Tuesday, July 8, 2014

Mark Up versus Margin

Markup vs. Margin

What is the Difference? Is there a difference?


These two terms are often used interchangeably by folks that do not value accounting skills. However, that misunderstanding can menace of the bottom line of your enterprise. A solid understanding and application of these two separate concepts can enhance our pricing model, and have a drastic effect on the bottom line.

By definition:
  • markup percentage is the percentage difference between the actual cost and the selling price.
  • gross margin percentage is the percentage difference between the selling price and the profit.
Photo credit:  Simon Cunningham

Mark up reflects your cost. Margin reflects your price.
Gross margin or gross profit is defined as sales minus cost of goods sold. If a retailer sells a product for $10 which had a cost of $8, the gross profit or gross margin is $2. In our example the gross margin ratio is 20% ($2 divided by $10).
In our example, the product had a cost of $8 and it had a markup of $2 resulting in a selling price of $10. The $2 markup is the same as the $2 gross profit. However, the markup percentage is often expressed as a percentage of cost. In our example the $2 markup is divided by the cost of $8 resulting in a markup of 25%.
Many people have a problem with accountants’ jargon and often get confused between the terms “profit margin” and “markup” which are often bandied about freely or used interchangeably. Although these two terms are used to express different things, they are also, in fact, two different ways of analyzing the cost and profit of a product or service in your small business.
“Profit” is the difference between what you sell it for and what you paid for it. “Margin” simple means you turn that into a percentage of the selling price. You do this so you can compare different items easily.
So the difference is that markup is your profit as a percentage of the cost price and profit margin is your profit as a percentage of your selling price.
For additional information and insight into the fascinating and powerful realm of prices, check these two research-based resources:

Thursday, July 3, 2014

How Discounting Products Can Hurt Your Business

by Juliette Enfield, Extension Educator, Warren County

Businesses that sell perishable items such as baked goods, vegetables, fruits, or plants often feel that they want to get rid of their product at the end of the day and so they discount it in order to “get rid of it”. While discounting your products will temporarily boost sales and bring in customers who may otherwise not buy your product, discounting too frequently will not help your profit or your product image. Some farmers markets do not allow end of day discounts, and there is a very good reason for this.

Discounting too frequently will not help your profit or your image.
Grocery stores used to offer day old bread at a discounted price but they stopped this practice when they realized that they were losing money from their fresh bread sales. Their customers would continually purchase the day old bread at the discounted price instead of spending more for fresh bread. These stores eventually stopped selling day old bread because they found it was more profitable for them to donate old bread to food pantries than to sell it at a discount.

Niche marketing, or focusing marketing efforts on a specific segment of the population, is a recommended practice for small food businesses who sell directly to the customer. Small food businesses produce high quality food items with attributes that mass produced foods do not such as handmade or locally grown. Higher quality demands a higher price, and price is linked with product image. For example, when you buy an everyday item that is priced very low, you may think that something is wrong with the product. When an item is priced higher than normal, there is a perceived higher value in that product.

There are different types of customers in the market. In a previous blog post “Do YourProducts Meet Your Customers’ Values?”, we learned that not all customers are looking for the same product attributes. Some customers consider price more than other product qualities such as whether it is locally produced or not. Other customers consider the intrinsic value of the product, including where and how it was made and with what ingredients, before price.

Most food businesses know that when a price is too high, the product will not sell. When the price is too low too frequently, the business image and profits will suffer. Even with bargain shoppers, there is a point at which price will no longer influence demand. There are critical limits for pricing. For example, when the cost of a pint of heavy cream drops from $2 to $1, demand increases. But when the cost drops below $1, demand no longer increases (Perner, 2008).

Pricing is just one of many factors which influence a sale. Mark Hunter, the author of High-Profit Selling: Win the Sale Without Compromising on Price says, “Stop thinking the conversation is about price. It’s about the customer and the solution you know you can provide to them”(Hunter, 2013). When the customer’s needs are addressed, the issue of price doesn’t come up as quickly. This statement also reminds business owners to listen to the customer and find out what their needs and wants are.

Keep the integrity of your high quality product. If you are concerned about wasting your products, find a food bank that will accept your old products, or find a way to turn the excess into compost. Today’s customers want to know the story behind your business and they want to know about causes that your business supports (ConAgra Foods, 2014). Making food bank donations or making compost could be a behind the scenes story that you are proud to share with your customers without hurting your profits.

