Question of the Week
Answer: The number-one factor in effective pricing is quantifying your costs and selling above those costs. It can be difficult to quantify production costs accurately and estimate profits from sales, but knowing production costs is key to staying in business. You must make sure that you’re making more than you're spending and also know whether your investment in time and money is providing an adequate return.
Organic pricing strategies vary between farmers. Some farmers quantify production costs and add a price margin to assure a reasonable profit margin. Some price according to local market prices. Most farmers likely use a combination of both approaches. Pricing also depends on what market outlet you use—whether you're selling directly at a farmers market or to a retailer like a grocery store or restaurant.
Several factors should be considered when developing your pricing strategy
• Operations, overhead, equipment, depreciation, and marketing costs
• Labor wages
• Profit desired
• Competitors’ production costs and prices
• Demand, customer motivation, and priorities
• Brand, image, quality, and reputation of your products
Don Hofstrand, retired agriculture specialist for the Ag Marketing Resource Center at Iowa State University Extension, stresses three factors to consider when deciding on a pricing strategy. First, consider the cost of producing and marketing your product, which is the minimum price you should set for your product. Second, consider what the buyer is willing to pay. For instance, if you’re direct marketing sides of beef or CSA shares, talk to consumers about what they’re getting and what they will pay, while explaining your costs. Try and negotiate what is reasonable for both parties. Finally, consider competitors’ prices by looking at market prices at venues similar to those you’ll use.
Mary Peabody, from the University of Vermont Extension and Director of the Women’s Agricultural Network, presented a webinar titled Pricing for Profit. The webinar offers information on identifying costs, factors that affect pricing, and pricing survival tips. Peabody's advice is to record costs consistently over time so that you know your expenses and how they change, and also to record all time put in by keeping a labor log. Peabody feels that operating expenses and overhead should be the biggest determinant of pricing if you want to be successful. "Don’t set prices based on others’ prices!" Peabody says. Thinking you have to price competitively with, for example, the price in a co-op isn’t realistic; a small, beginning farmer cannot compete with large producers who have paid off start-up costs. Instead, find different markets or find ways to capture greater value for your products using marketing tactics that aren’t obvious. One example is to use different packaging or bundling.
There are other factors that Peabody says impact pricing:
• Harvesting costs
• Quality and selection of products
• Location and market
• Customer income/demographic
• Sales volume offered
• Supply and demand in your market
• Market price in your area
Your pricing strategy speaks volumes about your business. You will quickly earn a reputation as fair and ethical if you have a good pricing strategy. The alternative is to be known as cheap, dishonest, and desperate among consumers and competitors. Your pricing strategy should be consistent, accurate, and reliable. Many people want farmers to have a good quality of life and are willing to pay a fair price for quality products, so price according to what you are spending and add a reasonable markup.
There are some pricing strategies that may help if you are charging a fair price but not making enough profit:
• Produce more
• Focus on the products that are generating the most profit
• Decrease expenses
• Redefine your niche, customers, or marketing (repackage products in different sizes or by the bunch to get away from the same volume as competitors)
To learn more, consult the ATTRA publication Understanding Organic Pricing and Costs of Production. This publication provides resources to compare organic and conventional agricultural prices, discusses organic production costs, and offers tips on how to set organic crop prices. Several case studies are included that summarize insights gained from successful organic farmers and ranchers.
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