Last week, we took a look at the most-oft used pricing strategy - competitive pricing - the act of glancing at your neighbors' tables at the farmers' market and pegging your price to something comparable. As we discussed, this strategy leaves much to be desired, mainly because you're using someone else's factors to influence one of the biggest drivers of your business.
This week, we're going to get a little more intimate, by looking inward and taking a good, hard look at our own business with a cost-plus pricing strategy.
Cost-plus is a popular pricing strategy for a couple of reasons: it’s a low-risk pricing strategy and can be factored pretty easily. It does however, as the name suggests, require that you know the price of your individual crops. If you don’t, make it an immediate priority to figure out the cost of production of your five highest volume crops.
A cost-plus strategy is exactly what it sounds like – a calculation of the costs of production & distribution (don’t leave things like gas or CSA boxes out!), and add a percentage (typically 25-33%) to the cost, in order to cover over-head costs* and provide a profit.
A typical cost-plus calculation might look like the following:
I’ve planted 400 bed feet of kale, which yielded 300lbs.
The cost to produce the 400 bed feet of kale was $700.
I’d like my revenue on kale to be 133% of its cost, or $930.
Each pound of kale is $930/300lbs. or $3.10
But, what if my costs went up to $850?
Simple…. My revenue now has to be $1130 to make the same rate of return, and I have to charge $3.75.
If you keep the price the same when the costs go up ($3.10/lb.) on costs of $850, you’re only making $80 (or 11%), and the kale isn’t providing enough revenue to cover your overhead costs.
The cost-plus model is a good way of making sure that revenue exceeds costs (as long as all of the costs are being counted).
Pros: Priced to cover cost of production & distribution, and is a more accurate price, based on individual farm characteristics.
Cons: Limits margin/profitability by basing it on costs, instead of a more accurate indicator, consumer demand and the value that consumers assign to the product. And, it can be difficult to isolate costs by crop.
A combination of cost-plus and competitive pricing strategies will work for many products, particularly those that are plentiful, on the lower-side of the value spectrum, and ubiquitous (think zucchini & summer squash).
Next week, we'll be taking a look at value pricing strategies. Without the right tools, they can be hard to get a handle on, but with the right tools, they can transform your business.
*These vary widely from farm-to-farm, and how much “plus” you’ll need depends on how much volume you sell across your entire business to cover the over-head costs.