Thursday, June 26, 2014

Cooperative Marketing for Agricultural Producers

by Heather Mikulas (Allegheny Co.) and Winifred McGee (Dauphin Co.) Penn State Extension

Cooperative marketing is a model which may be useful for all sizes of farms, although small to medium sized diversified farms, and those making specialty value-added products, will especially find that selling as a group makes a great deal of sense.  The evolution of demand in the local and regional food sectors has grown from one farmer conducting transactions with one chef; to a small scale wholesale niche marketplace in which increase in demand sponsors better market penetration when growers join forces.  Let's explore some business benefits to marketing cooperatively.
Cooperative marketing "puts all the pieces together"
 to reach new customers.

Increase Bargaining Power
Farmers have long used cooperatives and other forms of collective organization to increase their bargaining power in input supply and product markets.  As membership of the cooperative grows, and the supply of quality foodstuffs becomes greater, opportunities for negotiating more favorable prices also grow.

Promote a Product Line
Coordinating a marketing message, branding, locale, and other shared points can assist with product recognition with customers.  Using geography to create provenance (think Champagne or Parmesan cheese) can help the coop's products be recognized in the marketplace and cross the finish line at the point of sale.

Access a Broad, Diverse Customer Base
The fledgling cooperative effort among growers of goats and sheep for Halal processing is an example of farmers banding together to raise enough animals and support a local processing plant that will sell to a growing Muslim population - most of them NOT living in Pennsylvania.  This access to customers outside the community brings dollars into local towns and local farms.

Take Advantage of Size Economies
Often, though not always, you can enjoy significant cost savings or command a higher price by marketing a larger aggregated volume of product.  For example, marketing larger quantities of products can result in bigger contracts than if each individual marketed their own smaller quantities.

Maintain a Steady Flow of Product
Having your product available at the time your customers want to buy it is essential for successful marketing.  Even the best product will quickly lose market share if it is not reliably available.  This is true whether you sell directly to customers or into wholesale channels.  While a single producer may not be able to maintain a steady flow of product, a group of farmers working together can extend the time their product is available and smooth out the flow in order to minimize periods of shortages and oversupply.

Create a New Market
There are two sides to every market - suppliers who offer a product for sale and customers who offer to buy it.  Sometimes potentially viable markets fail to develop if a minimum volume can't be reached.  For example, numerous small grower/producers in Central PA could economically produce their farm fresh and value-added products, but did not have the time or money to launch their marketing efforts.  Or new slaughterhouses could be started to meet the rising demand for local, sustainably produced animal protein.

If these ideas resonate with farm goals (such as penetrating new markets or finding new ways to sell product), the first step is to convene a meeting with likely partners to explore collective ideas.  Pennsylvania has several resources, including Extension, to assist developing coops should a cooperative marketing model make sense.

Tuesday, June 17, 2014

Some Questions I Get About Social Media

by Sarah Cornelisse, Sr. Extension Associate, Dept. of Agricultural Economics, Sociology and Education

In this post, I thought I would simply give my thoughts on some of the questions I get when leading workshops and meeting sessions on the use of social media by businesses and organizations.
There are numerous social media tools to choose from

How do I choose the social media tool to use?
There are many factors that should play into your decision on what social media tool(s) to use.  Among them are:

  1. What are your goals?
  2. Who do you want to connect with?
  3. Where are your competitors or similar organizations?
  4. What type of content do you want to share?
  5. How do you want to engage?
For more detail about each of these, visit my blog post on this topic.

How much time should I be spending on social media?
This is a question with no concrete answer.  Certainly, when you first delve into social media you'll spend more time learning how each of the different tools function, "listening" and following other pages, tweeters, etc. to learn about the people and businesses/organizations, and the conversations that are taking place, and learning how to craft content for the tool(s) that you've decided to use.  However, as time goes by, your use of social media will likely become less time intensive (unless you've decide to keep adding additional tools to your toolbox).

