Growth Strategy: Pricing Strategies for Farm and Food Business

For a small business owner, understanding how to appropriately and smartly set prices is a key skill. The prices you set for your products affect your customers' likelihood to purchase your products, their perceived value of your products, and, of course, your total profits. So, how do you arrive at the right price?

The first step in finding your product's price is to determine your break-even price, or the minimum price that you can possibly sell the product for in order to cover the costs of producing it. Be aware that your costs of production, and therefore your break-even price, may change depending on how much product you plan to sell! It is important to plan realistically here; a common mistake made by new business owners is to overestimate the amount of product expected to be sold. A sensitivity analysis will help you determine your break-even price as it relates to your projected sales.

Once you know your break-even price, you can start thinking about the pricing method that will best fit your business goals. For example, is your highest priority with your business to gain market share, to retain existing customers, or to be profitable? Your business goals should be clearly laid out in your business plan, and having a clear understanding of your goals will help you determine which pricing method will work best for you and your business.

Now, you are ready to begin considering your customers and how their needs will factor into your price. What are your customer demographics (age, gender, race/ethnicity, income level, geographic location, etc.)? What are your customers' values and lifestyles? What are they willing and able to pay? How important is price in their purchasing decisions? Do your customers tend to be repeat customers or one-time customers? Also, imperative to understand is your competition. Who is selling similar products in your area? What are your competitors charging for their products? A thorough understanding of the competitive landscape will give you an advantage by helping you identify unmet needs or customers, setting comparable prices, and adjusting as necessary to fluctuations in the marketplace.

At this point, you can finally start delving into particular pricing methods and choose the method that is right for your product. There are many pricing methods to choose from, from cost-plus pricing to subscription pricing to target return pricing (see figure 1).

Once you've arrived at a general pricing strategy that you will use for your product, there is a large body of research to show that the specific number that you land on for your price, as well as the way that your prices are presented with your product, can have a large impact on how your customers perceive them! This is known as psychological pricing, and the following tips can be applied in any situation as best fits the needs of the seller and consumer.

Tip 1: Smaller is Better

Studies show that pricing with the smallest leftmost digits register in our brains as significantly smaller. For example, the perceived difference between $3.00 and $2.99 is much greater than $0.01. This is known as the "left digit effect" or "charm pricing." Additionally, numbers with a smaller number of syllables and numbers written in a smaller font are perceived as lower numbers than numbers with a high number of syllables or written in a large font. May sound strange, but it's something to consider!

Tip 2: Make It Easy

Always make your prices as easy as possible to read, understand, and assess. Clear, readable font or handwriting is key, and if you are selling your product in multiple units (i.e., apples by a smaller carton and by a large crate), display the prices of both units to avoid making your customer do the math for themselves. Additionally, think about if you want your customers to see your product first or the price first. In other words, do you want them to see your product before they know the price, or after? These distinctions create subtle differences in how our brains make purchasing decisions!

Tip 3: Make It Feel like a Deal

There are many ways that you can use pricing to make your product feel like a great deal to your customers. It can be helpful to emphasize gaps, in price or in quality, between your reference points. This could be for a sale price by keeping the original product price clearly visible, in comparison to a competitor's price, or in comparison to similar products from the supermarket, etc. Also, research shows that when prices are listed in a row, listing prices from high (top) to low (bottom), will encourage customers to spend more money than when prices are listed in the opposite way.

Tip 4: Use Visual Cues

Presenting strong visual cues is an important part of several marketing strategies, and it can also help to increase your customers' perceived value of your products. It is usually a good idea to use strong cues to indicate sale prices (different color, bold font, etc.) as well as to keep the original price visible. Also offer visual cues that point to the effort that went into your product, such as pictures of your farm or your process, raw materials, or tools. All of these images will conjure in your customers' minds a more realistic idea of the labor and love that went into your product, and help them to see the value in it!

Tip 5: Simplify

No one enjoys the experience of parting with their money, even when paying for products we truly want! This is referred to as the "pain of paying," and as much as you can do to reduce this "pain" will serve to benefit your customers and lead to a positive payment experience. How can the interaction be as quick as possible? Do you offer multiple payment options (cash, card, etc.)? In the case of a farmers market, this tip could outweigh the "charm pricing" technique as dealing in small coins for change can take much longer than working only with dollars and quarters.

In the end, the process of pricing can end up being much more of an art than a science. With all of these considerations, there are often many judgment calls that need to be made in the moment based on your intuitive sense of your product and your customers. However, coming from a strong basis of knowledge and applying some structure to this process can help you arrive at prices that are well thought out and meet the needs of your business and your customers.

You Can Find More Articles on Pricing Here

Product Pricing: Choosing a Pricing Method

Understanding Pricing Objectives and Strategies for the Value-added Ag Producer

Product Pricing: What do I Charge?

Price Discounts: Types and Use

This article has been adapted from a workshop series by Penn State Extension Business Management Team called Strategies for Successful Selling and is the first of a 3-part article reflecting the series.

The Penn State Extension Business Management Team offers articles, in-person workshops and online courses in all aspects of farm and food business management.