GoFarm Hawaii

GoFarm Hawaii

Pricing Strategies

Pricing your product is critical to ensuring your business profitability. Doing it wrong will cause you to lose money.  To price your product, you should balance:

  1. The cost of your product.
  2. The existing market/competition.
  3. The value of your product.
  4. Your business goals.
  5. The market segment.

Cost of Your Product

Determining your cost of production is key to ensuring that products are being sold for a profit.  To ensure profitability, price products above the cost to produce the product.  One method used to price product it to add a markup to costs to determine the final selling price.  Depending on the market, product, and demand, farmers may add anywhere between a 10-200% markup to their cost.

When analyzing costs, consider comparing costs and price potential by crop and market.  For example:

Cost by mkt

 

Existing Market/Competition

When deciding on price, consider the demand of the product and your competition for a similar product or service.  Understand the competition and research:

  • How much are others charging for the same or similar product?
  • Is there a high demand for the product?
  • How many competitors are in the marketplace?
  • How easy is it for the potential customer to shop at a competitor?
  • Why do you think people are shopping at a competitor? Does the customer already have a relationship, do they provide consistent product and quality, do they have a superior product, do they provide convenience or special services (i.e. delivery)?

Much of this information can be found by talking to potential customers and observing prices and behaviors at markets.

Value of Your Product

Consider the value of your product to your target customer:

  • Will customers think they are getting their money’s worth from your product?
  • What is the product worth to your customer?
  • Does your target customer value high-quality/prestige or value?
  • Is your product similar to what is already on the market?
  • What makes your product unique?
  • If you are aiming for higher pricing, why would someone pay more for your product (i.e. is it fresher, tastes better, a unique variety, you provide better service)?

Much of this information can be gathered by talking to potential customers and observing prices and behaviors at markets.

Business Goals

Your business may have specific goals that may affect pricing.  For example:

  • Is part of your goal to make local, healthy food accessible? If you are trying to reach a specific demographic, this may require lower pricing.
  • Is part of your goal to have a high-end, gourmet product? This may help justify higher pricing.

Pricing for Different Market Segments

Depending on the volume of product you have, you may consider selling to various types of customers.  Consider the following pricing strategies:

Type of Customer Pricing Notes
Retail/Direct to Consumer (Farmers’ Market, CSA, online)
  • Most profit on this type of sale but typically lower volume of sales.
  • Prices tend not to be lower than shelf price at the store.
Wholesale: Small Buyers (restaurant, juice shops, caterers)
  • Prices tend to offer a small discount from retail prices when volume is more than retail or to reward regular purchases.
  • Consider lower prices for second grade produce since many will process the product and appearance may not be as critical.
Wholesale: Large Buyers (grocers, schools, hospital, high volume restaurant)
  • Prices tend to offer a large discount from retail prices because of high sales volume.
  • Recognize that grocers will need to resell product and will want a profit as well.  Consider their markup to ensure end price is similar to your retail price and attractive to the end buyer.
Wholesale Distributor (you provide product to distributor; they add a margin and deliver to stores; sometimes they may help with marketing)
  • Prices tend to offer the largest discount because of high volume of sales.
  • Distributor may save a business costs by managing some sales/marketing, collections (you are selling to one vs. many), and distribution.

Example of Pricing and Requirements to Achieve $25,000 of profit:

Market Segment Sales Price Cost of Production Farm’s Profit Per Pound Volume to Earn Profit of $25,000
Retail $2.00 $1.00 $1.00 25,000 pounds
Wholesale: Small Buyer $1.75 $1.00 $0.75 33,363 pounds
Wholesale: Large Buyer $1.50 $1.00 $0.50 50,000 pounds
Wholesale Distributor $1.20 $1.00 $0.20 125,000 pounds

Note: Adjustments may be made if Cost of Production is different for each market segment.

Pricing Incentives

The following are pricing incentives to consider:

  • Promotional pricing: lower prices to gain attention. Could be in the form of a buy-one-get-one, discount, or coupon.
  • Volume discounts: incentive for purchasing a large volume. For example, a percentage off when hit specific volumes.
  • Bundle pricing: discount for purchasing a group of packaged products. For example, 3 types of pickles or a salad mix bundle (lettuce, toppings, and dressing).
  • Loyalty incentive: Could be in the form of a stamp card (get something when stamp card is filled) or a coupon for a future visit.

Notes and Tips When Determining Pricing

  • Pricing can get complicated.
  • Some base cost plus pricing on Direct Costs (vs. Total Costs). If you do this, be sure that the markup is sufficient to cover Operating Costs and desired profits.
  • If you have not calculated costs and want to test market prices, consider the following strategy based on competition pricing:
    • If you have very similar products, set prices near the competition.
    • If there are advantages to your product (i.e. service level higher, product is better, organic, local), set prices higher than the competition. Be sure that the customer will recognize the advantages or that you communicate them to your customer.
    • To encourage new customers, set prices lower.
  • Depending on the market, prices can easily change as you test pricing strategies. For example, you can easily adjust prices at farmers’ markets.  However, some customers (like grocers) may prefer set pricing for certain products.
  • Competition for your product may be beyond your location and product:
    • If you sell at the farmers’ market, consider other vendors as well as grocery stores, CSAs, delivery services, and roadside stands as competitors.
    • If you sell salad mix, compare your product against all leafy vegetables or substitute products.
  • When researching pricing, you may see the terms markup and margin. These terms mean different things and have different calculations.  If relying on advice, ensure you understand the term and calculate accurately:
    • Markup: the difference between the actual cost and the selling price.
    • Margin: the difference between the selling price and the profit.
  • Continually think of new ways to sell more to existing customers and attract new ones.
  • Always try to get the highest price you can as it fits into your business model.

Additional Resources for Pricing Your Product

Get more information about pricing here: