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Pricing Strategies

The exercises below help you think through how to price your product. If you haven’t started producing it yet, it can be intimidating to think about what your costs might be. You may be able to get some good estimated numbers from your local Cooperative Extension educator or a willing farmer who is selling to similar markets as you are. If you can’t find a local source of enterprise budgets, you can start with the sample budgets in the website resources listed in the Choosing an Enterprise tutorial. This will help you get a sense of the financial feasibility of your business idea. If you go through this exercise and determine that you’ll need to sell carrots at $11/lb in order to make a profit, you’ll either need to replan your operation or come up with an innovative gourmet niche market that can handle that price!

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:
Add your variable costs + your fixed costs + profit needed for that product = Income

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

Up Next: Planning for Profitability>>