the chain.

Common FOB pricing mistakes

• Setting FOB without checking the shelf: Your FOB might cover your costs, but if it lands at a retail price that consumers reject, velocity will suffer and you risk losing distribution
• Ignoring freight in the math: Distributors pay landed cost, not FOB. A brand that ignores the freight component will underestimate the real cost to the distributor and miscalculate sell-in pricing
• Using markup instead of margin: Confusing these two calculations leads to underpriced products. At 30%, the difference is over $10 per case. See our Markup to Margin Calculator guide
• Pricing all SKUs identically: Different sizes, formats, and potency levels should have different FOBs. A 16oz single-serve can and a 12oz 4-pack case have very different cost structures and consumer expectations

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FOB negotiation and volume discounts

In practice, FOB is rarely a fixed number. Distributors may negotiate lower FOBs for volume commitments, new market launches, or promotional programs. Common structures include tiered pricing based on monthly or quarterly case volumes, seasonal promotional FOBs for key selling periods, and introductory pricing for new market entries with a defined step-up schedule.

The key is to build these variables into your pricing model before you agree to them. Alculator makes it easy to model different FOB scenarios across your full portfolio — simply change the FOB value for any SKU and see the immediate impact on every downstream number.