Do I need to worry about copyright issues?
Simply, yes.  The best approach is to post your own original content.  However, if you decide to share another person's or business/organization's content, the best approach is to get their permission to share.  Another tip, but one that should still be used with caution, is to make sure that you credit or link back to the original location for the content.  Beyond this, I would advise that you speak with an attorney or other individual knowledgeable about copyright law.
Source: http://commons.wikimedia.org/wiki/File:Copyright-serif.svg

How can I develop engagement with my followers?
Developing engagement with your followers is one of the aspects of social media that requires your time.  Social media is called that for a reason, and you must expect to spend time engaging with current and potential followers. Here are some additional tips:

  • Be transparent. Share what you're about.  Answer and respond openly and truthfully.  People can tell when you're not being transparent.
  • Don't over-share.  I mean this in two ways. First, don't share overly personal information on your business/organization's account.  Followers do want to get a sense of your personality, but there's a line that you shouldn't cross.  Second, there are general levels of acceptance regarding the number of frequency of posting to each of the social media tools.  Get a sense of these.  For instance, it's acceptable to tweet much more often than it is to post to Facebook.  Over-posting is a top reason people will stop following.
  • Respond to negative comments. Unless the person posting negative comments is a troll or becoming abusive, there is an expectation that you respond.  It is acceptable to ask to take the conversation offline.
  • Provide variety within focus. You need to provide a certain level of variety with your social media posts to keep your followers interested and engaged.  Yet, too much variety may lead people to question what your role/aim with social media is intended.
  • Act/respond quickly.  If followers ask questions, provide feedback, or criticism, you want to be able to answer or provide a response within a reasonable amount of time.  And, for social media, the expected response time is much shorter than for phone or email.  Depending on your job or access to a computer, this may mean investing in a smartphone or other mobile device and using the appropriate apps and notifications.

If you have social media questions, feel free to ask in the comments section and I'll try to address them in future blog posts!

Wednesday, June 11, 2014

When Targeting Retailers Rather Than Consumers

by Winifred McGee, Extension Educator, Dauphin Co.

In our Penn State Extension Food for Profit workshops, we routinely discuss the necessity of targeting a niche market, then innovating related to that market segments' wants and needs - actually getting ahead of your customer by creating what they will want next (before it is realized by target customers).  This process takes time and research, first identifying a set of similarities that define the group, learning as much as possible about the group (observation, social media, etc.) to create a strategy to reach these customers in ways that count.  This process works well for entrepreneurs who will make the product, and make direct sales.

However, if an entrepreneur sets his or her sights on selling to retailers (the ones who actually target, and sell to consumers) the market research can get a little "murky."  A new perspective is needed to develop an effective wholesale campaign that hits home for buyers - one that replicates the targeting to actual food customers.
Being a link in the supply chain takes connections,
work and perseverance!

The SBA Blog Spot has a great article by Caron Beesley (a small business owner, a writer, and marketing communications consultant) that provides basic insights in how to become a supplier to larger retailers.  While it may be a long, uphill stretch to attract the attention of buyers and get products from your small-scale food manufacturing concern placed in a substantial retail chain, Beesley indicates that the potential rewards are substantial.  She references a study that showed that after a small supplier lands a contract from a bigger company, the small company's revenues go up 250 percent and they create about 150 percent more jobs in just two or three years.

So, how to enter this lucrative marketplace?  Like all marketing activities, the process starts with research.  Start with identifying potential buyers, and then define the value your small business can offer if they carry your product(s).  One source of information about potential wholesale buyers is the Supplier Connection.  This portal allows small suppliers (with less than $50 million in revenues, or less than 500 employees) to market themselves (free of charge!) to a number of large U.S. companies at the same time, so that the "large guys" can expand the variety of items sold, while giving capable small firms the opportunities of the large marketplace.

The Supplier Connection is relatively easy to use, with a downloadable manual to facilitate new businesses' participation.  Each participating member creates a profile to display company information, their small business commitment, usage of Supplier Connection within their company, contacts, etc.  Accessing the Supplier Connection enables small-scale food business owners to identify businesses that are the best fit for their product lines.

Most times, just being registered is not enough.  There are several social media channels that will make a business more apt to be noticed through Supplier Connection.  One of these is a Linkedin group for small business members.  In addition, Supplier Connection can be visited on Facebook, Twitter, or Google+ for news, updates and information on small business development and they have a blog that hosts a monthly contest and highlights small business success stories.  Each of these are a great way to be actively learning and launching a wholesale endeavor.

