Farm Finance Blog

Are you charging the right price for your farm products?

By Jody Padgham

I’ve got 125 organic broiler chickens on the ground, and am anxious for butcher day so I can get these birds out the door and the well-earned checks in my pocket. It will be a few months before I’ll know the answer to the question, “Am I charging the right price for my chicken?” But, it doesn’t hurt to think about my prices now.

I used to work in a grocery co-op, and we had a pretty structured way to determine the price for something we set out on the shelf. We’d take what we paid for the item from the wholesaler, apply a pre-determined category mark-up, and then mark the price. It was simple to do. At the end of each year, we’d compare overall store income to expenses, and decide if we might need to bring in more money. As a result, we might change the markup of an entire section, say canned goods, from 32 to 35%. Voila! Instant added revenue—assuming we sold the same number of cans!

Once I got into farming I realized that this world of pricing was a lot more complicated. Just starting out, I had no idea how much it cost me to produce a chicken. (How much had I invested in the product?) It didn’t seem like it would be all that easy to figure out, so I just picked a likely price and tried it. I, like most new farmers, choose a starting price that was way too low. Now in my 11th year of chicken production, my selling price is 220% higher than the first year I started. True, feed costs have gone up, but not as much as my price has. I’ve now got prices set so I have a sustainable business.

So, what is my advice to you for how to set your prices? There are three primary things to consider when setting prices for your direct-marketed products: cost of production, the perceived value, and your competition. A good pricing decision will take all of these into account, and will bring you enough profit to operate a sustainable business.

Cost of production: Your price must always be above your cost of production. If it isn’t then you are losing money. In fact, you lose more money for every additional piece you produce if your price is below the cost of production. The amount you get above your cost of production is your profit.

As I mentioned above, cost of production can take a bit of work to figure out. You will want to do an enterprise analysis. It will probably take a year or two to get good numbers, but once you have tracking systems set up, it can be pretty straight forward to run numbers each year to find out if your costs of production have changed. My main poultry expense is feed, so I keep a spread sheet in which I can plug the feed cost to see how things have changed.

Perceived value: Do you sell something everyone else has, or do you sell something special? Is there a way that you can make customers see that what you sell is better than what other people offer? I sell organic, pasture-raised, custom-produced and processed broilers. My customers pre-order, and I let them know that I raise each bird just for them, and invite them out to my farm to see where their birds have been raised. I have created value, which my customers are willing to pay for. Every personal story, special label or added customer service you offer raises the value of your product for your customers, and increases the price that they are willing to pay.

Competition: Who is your competition? Are you selling the same tomatoes that people can get in the grocery store for 89 cents per pound, or are you selling something closer to what they sell in a gourmet market? When comparing your product to others, be sure to compare to something equal. If everyone is selling beets for $1.00 per bunch at your farmer’s market, you may struggle to charge a lot more for yours, unless you create additional value. If you can’t do something to get more than $1.00, but discover that it costs you $1.10 to raise the beets, it doesn’t make sense for you to sell beets at that market.

I figure that my competition is other small farmers in the area that produce organic pasture-raised birds. Every spring I contact several of them (or visit their websites) to make sure that I’m not undercutting them on price. Why? Because we have more customers than supply in my area, and there is absolutely no reason that I need to try to give people a “deal” on my custom-raised organic birds.

When I talk to other producers they often worry that customers will think that their prices are too high. I will never forget a workshop I attended where the presenter said “If your customers think that the price you have to charge is too high, then you need new customers.” Huh. Think about that for a minute. We may wish we could be the Wal-Mart or Aldi of the organic food world, but we’re not, and never will be. We generally don’t produce cheap food. But, we can produce the highest quality food, nutritious, and high-value. And, there are people that are willing to pay us to do so. If you truly can’t find people to pay the price that you need to charge to cover your costs and the profit you need, then you need to either add value so people are willing to pay more, reduce your costs of production so you can charge less, or think about growing something different.

As the butchered birds leave my farm and the checks get deposited in the bank, I will be glad that I have done my homework and ensured that the price I am charging this year covers my cost of production, is bringing in the profit I feel I need to make the enterprise worthwhile, and allows my customers to feel that they are getting a valuable product for a fair price. That is what makes my operation sustainable, and is a win-win for both me and my customers.

Jody Padgham is the Financial Director for MOSES, and Associate Editor of the Organic Broadcaster.

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