Awhile back, I got it into my head to draft a brief explanation of pricing strategies, as they pertain to small farmers. I kept meaning to publish it or send it to someone, but life (and the rest of the business of running Cabbige) got in the way, and it sat unread and unloved on my desktop.
No longer! I'm publishing this three part series, which covers the three main pricing strategies that small farmers use (whether they realize it or not): Competitive, Cost-plus, and Value pricing. I go through each one's pros and cons and some tips for employing them effectively.
It's a bit dry (as economics and pricing has a tendency to be), but I hope you find it worthwhile, and, of course, feel free to contact us through the comments section or on the contact us page.
To start out, let's take a look at Competitive Pricing Strategies, or the practice of basing your prices on your peers' current prices.
As a stand-alone strategy, this is probably the most widely-used, the easiest to implement, and, in keeping with the long-standing tradition of effort and value exchanges, the least effective.
Competitive pricing basically involves assessing the quality of your crops compared to your peers’, and pegging your price to the closest matches. There is a herd mentality aspect that prevents anyone from straying too far outside of a range.
The only real inputs for a competitive pricing strategy is a look at the other tables at the market, or a quick phone call to a friend that sells a similar product. Once you figured that out, peg your price to a middle range and get on with your day.
Pros: Low immediate risk, easy-to-implement
Cons: Medium-to-long term profitability risk, low visibility into the health of your business
There are several problems with a pricing strategy that only relies on competitive pricing as an input, but the biggest one is that it doesn’t factor in any of the particulars of your business to determine one of the most critical drivers of your business.
Let that sink in for a minute. Imagine going to the doctor, and s/he used your neighbor’s vitals to determine your health. You could call it ineffective at best and dangerous at worst. It’s the same with relying exclusively on your peers’ prices to determine your own. Farms have different costs and product & planting mix strategies. What if your peers’ price range doesn’t cover your costs? What if you have far more of a particular product than can sell at the price they’ve set? What if no one has raised their prices in 5 years, and the herd mentality is slowly pushing everyone into the red? Without the personal business assessment that Cost-plus and Value pricing strategies require, you could have a very risky lack of visibility into your business.
I know some of you are thinking, “Wait a second! If I charge more than everyone else, I won’t sell as much.” Maybe, maybe not. There’s enough anecdotal and empirical evidence to suggest that relatively small price differences don’t materially impact sales. You know that farmer who charges 25-50% more than everyone else and has a line around the corner? Yeah, we do, too. In There may be less price sensitivity than you think.
More importantly, competitive pricing has a place in your overall pricing strategy, it just happens to come in third, behind Value pricing and Cost-plus, which we’ll be covering next week. Stay tuned...