Growth Strategy: Pricing Strategies for Farm and Food Business
For a small business owner, understanding how to set prices effectively 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 overestimating the amount of product they expect to sell. A sensitivity analysis will help you determine your break-even price relative 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 in your business to gain market share, retain existing customers, or be profitable? Your business goals should be clearly laid out in your business plan, and having a clear understanding of them 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 setting. 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, it is imperative to understand 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 customer segments, set comparable prices, and adjust as necessary to market fluctuations.
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, including cost-plus pricing, subscription pricing, and 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 prices with the smallest leftmost digits are perceived 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 fewer syllables and those written in a smaller font are perceived as lower than numbers with more syllables or written in a larger font.
Tip 2: Make It Easy
Always make your prices as easy as possible to read, understand, and assess. A clear, readable font or handwriting is key, and if you are selling your product in multiple units (e.g., apples by a smaller carton and a large crate), display the prices of both units to avoid having your customer do the math. Additionally, think about whether 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 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 to similar products from the supermarket, etc. Also, research shows that when prices are listed in a row, from high (top) to low (bottom), it will encourage customers to spend more money than when prices are listed in the opposite order.
Tip 4: Use Visual Cues
Presenting strong visual cues is an important part of several marketing strategies and can also help increase your customers' perceived value of your products. It is usually a good idea to use strong cues to indicate sale prices (e.g., a different color or bold font) while keeping the original price visible. Also offer visual cues that highlight the effort that went into your product, such as photos of your farm, your process, raw materials, or tools. All of these images will conjure a more realistic picture of the labor and love that went into your product and help customers see its value.
Tip 5: Simplify
No one enjoys parting with their money, even when paying for products they truly want. This is referred to as the "pain of paying," and the more you can do to reduce this "pain," the more it will 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 pricing process can be much more of an art than a science. With all of these considerations, there are often many judgment calls to make in the moment, based on your intuitive sense of your product and your customers. However, building on a strong knowledge base 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.
Additional Articles on Pricing
Product Pricing: Choosing a Pricing Method
Understanding Pricing Objectives and Strategies for the Value-added Ag Producer
