Transcript So You Want to Start A Food Business * What you Need to Know

Dee Singh-Knights, WVU Extension Service
August 8th, 2013, Spencer, WV
[email protected] (304-293-7606)
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What does it take to have a successful small
agricultural business
ACKNOWLEDGE THE “BIG PICTURE” – understand that
price is just part of the equation
 Understand the three C’s of pricing
 Calculating Cost of production
 Understanding Customers willingness to pay
 Understanding your Competitive Advantage relative to
Competitors
 Choosing the right market option
 Choosing pricing strategy
 Monitor market trends
 Advocate for your products
 Avoiding common pricing mistakes
 Seeing the ‘Big Picture’
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Having a good product that consumers
want and are willing to pay for
Marketing your product to the right set
of customers

Selling the right amount to be profitable

Selling at the right price
 All
of the above
Marketing
to Target
Audience
Good
Product
Right Price
and Right
Volume
The ‘Big Picture’ Approach to
Marketing Products
Profits
Revenue
Quantity
Price
Costs
Costs
Increase Profits = Increase quantity sold, Increase selling price,
or Lower production costs
Understand the Factors Affecting Prices
(in general and in the market you are
operating in)
Price Taker


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Commodity Market
Homogenous Products
Market Outlet
◦ (auctions, graded sales, wholesale
markets)
Low Cost of
Production
Price Maker

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Niche, Specialty Markets
Differentiated
Products/Added value
Market Outlet
◦ (farmers market, CSAs, institutions,
farm gate, forward contracting,
internet sales)
Higher Cost of
Production
PRICE CEILING
$$
PRICE CEILING - Who are your
CUSTOMERS and what are they willing
to pay?
Who are your COMPETITORS and
what are they charging?
$$
PRICE FLOOR
PRICE FLOOR - What is your COST OF
PRODUCTION?
Calculate your Cost of Production and
make Farm and Marketing Decisions
Based on it

Know your cost of production for each
enterprise – starting point!!!
◦ Starts with enterprise budgeting or income statement


Use you enterprise budgets to determine
you break-even point
Use this break-even point to make pricing
decisions


Much should I charge for a pound of organic heirloom
tomatoes
Get Break-even Price: take total expenses per
bed/pounds of tomatoes sold per
 Total expenses = $152.79 per bed
 Lbs of tomatoes sold/bed = 400 lbs
 Break-even price = minimum acceptable selling price
 $152.79/400 = $0.38/lb
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Organic Heirloom Tomatoes Template:

Sample Enterprise Budgets available at:
◦ http://www.uky.edu/Ag/NewCrops/budgets.html
Understanding your Customer and
their Willingness to Pay
Product Driven

Market Driven
First identify a market need and then grow products
that satisfy that need, at a price customers are
willing to pay and will still return a profit to the
business and generate timely cash flow to pay bills.

Discovering the needs and preferences of
customers – what are they willing to pay for

What products do they want

What specific requirements (quantity,
quality, specifications)

What added value are they willing to pay for

Can help you with your MARKET POSITION
◦ Creating the desired product image in your
customer’s mind
Farmers Market
Price Market
Specialty Market
(price sensitive, cost savings,
set prices to beat large retailers)
(price premiums for valueadded, unique value)
0
Very Important
20
40
60
80
100
Important
Food Safety
98
Guarantee
2
92
Consistent Supply
8
85
Freshness
15
83
Packaging
17
78
22
Delivery
72
28
Not order individually
71
29
Product Knowledge
64
36
Price
60
40
Product Maturity
59
41
Consistent Appearance
57
43
Extra processing
56
44
Length of Season
USDA Inspected
43
8
57
92
Source: Collaborative for the 21st Century, WVUES Small Farms Center, 2010
Understanding your Competitors and
your COMPETITIVE ADVANTAGE
relative to your Competitors
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Many customers think prices at the farmers’
market are too high relative to grocery stores.
Many farmers markets discourage vendors
from purposefully undercutting each other on
prices.
◦ Differentiating your product from your competition
can help address this problem.
◦ The reputation you develop for offering quality
packaging, presentation, and high-quality products
will allow you to maintain a higher price.
◦ The best strategy for pricing against your
competition is to know your cost of production.
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Respond to needs that aren't currently being
addressed by competitors
◦ What is the product they want

Analyze what they do better than you:
◦ Are their prices lower?
◦ Are their products of a higher quality?
◦ Is their customer service highly regarded?
◦ Is their marketing material more engaging?
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Identify factors that will make customers choose
your offering over others.
Barriers to entry based on competition.
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Add value by adding
service

◦ Create unique ‘brand’
◦ Price, quality, unique feature,
availability,
◦ Ready-to-use
◦ Credit or Delivery
◦ Special Wrappings
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◦ Special Containers
◦ Demonstrations, tasting,
◦ Classes or contests
Creative ways to
communicate with
customers:
◦ Newsletters (Mail Chimp)
◦ Recipes and Nutritional
Info.
◦ Product information
Differentiate your Product
◦ Social media, coupons,

Build relationships
◦ Preferred customer, Engage
customers, Be reliable
Choosing the Right Market Option for
your Farming operation
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What is your net income goal?

