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DCarrington
Riverview, NB
(Zone 5b)
April 7, 2008
10:16 AM Post #4770282
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Know your Costs, and Price for Profit:
Price is the dollar amount that you ask for sales of a product or a service. It is one of the four P's of marketing: Price, Product, Placement and Promotion. Price is critically important to the profit on the farm, but the other P's of marketing contribute substantially to the price that you can get. Profit is the 5th P- the one that keeps you in business. There are various factors that go into deciding what price you will charge for your product:
1. Start with the input costs. These are also called Variable Costs (VC). Input costs include such things as: fertilizer, seed, gas, labor. If you don't cover these costs, your farm will not last long!
2. Add in the ownership costs. These are also called Fixed Costs (FC). These include: depreciation, interest, repairs and taxes (DIRTI).
If you cover these first two costs, you will meet your break-even cost to the business but have nothing left to live on! Every item should contribute to ownership costs. If the ownership costs are not covered, you will not remain in business for long.
3. Add in a return to you. This is called the Profitable Price. This is the price you will need to survive in the long run.
Allocate Expenses by Enterprise:
To track labor and equipment costs by enterprise requires excellent records. You can keep track of tasks and expenses, such as plowing time and fertilizer, for the entire farm and then allocate these through enterprises based on square footage or acreage used by a particular enterprise or product. Keep track of daily time spent for efforts or expenses required by specific products- such as transplanting or weeding- separately. Add all of these expenses together for each product or enterprise to determine cost per product. Be sure to keep track of harvestable yields or the amount of product that was actually sold, as these impact your price per unit.
Calculations for Determining Price:
Even if you don't know all of your exact costs yet, get some good estimated numbers from your local Cooperative Extension educator or a willing farmer. 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!
Cost and Profit Method:
Add your variable costs + your fixed costs + profit needed for that product = Income
Dived this by the number of units produced = price/unit
For example:
If it costs you $3000 total variable costs, and $2000 fixed costs and you need $2000 profit from the product, then your total income from that product needs to be $7000. If you have 950 units, your price per unit is $7.38 per unit.
$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
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-.3) ----> $5.00/.7 = $7.14 per unit
Plan for Profit- Don't Drop Prices!
You need to be aware of your local competitors and what they are charging. Be prepared to explain why your prices are higher. If you have never sold this product before, it is better to start higher and be able to lower your price than to have to raise the price.
How much is too much? Or too little? What if you have corn at $3.50 per dozen according to your calculations, and your neighbor is charging $3.00? Can you still make a profit by lowering your price? Sometimes it is better to sell fewer at the higher price than to sell more at the lower price. For example, suppose your margin on the $3.50 per dozen is $0.50 towards profit. If you sell 300 dozen, that will give you $150 in profit. If you dropped your price to even $3.25, you would have to sell 600 dozen to get the same profit. Is doubling your production AND your number of sales feasible? For a 7% decrease in price, you would have to sell twice as much.
You can stick with your higher price by differentiating your product. Use techniques like: signage, layout, local label, baker's dozen, recipes or add some other value to keep your price point and make the extra 25 cents per dozen.
As your customers get to know you, you will build your reputation for quality and honesty. 60% of sales come from repeat customers. Yet, many people concentrate their advertising and promotion on the 40% that are single service sales. Satisfied customers will likely tell their friends and neighbors. The most effective advertising is word of mouth- and repeat sales are key to your success. It is much more difficult (and expensive) to secure a new customer than to get a current customer to buy more. Make your repeat customers feel special and keep them coming back for more.
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