Part of your pricing strategy must include an emphasis on value, while still getting the best price possible.
Photo By Fotolia/Alexy Stiop
Market Farming Success (Chelsea Green Publishing, 2013) is the go-to guide to market gardening for those in the business of growing and selling food, flowers, herbs or plants. In this new and expanded edition, learn how to find land, which crops to grow, how to market your produce and more. Author and editor/publisher of Grownig for Market, Lynn Bycynski’s expert advice will help beginning farmers advance confidently through the learning curve of starting a farming business. In this excerpt from chapter seven, “From Field to Farm,” learn a few pricing strategies for selling your produce.
You can purchase this book from the MOTHER EARTH NEWS store: Market Farming Success.
How to Price Your Product
Setting prices is one of the most difficult jobs facing the direct-market farmer. There is no single resource that can tell you what to charge. Yet it’s essential that you know how much to ask for your products if you want to make a profit. In this section, I’ll tell you about some of the pricing strategies other growers use and refer you to other resources on the subject. First, I’ll address the question of pricing for retail, such as farmers markets and your own farm store; then I’ll tackle the more difficult question of pricing for restaurants, grocery stores, and other wholesale accounts. But first, a few words about your cost of production, which should be your first consideration in setting prices for any market.
Cost of Production
When you first start growing, you probably won’t have a very clear idea of your cost of production for any specific crop. New growers tend to just lump all the crops together, add up their income, subtract their expenses, and then decide whether they made a profit or not. Sometimes you get lucky and do make money, but this is a risky way to approach the central issue of your business.
Instead, you must learn to track your expenses and assign them to each crop as either a direct cost (for example, the seeds for that crop) or as a percentage of overhead (the liability insurance on your farm). This number should include the salary you want to pay yourself. The prices you set should use this as the base but also include a reasonable profit for the business.
If you are selling at farmers markets or your own farm store, you know that your prices must be in line with what other vendors are charging and what the supermarkets are charging. That does not mean you want your prices to be the lowest in town. In fact, you should probably be charging substantially more for your products if you are offering higher quality or some other perceived value. Always be careful that you are comparing apples to apples. A few years ago, for example, a grower in Oklahoma was upset when some customers complained that her prices were too high. She conducted a study in which she compared her certified-organic produce prices to prices charged at several supermarkets and a Wal-Mart store. In comparing 42 items, she found that, although unit prices were often lower at the supermarkets, her produce always weighed more per unit. As it turned out, her price per pound was often cheaper and always competitive with supermarket produce.
Unfortunately, many people believe that farmers markets are expensive, offering food just for wealthy people. Numerous studies have refuted this myth, but still it persists. So part of your pricing strategy must include an emphasis on value, while still getting the best price possible.
Grocery store prices are the starting point for setting prices. But there are several reasons why your prices might be higher than grocery stores:
- First, produce is often a “loss leader” for supermarkets. Produce managers buy big quantities of an item and sell it for barely above cost as a way of enticing shoppers into the store. Don’t try to compete with these deeply discounted prices. You’ll go broke.
- Freshness gives you an edge over supermarkets, and you should be able to charge accordingly. Potatoes, for example, may be selling for 50 cents a pound in the supermarket. But those potatoes may have been in storage for months, and their flavor will be far inferior to your freshly dug spuds. In fact, the two aren’t even the same item. Freshness equates to better flavor in virtually all kinds of produce. Consumers know it and are willing to pay more for it.
- Quality should be higher at farmers markets than at supermarkets. Green beans that were mechanically harvested and have been sitting in a box for a week will be noticeably duller than your fresh-picked beans. Lettuce varieties that withstand a thousand miles of shipping will be tougher than your crisp greens. Charge more for higher quality.
- Specialty items just aren’t available at many supermarkets, so you’re going to have to make up your own prices. Heirloom tomato varieties, ripe and flavorful, are worth considerably more than the pale, hard tomatoes sold in stores. Purple potatoes, fennel bulbs, arugula, specialty melons — those kinds of exotic items command a higher price than some vaguely comparable supermarket item.
How do you know what is a fair price? It helps to know your costs of production. If you keep good records of your inputs and overhead, you can figure out how much you need to charge to make a profit. But you also have to take into consideration what other vendors are charging. Some markets have price guidelines that prohibit vendors from charging too little. Find out from your market manager if your market has any pricing rules. If not, survey the market regularly to find out what other vendors are charging. Find someone who attracts a lot of customers, who has high-quality produce and a good display, and use that farmer’s prices as guidance.
