“How much can I sell this for?” is a common question Kevin Burkett, an Alabama Extension regional extension agent, hears from producers in Extension meetings many times. “It is an important question and one that does not always have a straightforward answer. Usually there is a lot to consider in pricing products.” Burkett describes factors that can affect what you want to charge below. At the end of the day, he says you want to net as much as you can and earn a profit to bring back to the business.
Factors that affect price:
- Cost – It may not be a perfect calculation, but we want to have a ballpark number of how much we actually have invested in the crop. There are different systems that will work, but what can you do to understand all of the costs that have gone into producing the product? Crop inputs are usually the easiest to track while items like labor, machinery, utilities and others may involve making a calculated guess as to how much they were used. Some operations may use a percentage method such as 20% of overhead went to tomatoes, 10% to greens, 70% to cattle. As you work on this, you can refine the numbers and get more precise. Calculating an enterprise budget can help a producer understand upfront what the investment in a crop will be.
- Price Comparison – You can reference other markets to see what comparable products are selling for. This is helpful information to know, but we would not encourage simply matching your price to what you see at other places. It is better to develop a range for what you think is fair. If you determine that you are profitable at $5 a pound, but see that a grocery store is selling for $7, that helps you understand what customers are willing to pay. Places for reference would be other farmers markets, grocery stores, USDA reports, and any other place where produce is sold.
- Markets – If you’ve determined your cost and what your price/break-even revenue needs to be, the next step is evaluating your market. (In this article we say markets, but consider these factors for any type of customer you want to evaluate). Evaluation is important, as even though you may know what your price needs to be, you have to find a market that will support that. That means, your customers have to be willing and able to pay the set price for your product.
A number of factors can determine if that market/customer is appropriate.
- Do the customers have the means and willingness to pay? If you have premium products, who will be willing to pay for that and where are they located?
- Are your items standard or more niche? Some areas would appreciate continuous new items while others are looking for more standard items.
- Is your market local or will you have to travel to reach it? Look up the federal mileage rate ($.58 for 2019) and use that to calculate travel cost for each market. If there is an additional $100 cost each time you visit, consider the additional revenue you would need.
- Some markets are small and some are large. If you and several others are growing tomatoes but there are only 10 consistent customers, it may be hard to make enough sales to recover your cost. Some markets may even put restrictions on what you can or cannot bring to discourage duplicate offerings. At this point, it is not a price problem but having enough buyers available.
“Price is something highly variable and can even have several swings during the year,” Burkett says. “If a farm is able to net enough from their products to financially sustain the business and even have periodic opportunities to grow, that is a success.”
For more information, visit Alabama Extension online at www.aces.edu.