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Pricing your custom harvesting services is a difficult, yet critical business management activity. Set your prices too high and potential customers may look elsewhere. On the other hand, if you set your prices too low, you may not adequately cover your costs or recoup a sufficient profit. So how do you know if you are setting your prices correctly?
Have You Covered Your Cost of Production?
The first, and key, step in pricing your services is to know your costs. Variable and fixed expenses make up your total cost. Variable expenses, or operating expenses, are those expenses you incur as a result of performing your harvesting activities. Examples of variable expenses include fuel, oil, hourly employee pay, etc. Fixed expenses, also called ownership expenses, will include insurance, depreciation, and other expenses that don’t change as a result of the amount of work performed.
From your annual fixed and variable expenses you can calculate your total cost on either an hourly or per acre base (or another basis if desired). There are numerous guides online that include worksheets if you need assistance in calculating your fixed and variable expenses. Alternatively, you may want to set up a spreadsheet or use some other piece of software to track expenses and calculate cost of production.
There may be other factors such as field size, shape or terrain that may warrant additional adjustment to your prices. Working with small oddly-shaped fields may increase the overall amount of time spent performing your operations over the amount of time spent on one large field of the same total acreage. Any other special considerations or requests by your customer could be handled in a similar manner.
What Are Your Business Goals?
The prices you set for your services should move you toward achieving your long term business goals. Is your goal to grow the business, sustain it, or perhaps prepare for exit? At the same time, consider how you are looking to position yourself in the business landscape. As the low cost provider? As a leader in providing premium service? On the other extreme, perhaps you’re in a situation of short-term survival.
Once you know your cost of production, you can then utilize specific pricing objectives and methods such as profit margin maximization, revenue maximization, partial cost recovery, or quality leadership by incorporating an additional fixed dollar amount or percentage, or setting premium prices that will allow you to achieve your business goals and reflect your market positioning.
What Are Your Customers Willing to Pay?
Understanding your current and potential customers through market research is an important step in setting prices. The most direct way to do this is to talk to farmers about what services they’re looking for and challenges they may be facing in their operations. While some farmers may be reluctant to provide specific a specific price that they would be willing to pay, conversations can allow you to focus in on the service aspects that they value. For example, aspects such as skill and experience, timeliness, cutting edge equipment or technology use, and guaranteed performance can command higher rates. Conversations can take place in person or you can use more modern tools such as social media or other online forums.
What Is the Competition Charging?
A common method of determining the appropriateness of a fee is to look at what your competitors are charging. Many states publish custom rates for a wide range of farming activities. Keep in mind that these rates are averages of collected survey responses, so note how many responses went into calculating the average as well as the fact that you don’t know the location or individual situation of the businesses that responded. When looking at published custom rates, take note of the basis for the fee (acre, hour, bale, cwt, etc.) as well as whether labor, fuel, and other materials are included. Additionally, some states, such as Pennsylvania, distinguish rates based on region to account for topographical and other differences that exist. While you shouldn’t set your prices solely on what your competition is charging, looking at other rates can give you a feel for whether you are in the right ballpark.
What Are You Hearing from Customers?
Finally, current and former customers as well as potential customers can serve as a gauge for whether your services are priced appropriately. What sort of feedback or comments do you get when discussing fees and payment? Do your customers comment on the value you provide to them? Pay attention to body language and speaking tone as it can clue you in to unspoken grievances.
It’s a good idea to also be prepared to explain how you set your prices. Ensure that your customers understand how they’re being charged for the services you’re providing. Some operators may set a fee that’s all inclusive of the operations being provided, while others may separate operations and charge for each on an individual basis. You can do this without divulging specific figures.
Ultimately, your ability to attract and retain customers over the long term will speak to whether your custom services are priced correctly. Your prices should be in line with the quality and level of service that you provide, which in turn should be moving you toward your business goals. Providing a high quality service on a timely basis with consistent communication can, in many situations, be more important than price in a customer’s decision to hire you. The burden will be on you to ensure that your prices match the value you deliver.
Reprinted by permission from the June 1, 2018 issue of Progressive Forage. Copyright 2018 by Progressive Forage.