Retail Farm Market - Pricing

Agricultural marketing activities account for roughly 20% of the nation's gross national product. Additionally, roughly seventy cents of every consumer food dollar goes to cover marketing expenses. Being active up and down a marketing channel is attractive as a method to capture more of the consumer food dollar. Being involved in marketing also helps producers decide what to produce and when. Clearly, performing some marketing tasks also increase the costs associated with 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. Of the nine functions of marketing, only selling generates cash. Price must be a part of your overall marketing plan.

Cost of production (cost of goods sold) is the basis of calculating price. However, pricing must be flexible enough to address competition and adjustable to changing situations. In order to realize the objectives of the marketing plan, price must be set to meet 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

Price markups are an area of great confusion. Markup should be given as a percent of the selling price. Net profit is greatly effected by calculating your markup incorrectly. Cost plus markup equals selling price.  Here's an example.  Let's say my marketing plan calls for a gross profit goal of 20%. Let's also say a watermelon costs me $1.00. The proper selling price is $1.25, not $1.20. The cost of $1.00 plus markup 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.

Is the Point Profit?

Typically, 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.

An effective pricing strategy depends on four factors:

• Cost for each product must be understood.
• The costs and prices of the competition.
• What the competition does in response.
• Potential impact on sales from a price change.

There are many influences affecting demand, prices, and profitability. Setting the right price is a significant step aimed at profitability.

As you develop the best pricing model for your business, remember the ideal pricing strategy will depend on more than your costs. It also depends on good pricing practices.

Summary

It is difficult to say which component of pricing is more important than another. Just keep in mind, the right product price is the price the consumer is willing to pay, while providing a profit. Proper pricing is essential to long-run business success. Pricing is as much a marketing concern as an accounting one. Pricing strategies can be a measure of management effectiveness. Effective pricing allows a retail farm market to more easily reach their marketing and financial goals.