If you don’t price it right, you won’t be around long. That was the message from Kathy Bosse, a New Venture coach with Alberta Agriculture, to the Alberta Farm Fresh Berry and Vegetable School held here at the beginning of March.
Bosse urges producers to make sure they cover their costs, and price accordingly. “If you don’t have a profit, you don’t have cash flow. And if you don’t have cash flow, it will kill your business.”
Bosse says price is affected by four aspects: cost of production, customers, competition and the value the market places on your product.
Cost of production involves all costs that go into growing or producing a product. This includes fixed costs, which are static, and variable costs, which change from month to month. Some costs may fall into both categories.
Bosse says some sellers tend to overlook certain costs such as transportation to and from markets, and smaller items such as scales or signage.
Producers should budget and calculate expenses as though they are paying themselves and any family members who help with the business. “If you lose the family that’s helping you, you’re going to have to replace them. So pay yourself and pay them. Pay them on paper, I don’t care, but be accountable for it because if it’s gone, you’ve got to come up with that money to pay for it,” she said.
Know your terms
Bosse outlined a number of terms which can help people determine their pricing.
Determining a break-even point is crucial, as is knowing the per-unit cost, since producers can use it to calculate how many units they need to sell to cover their fixed costs.
A profit margin is the percentage of money added to the product cost, which is where sellers will make their money. Profit margins boil down to input costs, which may fluctuate over the course of a business. Bosse says price items according to the true value of the product in order to create a profit. She says most producer tend to underprice their product, instead of pricing at an appropriate level.
A markup is the amount added to the cost of goods sold to cover the fixed costs and create a profit margin.
“What I suggest to people is to understand the industry and the terminology for doing your financials. If you’re not good at numbers, and you don’t like numbers, hire it out. It’s critical that you know the numbers.”
Bosse encourages producers to do the math and play with numbers to determine the best price points.
The customer factor
Customers are also an important consideration when pricing. Customers who buy products are likely to be repeat purchasers and are the people who should be targeted in marketing. Knowing customer demographics, including age range, family size, educational level and spending habits can help a producer understand what customers want and how to price accordingly.
Bosse advises producers not to follow grocery store trends when pricing, because their locally produced products are unique. Knowing the trends is important, but following grocery store prices is not. “Don’t be afraid to tell customers what your price is and stand by it.”
Customers in urban markets will generally pay more than customer in smaller, rural markets, Bosse says.
She recommends pricing based on value, which is created by a perception in the customer’s mind. These perceptions are based on features and benefits. Features belong to the product and the benefits are spin-off effects created by the features of the product. Both are important things to consider when pricing, said Bosse.