FACT SHEET: Part 1—Introduction to pricing

Developing your pricing plan

By Michelle Frain, Marketing Coordinator for the Rodale Institute and Christine Ziegler, Editor

Posted June 27, 2005

Pricing is a challenge for every business. As a small farmer, you know you can charge a premium price for fresh, local, direct market, and/or organic products. But do you know how much more you can charge? And do you know how to convince people to pay that price? The answers to those questions can be found in one place—your pricing plan.

1. good record keeping,
2. a dose of elementary math,
3. a basic understanding of economics, and
4. a splash of psychology and sociology.

If you powered through that bullet list and you’re still reading, congratulations! You’ve got the interest and tenacity you’ll need to get a handle on product pricing for your operation. For many farmers and small businesspeople, each of these pricing requirements is dull (at best) or daunting (at worst). And the prospect of coordinating records, math, economics, psychology, and sociology all at one time sends many people running for the back forty!

If you’re reaching for your boots, stop! You don’t have to do everything at once. To develop an effective pricing plan, the best approach is to take only one step at a time. Don’t overwhelm yourself! Do what you can, keep it simple, and make only one or two changes to your work system at any given time. Remember: Even if you can take only one small action that improves your pricing plan, you’ve done a good thing for yourself and your business.

A pricing plan can help you:

• determine accurate production costs for each of your products,
• set selling prices that cover your costs AND make you a profit,
• convince your customers to pay that price,
• expand your customer base, and
• increase your peace of mind.

While these benefits are great, the reality is that most farmers already have more tasks on their “to do” list than they can handle, and this fact is a major obstacle to the development of an effective pricing plan.

Collecting the information you need to formulate a fair product price (one that covers all your production expenses and pays you a living wage) can be challenging and time consuming, especially if you’re working without a plan or some guidance. The good news is that, once you go through your first organized pricing process, it gets easier and less time consuming each time you do it. Basic pricing concepts apply to most products, and the records you create the first time can be easily updated and reused.

The goal of this fact sheet series is to make your initial price calculations a bit easier and more effective by helping you:

1. identify and calculate the major components of your production costs,
2. develop systems to record cost information as a regular part of your daily operations,
3. use basic math to turn cost information into prices that give you a reasonable return,
4. find ways to add value to your products to capture a larger share of the food dollar,
5. determine the premiums you can charge for your value-added products,
6. assess the relative profitability of organic products, and
7. identify resources for further ideas and assistance.

Developing a pricing plan is not usually “quick and easy” the first time you do it; it requires focus, persistence, and time. However, farmers who have taken the time to figure out their own pricing plans will tell you that the benefits are well worth the effort. And those who don’t make this effort often struggle financially, barely breaking even or losing money.

If you haven’t had the time to develop a pricing plan in the past, don’t be too hard on yourself! You are a member of the majority. But you can become a member of the more profitable minority more easily than you think. Every farmer who has successfully mastered product pricing has done so one step at a time, and you can too! Even one small step can improve your pricing plan and your bottom line.

So, if you’re ready, click here for the Cost Concepts fact sheet, and let’s take that first step!