Pricing Goods for Profit

There are many small farm owners who would like to start a business on their farm. Before production has started, it is important to have a plan for marketing goods. When asked what is marketing, many people list marketing activities, such as: advertising, selling products, and delivering goods. Jay Levinson, author of Guerrilla Marketing, defines marketing as ―everything you do to promote your business from the moment you think of the idea until the customers buy and begin to do so on a regular basis.  Marketing is probably the most important part of a business.

The most important part of Jay Levinson’s definition of marketing that many people forget, is the statement ―begin to do so on a regular basis.  A good rule of thumb for businesses is that 80% of sales will come from 20% of customers. So how should a small business go about marketing their products to their customers? The first consideration is the customers’ needs and wants and then developing a product or service to meet those needs and wants. A business owner must also understand their competition and what they are offering. Finally, doing all of this with their number one goal in mind, PROFIT!

Price is the most visible element of all marketing efforts. If profit is the main goal of a business, pricing goods is an important step. A product priced too high in a market with competitors will likely not sell. On the other hand, a product priced too low will sell but may not be sustainable for the business owners. To price goods the cost of production and the break-even price must be determined.

Can you produce this product at a price that customers will spend? If consumers are used to paying $5 for pumpkins but you cannot produce them for less than $6 each, then it may not be a good business venture for your farm. However, if you can produce them for $3 each and the demand in the market can support another supplier, pumpkins could be a profitable enterprise for your farm. To determine cost of production, a producer must know their fixed and variable costs. Break-even price takes in consideration projected sales to determine the per-unit cost of production.

There are several pricing strategies that could be used. Premium pricing should be used when the product is unique, high quality, and has no substitutes. This is typically short term because the competition sees the price margin and will enter the market. Value pricing can be used when there is moderate competition, customers value the benefits provided by the product, and there are barriers for competitors to enter the market. If the objective is to develop market share and profit, then the cost/plus pricing strategy should be considered. This strategy uses break-even price plus a mark-up for each unit. The mark-up should be large enough to provide a significant profit, but not large enough to exceed what customers are willing to pay. The competitive pricing strategy is focused on cost reduction and to protect market share. In this strategy, competitors’ prices are determined and products are priced accordingly. A final strategy to consider is penetration pricing. This is typically used when a company launches a product in a market with several competitors. Price is set low to grow sales and attract new customers and then increases to market share.

Reaching the ultimate goal of profit in a business is easier to obtain when an appropriate price has been set and customers start purchasing goods. MU Extension Guides G648 ―Break-Even Pricing, Revenue and Units‖ and G649 ―Selecting and Appropriate Pricing Strategy are great resources to assist business owners set prices.
(by Randa Doty, MU Ag Business Specialist)