STRATEGIES FOR

SUCCESSFUL PRODUCT PRICING

Michelle Wolf @ BCAFM - 2015

Four Main Discussion Points

1. The correlation between price and quality

2. A pricing FORMULA you can know and love (because it will make you money)

3. A pricing formula is useless if your mindset, ideas and understanding about money and pricing are limited

4. Pricing by components of your business, rather than by individual products, can be a useful strategy (nuances & big picture)

Quality and Price

• Directly correlated

• If you keep quality and price consistent, you can fill any niche and people are comfortable

• Low-end quality with low-end pricing

• Mid-range quality with mid-range pricing

• High-end quality with high-end pricing

• There is room/need for all 3 at farmers’ markets

Quality and Price • You can fill any one of those niches and do well

if you stay consistent and you use a pricing formula that ensures you make money at each level

• What does NOT work is when consumers sense a disconnect between price and quality

• Obviously, a low-quality product at a high-end price; also, a mid-range item at a low-end price (what’s wrong with it?); etc.

Quality and Price • It’s not the pricing itself that is the problem in

terms of perception, people buy things at all 3 levels

• The problem is when there is inconsistency between your quality and pricing

• Find your niche, use a pricing formula, stay consistent with your quality and price

• Quality relates to your display/merchandising as well as the products themselves

A Pricing Formula to Love

A. Costs + Labour + Profit Margin = Wholesale

• Wholesale x 2 = Retail

B. (Costs + Labour + Profit Margin) x 2 = Retail

C. * Fix Costs + Variable Costs + Labour + Profit Margin + Costs of Selling = Retail

Costs 1. Fixed Costs

– Rent, office supplies, phone, fees/dues, electric, etc

– Things that it takes to run your business, regardless of what/how much you produce of a given product

– Many of these will be items you capture in your book-keeping for your farm/small business taxes

2. Variable Costs (Costs of Production)

– Seeds for a certain crop, supplies for a dress, % of greenhouse space used, certain equipment, etc.

– Costs directly associated with the production of that particular item or crop, costs you incur only because of production of this item

Costs

1. Fixed Costs – Add up all your fixed costs from last year and

divide by some unit that makes sense for your business

– For a dress-maker, it might be the # of dresses you produce each month; For a farmer, it might be bed feet in the garden or by crop weight; For a winery, it might be bottles produced each year

– This will give you a unit of fixed cost to assign to each and every item you produce (if you are using a monthly production, divide accordingly)

Costs 2. Variable Costs

– For each individual item you produce, you need to list all the costs associated with the production of just that product

– Don’t forget things like bags, labels, ties, gas for a cultivator, % of greenhouse space, everything that wasn’t captured under fixed costs

– Your formula will NOT make $ if you aren’t accurately capturing costs (big common error)

– The good news – only do this for a handful of representative items your produce, you don’t need to do this for everything

Labour • What do you want to pay yourself per hour?

• This is totally up to you, but ask yourself this: “When I am handing over my product to a grumpy, awful customer who I don’t like, what wage will I have had to have received to make me feel like I’d be willing to do this over and over and over?”

• $3/hour doesn’t feel very good to most people

• Lack of confidence and self-worth in our sector

Labour • Let’s say you pick somewhere between $10-

$20/ hour

• Determine how long it takes you to make a standard ‘batch’ of whatever you make (an item, a batch, a crop), including everything from buying materials to having it ready to load in the truck to sell

• Do not include selling time here – comes later

• Multiply time by labour rate and divide by # of units of production = labour cost per item

Profit Margin

• “But I’m happy! I calculated by price based on an hourly rate of $17/hour and covered my costs. Adding a profit margin will price me out of the market, and I’m happy just doing what I love and making $17/hour while I do it.”

• “I’m in farming to make a living, not to make a profit. I consider the opportunity to do what I love a gift and don’t need more than a fair, basic living wage.”

3 Compelling Reasons to Include a Profit Margin 1. Cost Capturing – rarely is this done

completely and accurately

2. Pay back your initial investment – we all put some of our own money into starting our businesses

3. Growth – profit margin represents the only cents from each dollar that can be dedicated to buying new equipment, getting a better vehicle, hiring a summer student (the $ you earn for labour is paying your personal bills!)

A 4th Compelling Reason 4. Otherwise, you are just kidding yourself

Some of you are sitting there squirming. You don’t like financial language or feeling like you need to monetize your time this way

Deep down, I’ve come to know that people want to make a contribution while honouring themselves – people matter to themselves

If you don’t pay yourself properly, you devalue your work and your talents and you never feel fully expressed, fully happy, like you are living up to your own potential

So Far… Equals Wholesale • The formula so far gets you to your wholesale

price

• Fixed costs + Variable costs + Labour + Profit Margin = Wholesale

• This is the cost BEFORE you go to sell it

• Many formulas are: Wholesale x2 = Retail

• More detailed way is to add selling/shipping costs to wholesale and that equals retail

• This is where cost of market table, transportation, portion of display costs, FM dues, labour for time selling, etc. comes in

The Wow Factor! • The formula is the first part

• Just figure out what you need to make your labour (your salary), cover your costs, and make a profit that will allow you to slowly build/grow your business

• Some products can be priced (much) higher than their formula worth

• I call it ‘the wow factor’