Which marketing option will help me reach this
goal
◦ Am I a low-cost producer
 Can be price-taker or price-maker
◦ Am I a high-cost producer of a unique, limited, valueadded product
 Choose marketing option in which I am a price-maker
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To-market-to-market Workbook
◦ http://aesop.rutgers.edu/~farmmgmt/marketing/tomarket.pdf
Pricing Strategies
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Break-even prices (production and transaction costs)
should establish a floor or minimum price.
A desired profit goal needs to be added to the floor
price to allow for an economic return to
management.
To establish a Price Mark-Up, the desired mark-up
percentage is added to the cost of goods.
◦ In the case of a person producing their own product, the cost
of goods is the same as their break-even price.
 For example, if a product costs $2 to produce and a 50 percent
mark-up is desired, the established price would be set at $3 (150
percent of the $2 break-even cost).
◦ In general, wholesalers mark up their products 50 percent,
whereas retailers may mark up products 100 percent (Adam
et al, 1999).
Pricing Strategies
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“Skimming the Cream” - offering a unique
product for which there is a strong demand
allowing for higher prices
Penetration - Setting prices low to enter the
market as quickly as possible and gain a
high- volume position
Neither of these is optimal as a long-range
pricing strategy

Loss Leaders - Products that are purposefully
priced below their cost of production.
◦ loss leaders attract customers to your stand, especially
if the customer is then led to also purchase other,
higher profit items.

Pricing for Value - Sell more quantity by giving
price breaks when more product is purchased.
◦ For example, pumpkins might be priced at “$4 each or
3 for $10.”

Seasonal Discount – Induce buyers to purchase
products in large supply.
 “This Week’s Special: Winter Squash, 2 for $5.00.”

Price-lining: Offering
products at a limited
number of prices,
reflecting varying product
quality or product lines.
◦ Sell top quality produce at a
premium price and an
"economy line", e.g. overripe
or smaller fruits.
◦ “We have a special on #2
canning tomatoes this week.
They’re slightly blemished
but will make great sauce or
salsa. Here’s a copy of our
family’s salsa recipe.”
Monitor Market Trends
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Boston Terminal (where fruits and veggies come into
the east coast for Distribution) posts daily price
reports:
◦ http://www.terminalmarkets.com/bostonterminal.htm
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Rodale Institute publishes a Daily Organic Price Report:
◦ http://www.rodaleinstitute.org/Organic-Price-Report
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MOFGA Organic Price Reports are monthly
◦ http://mofga.org/Publications/OrganicPriceReports/tabid/260/
Default.aspx
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Auction and Farm Market Prices, weekly
◦ www.uky.edu/Ag/NewCrops/price.html
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Wholesale Terminal Produce Prices, daily
◦ www.marketnews.usda.gov/portal.fv
Advocate for your Products
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Be an advocate for small farms and local, fresh,
healthy, affordable food.
Don’t lower or apologize for your prices
Help educate your customers about the true costs
of food and your sustainably grown products.
◦ Helping your customers understand the expenses
associated with small, sustainable farming in WV, and the
importance of the farmer making a living wage should be
part of this education.
◦ http://www.dailymotion.com/video/x1qeop_the-truecost-of-food_shortfilms
Avoid Common
Pricing Mistakes
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Pricing too low relative to production costs
Pricing too high relative to customers existing
value perceptions.
Pricing inconsistent with product’s image
Failing to adjust prices from one area to another
based upon
◦ fluctuating costs or customer’s willingness and ability to
pay
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Attempting to compete on price alone.
Setting prices too low with the intention of raising
the prices later.
Discounting prices - Making excuses for your
products and prices.
Understand the BIG Picture - Choose
the Pricing Strategy Suitable for
YOUR Farming Operation
Factors Affecting Prices
Strategies to Price Effectively
Production/Harvesting Costs
Keep records, alternative production
systems, different inputs
Quality & Selection of Product
Higher-value products, adding-value, high
quality
Marketing Option
Higher-value (balance volume and price)
Location of Market
Marketing option, timing of sales,
Customer Income/Demographic Understand Willingness-to-pay, market
positioning, understand price signals
Volume
High volume lowers break-even price (size
matters), aggregation
Demand and Supply
Matching demand with appropriate supply
General Market Price
Understand price trends and signals
Operating Expenses/Overhead
Manage costs, track expenses, consider
alternatives
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“Overpriced. You're right. Just paid $3 for a bunch
of cilantro when I can get it at Fresh Farms for
$0.33. That's a 10x markup. Pretty much all of it is
overpriced. The main thing I use them for is non-
mainstream products, like their selection of potatoes,
or heritage eggs , or they seem to have weird onion
looking things. I know, you would think that cutting
out the middle man distributor, and not having a brick
and mortar store, would _reduce_ prices. Shop
wisely”.
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“ When you buy cheap produce from large chains
you're not supporting farmers as much as
supporting large corporations that do their best
to keep the little guy down. Farmer's markets
are a way to support locals and not the
corporate system. If the price is expensive,
think about how you don't see farmer's driving
around in expensive cars. It's the giant
corporation executives that do. There's a
reason for that”.