Setting prices for restaurants and grocery stores is a much trickier business. There is no open venue where you can compare prices. Other vendors and buyers usually keep pricing information a secret. And that keeps growers off-balance because they never know if they are asking too much and will thereby lose the sale or asking too little and not making the margin they deserve.
So how do experienced growers determine how much to charge? Here are the most common options:
1. Go with the market. Find out what the wholesale distributor is charging for produce of a similar type and charge the same amount or slightly more for better quality. But how do you know what the wholesaler is charging? Your most important tool in this area is the US Department of Agriculture’s Market News Service. The USDA collects and publishes pricing information for all kinds of produce on a weekly basis. Two of the most useful reports available online are the National Fruit and Vegetable Retail Report, which lists supermarket prices for commodities, and the National Fruit and Vegetable Organic Summary, which lists bulk pricing of organic produce at terminal markets. You can create your own custom report for conventional terminal market prices. Start at Market News and choose “Fruits and Vegetables” to see what’s available. Bear in mind that terminal market prices reflect what is paid by “first receivers,” which can include distributors, so those prices may be marked up by 20 percent or more before being sold to restaurants and grocery stores.
2. Check prices at local grocery stores. This is not a great way to find out the going price, because supermarkets and natural foods stores vary in the amount of their markup. Sometimes produce is much cheaper than you might expect because the store is using the low price to attract customers. Other times, particularly with the natural foods superstores, the markup is much higher than a regular supermarket. All those caveats aside, a general rule of thumb is that supermarkets mark up produce 130 to 140 percent. (Multiply your price by 1.3 to 1.4 to see what the expected retail price might be.) But the best way to find out current prices may be the way you would least expect:
3. Ask the chef or produce buyer to tell you prices. No kidding; many growers really do depend on their customers to tell them the going rate for their produce. This works only if you have a good relationship with the buyer and feel you can trust him or her to be straight with you. You might, of course, tactfully point out to the chef that your operation can remain financially viable only if you can get a fair price. Chefs who are happy with your quality and service have an interest in your success and will no doubt see the logic in helping you get your best price.
One strategy is to sit down with a chef before the growing season and ask what he or she would have to pay for a particular item from a wholesaler. If you think the price seems reasonable and you can produce the item for that price, offer to grow it for the chef and keep your price constant throughout the season. That’s a great help to the chef, who can put the item on the menu and know exactly how much it’s going to cost. The same is true of grocery stores; buyers like a consistent price because it helps with planning. If you are sure you can make a profit from a certain price, everyone wins.
Still, it wouldn’t hurt to have access to current prices from a market report just as a backup. Keep in mind that produce is a tiny percentage of chefs’ total costs. Substantially higher prices to you will affect their per-plate price very little. Chefs who try to cut corners by shorting you are headed for trouble anyway, and you should be looking for new places to sell.
For some specialty produce, you are not going to find wholesale prices from Market News because the quantities are insufficient for them to be included on the report. When that happens, you can ask the buyer. But most likely, you’re going to have to depend on the fourth method of setting prices:
4. Determine your costs of production, and set prices to make a profit. This is the most logical yet least common method of setting prices. Some growers who do it say their prices often come in much different from the wholesale price — sometimes more, sometimes less. Chefs get accustomed to working on a different system and, if they’re happy with the produce, will not complain.
Still, keeping track of production costs is a difficult thing for most new growers to do because it involves keeping records about all inputs and all sales and then analyzing the data to determine where prices should be. It’s a headache in the midst of a busy season to keep count of every beet you pull or tomato you throw in the compost pile. But those kinds of records will be invaluable to you in the future to help you decide what to grow, as well as how much to charge, so you should start your business on the right foot by keeping good records. (I know I have said this frequently throughout this book, but I don’t think you will find a veteran grower who would disagree. Good records = success!)
Read more: For more tips from Market Farming Success, read Earning Potential of Market Gardening.
Reprinted with permission from Market Farming Success: The Business of Growing and Selling Local Food by Lynn Byczynski and published by Chelsea Green Publishing, 2013. Buy this book from our store: Market Farming Success.