• Based on uniqueness, supply vs. demand, solves a very particular problem or need in the marketplace

Higher Profit Margins • Think about corporations – many are more

likely to make 60% or 200% profit margins

• In commodity agriculture, profit margins are down around 0.25% to 2%

• In grocery retail, it’s around 3%

• Food doesn’t make big money

• But individuals items in your mix CAN make good profit margins – find those

• Selection is key, so use higher profit-margin items to offset needed lower-profit items

Selection is King, Think Holistically • Having a broad, full range of products will

make your business more successful

• Don’t make more just to make more – if you aren’t good at it, your entire business suffers from poorer quality

• But also don’t discount your ‘lost leaders’

• You can afford to flatline on some items if they help you build a more robust product offering, thereby selling more of your lucrative product

Understanding What Drives Sales

• Price is simply what people are willing to pay for your product – it can be rather arbitrary

• Price is based on costs and inputs but it also needs to take into account uniqueness, supply versus demand, and the perception of value that you leave with the customer

• Commodity pricing is brandless, storyless, valueless, contextless – the only value is low $

Understanding What Drives Sales

• In the absence of really understanding what your product can uniquely do or what unique values underlie it, people are forced to make their decisions based solely on one thing – price

• When people notice $0.50, it’s because they don’t understand the difference

• The more customers understand how/why your product solves a problem or fills a want they have, the higher your price can be

Understanding What Drives Sales

• Getting a deal, finding a bargain, getting something cheap is what people will focus on when they don’t really understand anything special about a product or appreciate how it helps them meet a need or want they have

• You can’t compete against Walmart and the Bulk Barn and Costco on price

• You can’t compete against wholesale producers on price

• You need to clearly articulate what benefit people will experience by purchasing your product - only then does price begin to fade into the background

Understanding What Drives Sales

• Think about a favourite something in your own life, a treasured product or service. Would you pay a ridiculous price for it? Yes! Because it’s not about the price. It’s about how good your life is because of access to that particular product. We spend money on things that meet our wants. Period.

Benefits and Results • So figuring out what benefits and results people

can have from your product is the key to moving the conversation away from price and toward the ‘service’ your product is in the world

• Without understanding that, you’ll always have a limited understanding of the complexity of pricing

• And you’ll always be playing a ‘dollars’ game instead of a ‘benefits’ game

• Always focus on WHY someone would want a fresh, tree-ripened peach, not on the peach itself (the peach is only the means to an end)

… Which Means • What is ‘local’? What is ‘organic’? What is

‘handmade’? We need to get much better at speaking to the values and ‘why’ behind these buzzwords

• Don’t assume people know... at best, they simply don’t get it; and at worst, they understand incorrectly

• The next time you are tempted to use buzz-words to describe the uniqueness or benefits of your product, use my handy little tool… “which means”

… Which Means • “All of our products are handmade in our

studio, which means we can guarantee that no toxic glues have been used, that local students can find summer employment with us when they come home from university, and the product will last longer than a factory-made version, so it’s cost-effective in the long run.”

… Which Means • “We grow our produce organically, which

means our customers can eat food knowing they didn’t support any agri-chemical corporations, there is no residue on your food, our farm is teeming with birds and wildlife, we’re keeping the waterways in our area pristine, and an inspection process ensures that we are telling the whole truth about all of this.”

… Which Means • Bottom line: People don’t buy your product for

it’s own sake. They buy your product for what it does to/for them. Your product represents a solution to a problem or the fulfillment of a need. You will sell more, and at a higher price, if you become great at explaining to people the value and benefit and result of your product.

• Masterful marketing isn’t about you or your product, it’s about results, values, benefits

Comparison Pricing

• Can be useful when you start but to rely on it is a mistake

• No 2 businesses have the same costs of production – you can’t make $ unless you know and honour your specifics

• Perpetuates the idea that FM pricing follows commodity-market pricing – it shouldn’t

• No 2 people have the exact same product, even when they have the exact same product

• You will get more or less based on much more than your product alone – (hint: branding)

Be of Service… Don’t Sell Crap • One reason things don’t sell at markets has nothing to

do with price. • You can price certain items at less than the cost of

production alone and they still won’t sell. Why? • Because there is no value to the customer in buying

something that represents an interest of yours if it doesn’t also fill a want/desire in others

• In the absence of an obvious benefit, it looks like you are selling it for no other reason than to make money or fuel your hobby… and that turns people off

• People don’t buy what you sell, they buy why you do it • Don’t call it a ‘price’ issue when it’s really a ‘value’

issue (lack of value to the consumer)

Money Mindset • Pricing is also a money mindset issue

• What do you believe your time, skill, labour, expertise, passion, lifestyle, contributions are worth?

• They’ll show up in how you price products

• Owning a successful business isn’t about having a solid pricing strategy. That helps, but its more about having a solid self-worth strategy, a solid sense of your value and knowing that what you do matters in the world

Four Main Discussion Points

1. The correlation between price and quality

2. A pricing FORMULA you can know and love (because it will make you money)

3. A pricing formula is useless if your mindset, ideas and understanding about money and pricing are limited

4. Pricing by components of your business, rather than by individual products, can be a useful strategy (nuances & big picture)