## Pricing Strategies

### Know your Costs, and Price for Profit:

You may have heard of the four P’s of marketing: Price, Product, Placement and Promotion. Profit is the 5th P, the one that keeps you in business. Profit is related to the decisions you make about the first 4 P’s. Here we will focus on price. There are various strategies for determining the price you will charge for your product:

Cost and Profit Method:

Divide this by the number of units (pounds, bunches, gallons, etc) produced = price/unit

Here’s a simplified example:
If you spend \$3000 total variable costs (seed, fertilizer, labor), and \$2000 fixed costs (hoophouse, irrigation and tool depreciation) and you need \$2000 profit from the product, then your total income from that product needs to be \$7000. If you produce 950 lbs of greens, your price per unit is \$7.38 per lb.
\$3000 + \$2000 + \$2000= \$7000
\$7000/950= \$7.38

Gross Margin Method:
This method derives from the whole business sales, costs and planned profit. This method is usually used by retail businesses that resell a lot of products. An example of gross margin method in a vegetable business might be:

Know your expected vegetable sales= \$10,000
Know your total fixed costs + desired profit = \$3000 (this is the gross margin needed)
Know your unit variable cost* = \$5.00
*Unit Variable Cost: How much seed, fertilizer, drip tape, fuel, tractor maintenance, marketing costs, etc. does each pound of vegetables cost? Estimate the total number of pounds of your crop you expect to produce, and the total variable expenses required, and divide the expenses by the number of pounds yielded to get a unit variable cost.
Divide your gross margin by total sales: \$3000/\$10,000= .30 (this is 30%)
Divide the unit variable cost (\$5.00) by 1- 30% (calculated as 1- 0.3) to determine the per unit price:
\$5.00/(1 – 0.3) —-> \$5.00/0.7 = \$7.14 per unit

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