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You are Not Your Customer

11/12/2015

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When you sell your goods, remember that you aren’t your customer.

Your customer has different values and different perspectives than you do.

You may look at an heirloom tomato and think, “I wouldn’t pay $4.00 a pound for that!” But you can grow it, and they can’t. And they’re watching Bobby Flay tell them how great it is. (Actually, if you’re a farmer, the fact that they have time to watch cooking shows probably tells you that you are not your customer.)

Don’t set your prices based on what you would pay.

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A Pricing Rubric

8/20/2015

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Pricing can make or break your business, and you have to approach it with care - especially when making adjustments for customers buying in quantity. The less you charge for your product, the more certain you need to be that you are pricing it right, because the costs are going to be much closer to the price that you receive.

First, you’ve got the cost of the product. This is what it takes to actually make the thing - what it costs, including labor and overhead, to grow and harvest a carrot.

Second, you’ve got the cost of selling. This is the money and time that you spend to get the thing to market, sell it there, and get it back home. You might want to think of this as an entirely separate division of your farm - or even another “business” entirely - as the processes here bear very little relationship to those of actually farming.

If you do a farmer’s market, this is the time to load the van, drive to the farmer’s market, set up, sell sell sell, break down, load the van, drive back home, and unload the van. It’s the cost of fuel and a market stall. That’s a lot of time and money, and you should get a lot of money for it.

If you take orders from stores and restaurants, this is the time it takes to send out information about what you’ve got, answer questions, take the orders, put the orders on pallets, load the truck, write the invoice deliver the product, and drive back home. It’s the cost of fuel and boxes. It’s probably less time and money per carrot, and you’re probably going to get less money for it.

This is a key point: you lower your per-unit price when you lower your per-unit costs. If you are taking orders from a restaurant for one bunch of carrots at a time to make up a $25 sale that you deliver, that’s not a wholesale sale, even if it is a business-to-business sale. It should be priced at retail prices. (When my business shops at Staples, I pay the same prices that I do when I go there for my daughter’s back-to-school supplies.)

Likewise, when you sell something to a food hub or a distributor, it may not make sense to take a lower price than you already get for selling to stores and restaurants unless they are buying in a quantity that significantly reduces your cost per carrot sold.

Third, you’ve got the risk of selling. When you sell a product at farmer’s market, you harvest, wash, and pack that product without ever knowing if you will sell it. If it rains, if there’s a big game on, if traffic is bad… you might wish that you had taken less product to market. Every carrot you sell has to pay for the other carrots that you took but didn’t sell. (The bank charges higher interest for risky loans because they still have to make money on the loans that don’t get paid back.)

When you take orders before you harvest, you reduce your risk because you can harvest only what you’ve already sold. This lowers your effective cost per unit, because you don’t have the risk of harvested, but unsold, product.

Take the time to understand the why behind your pricing levels for different customers and different quantities, and you’ll be one step closer to making great pricing decisions.

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Understand Margins to Understand Pricing

2/5/2015

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When a company buys your product to sell it to somebody else, they charge more to their customers than they pay you - that's how they cover their own expenses, and how they make money in return for their management expertise, risk, and investment.

The additional amount they charge can be expressed in two different ways: as a markup, or as a margin. A markup describes the additional percentage a reseller makes on the product, whereas a margin describes the percentage of the selling price that a reseller makes over and above the price they paid for it.

Understanding margins can help you estimate the price a store or wholesale distributor is paying for their product. Margins are also part of the language of the trade, so understanding margins puts you on a more professional footing when you talk with buyers.

Margins are useful because they describe the "gross profit margin" that a reseller actually gets. The margin has to cover all of the reseller’s expenses related to selling produce. For example, natural food stores in my area use a 42% margin as their basis for calculating retail produce prices. That 42% of their selling cost has to cover all of the store's direct expenses related to selling produce: the labor, bags, and display items, as well as the overhead costs of running the store: electricity, rent, bookkeeping, cash registers, and everything else.

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In other words, if the store is charging $1.00 for a bunch of parsley, they’ve got $0.42 to cover all of the costs of selling that parsley, because they spent $0.58 to purchase it for sale in their store.

And, even though they use a 42% margin to calculate their prices, they expect to realize only a 35% margin on their produce sales overall, since they lose a certain amount to "shrink," due to spoilage, trimming, blemishes, customer handling, and so forth.

Different outlets have different cost structures, so they use different margins.

A wholesale distributor I've worked with uses a standard margin of 23%. They have lower expenses per unit sold than a retail store does, so they don't need to charge as high of a margin.

In fact, different product lines in a grocery store also have different cost structures, so the margin on canned goods is going to be different than it is on fresh produce, since canned goods don't have the same risk of spoilage and don't have the same labor requirements as fresh produce.

And that's where margins matter to market farmers. When you have higher selling costs, you need a higher margin. When you sell produce at farmers market, your costs - labor, stall fees, shrink - are higher than your cost to sell to a retail store. If you sell at a retail store and at a farmers market, your prices in each of those markets should reflect your costs in each of those markets. It costs the same amount of money to grow a bunch of kale for your farmers market stand as it does to grow a bunch of kale for a retail store, but it costs a lot more to sell that bunch of kale at a farmers market.

We'll continue this topic next week when we get into margin math, so stay tuned!

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Lowering Prices

11/27/2014

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Black Friday has me thinking...

If you decide that you want to lower your selling price, you need to get something substantial for that. Lower prices should only be a reward for the customer who helps you drive down your acquisition costs, increase your utilization, or sell a lot more product.

CSA farmers often provide a discount for early purchases, and I've seen this more and more with the "market CSA" model where customers get a punch card to shop at a farmers market stand. Before you do this, you have to ask: does getting money up front reduce my overall expenses? Can I "borrow" the money from my customers for less than I could borrow it from the bank?

In that same model, you would also want to ask if providing a discount at your stand helps you to make better use of your fields or your product selection? One of the curses and advantages of farming for a CSA is the requirement to grow a lot of different crops - it's hard, but it also means you have the opportunity to get increased value on low-value crops by including them in the same box; for example, we used to include greenhouse greens in a box of winter roots, effectively increasing the value of the turnips by packaging them with the fresh greens.

Finally, does providing a punch card help you sell more product - and does it help you sell enough more product to offset the lost profits from the discounted produce? If you are making a 30% margin on your crops, and you give your customers a 10% discount, you are cutting your profits by a third.

The same questions apply to dropping prices in any situation. Does decreasing your price allow you to sell a lot more product - like moving pallets of broccoli to a wholesale distributor?  Does it drive down your costs - like saving the time and expense of going to farmers market? Does it get you needed cash flow to pay staff until you get to a more profitable crop? (Are you sure?) Does it help you put together a load that includes high-margin crops?

Never lower your prices for the sole purpose of selling products - sales without profit is just work.

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Value

9/25/2014

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The price that a customer is willing to pay has everything to do with how much value they ascribe to your product.

It has nothing to do with your cost of production and marketing.

The cost of production and marketing determines how much you have to charge for your product in order to not lose money, or in order to make a certain margin or realize certain returns from your business.

But it has nothing to do with the price a customer is willing to pay.

Unless, that is, you decide to make the production and marketing part of the story that adds value to the product you are selling. The fact that it costs more isn’t interesting, and isn’t likely to add value to your product. The story of why is interesting, if you make it so.

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