Power of Pricing!

Understanding our cost structure and desired margin helps us identify appropriate pricing methods and their relationship to profitability.
Power of Pricing! - Articles
Power of Pricing!

Pricing Power

Agricultural marketing activities account for over 17% of the nation's gross national product and seventy cents of every consumer food dollar goes to cover marketing expenses. Being involved in marketing helps producers decide what to produce and when. Clearly, performing some marketing chores is a possible source of increased revenue.

According to academics, there are nine functions of marketing.

  • Buying,
  • selling,
  • storage,
  • transportation,
  • processing,
  • grades and standards,
  • financing,
  • risk taking and
  • market information

One aspect of marketing that generates many questions is the function of selling. "What should I be pricing my melons at?" is heard on many visits to local farm markets. Looking at the above list - of the nine functions of marketing, only selling generates cash. This tells me that price is a significant part of your overall marketing plan.

Cost of production is the academic basis of calculating price. However, pricing must be flexible enough to meet the competition and adjustable enough to changing market conditions. As an integral part of the marketing plan, price must be set to meet the sales and financial goals of the enterprise. Having a clear idea of your marketing objectives and the target market for your products makes selection of a "proper price" easier.

Cost Plus Method

Price mark-ups are an area of great confusion. Mark-up should be given as a percent of the selling price. Net profit is greatly effected by calculating your mark-up incorrectly. Cost plus mark-up equals selling price. Here's an example. Let's say my marketing plan calls for a gross profit goal of 20%. Let's say a watermelon costs me $1.00. The proper selling price is $1.25, not $1.20. The cost of $1.00 plus mark-up of $0.25 equals selling price of $1.25. This represents a 20% gross margin on the selling price. A common incorrect method of calculating margin would be to take the cost at $1.00 add 20% and get a selling price of $1.20. The trouble with this incorrect method is when the accounting is done I have received a 16% gross margin, not the 20% called for in my planning.

This cost plus method does not take into consideration the competition. Remember, pricing at the level of the competition reflects the costs and perceptions at other farm markets, not yours. Your price is a result of your costs and the perception of your products by your customers. I suggest to retailers the concept of value instead of the concept of price when promoting to customers. Value includes the product itself in all its freshness and nutrition, and adds customer service, convenience and your status as a food expert. At a market some time ago I over heard a conversation between the clerk and a customer. The customer was agitated over the price of cantaloupes and suggested a neighboring market had prices much lower. The clerk never missed a beat with the reply - "Well, we know the value of our cantaloupes; I guess they know the value of theirs."

The Point Is Profit

We are trying to maximize total profits, not the profit per unit. Are you willing to take a lower price if you could sell more units? The following table gives you a picture of this game. The first row states that if your margin is 10% and you reduce your price 5%, it will take an increased sales volume of 100% to meet your planned revenue goals.

Current
%
Profit Margin
%
Price
Reduction
Required
%
Increase in
Sales Volume
105100
15550
1510200
20533
2010100
25525
251067

An effective pricing strategy depends on four factors.

  1. You must know your cost for each product.
  2. Possible sales response to price change is vital.
  3. What are the costs and prices of the competition?
  4. What are the probable responses from the competition to what you do?

Summary

Proper pricing is essential to long run business success. Pricing is as much a marketing concern as an accounting one and good pricing is a measure of management effectiveness. Good pricing allows a retail farm market to more easily reach their marketing and financial goals.

Authors

Direct to consumer marketing Poultry and meat regulations Farmers Markets

More by Brian Moyer