No route to launching a food business is 100% guaranteed - and there may be many barriers to break through on the way to successful wholesale marketing of a food product.  However, taking the time to get to know the "lay of the land" to successfully connect with potential customers will increase the chance of success in becoming a part of a supply chain - and getting a food product on its way to the consumer.

Friday, June 6, 2014

The Artisan Cheese Industry is Still Growing

by Sarah Cornelisse, Sr. Extension Associate, Dept. of Agricultural Economics, Sociology, and Education

Recently, I came across this WSJ article about American made artisanal cheeses.  It describes the growth in demand for and production of artisan cheese across the U.S.  This article grabbed me because it included numbers on how many producers of artisan cheese there were across the country as well as individual states - something I've found pretty difficult to come by.  Through my work, I know that dairies are looking at value-added dairy production as a possibly opportunity - for income growth, bringing the next generation back to the business, etc. - and this is supported by information from sources in the article.

Goot Essa cheeses.  Goot Essa LLC is located in central PA.
Photo credit: WPSU
As reported in the article, Jeffrey Roberts estimates that there were around 825 licensed artisan cheese producers in the U.S. in 2012, up from 410 in 2006.  I spoke with Mr. Roberts and he shared with me the numbers of artisan cheese producers that he has been able to identify for some individual states.  Perhaps surprisingly, or perhaps not, Pennsylvania ranks #1, by his count, for the number of artisan cheese producers for 2013 with 94, up from 41 in 2006.  Here are the producer numbers for the top three states for number of artisan cheese producers:

Three of the factors Mr. Roberts viewed as driving the growth of the artisan cheese industry are: raw milk cheese production, women farmers, and goats.  Indeed, as of July 2013, there were 55 permits for the manufacture of raw milk cheese aged 60+ days within Pennsylvania.  This accounts for over half of the number of PA artisan cheese producers.  Of those 55 raw milk cheese producers, 13 appear to be producing goats' milk cheese (I say "appear" due to my interpretation of the operation types given).

Demand for local foods is also a driver behind the growth of the farmstead and artisan cheese industry.  With no drop off in local food demand in sight, the future looks bright for enterprising dairies.  However, along with the increased demand and resulting supply (with the increased number of cheese makers), comes an increased environment of competition.  Artisan cheese makers must provide not only a local product, but it must be of high quality and be a product of a sound business plan.

For individuals interested in entering the cheese industry, Penn State offers a 4-day short course for farmstead and artisan dairy processors and others interested in cheese to gain knowledge of the materials and processes used to make specialty cheese and learn techniques to improve their business.

Wednesday, May 28, 2014

Season Extension Possibilities for Your Fruit And Vegetable Crops

by Lynn Kime, Sr. Extension Associate, Dept. of Agricultural Economics, Sociology, and Education

Selling produce and small fruits before or after traditionally produced local crops usually commands higher prices.  Think of what you pay for produce in the store during the "off-season" and what you pay for the same things during the traditional, local "in-season."  You almost always pay higher prices early and later, or when produce is delivered from non-local sources.  Capturing these higher prices with season extension can be something to strive for with your own operation.  Your customers will appreciate having these products from a local source instead of purchasing products from non-local sources.

It may be too late to consider season extension for your small fruit and vegetable operation for this spring, however, planning now for fall season extension may still pay dividends for this crop year.  There are several methods to extend your growing and marketing seasons for this year.  These include row covers, high tunnels, and greenhouses.

Strawberries growing under row covers
Row covers are traditionally used during the early spring months to "push" the plants to flowers and produce earlier than without row covers.  These may be the least expensive and easiest to use since they are installed in the field but are usually removed during the morning hours to allow the soil to warm.  If used for strawberries for example, you may be able to begin harvest one to three weeks ahead of producers not using this method, allowing you to market earlier and capture the early season market.  Prices can be as much as 10% to 20% higher which usually offsets the additional costs.

High tunnels can be heated or not heated.  If using a heating system, you will be able to plant earlier than without additional heat and remain in production later in the season.  The earlier you plant, the earlier you can produce and market.  Tomatoes and peppers are common crops produced in high tunnels for spring and fall, but you can produce these crops and greens later into fall and capture the locally grown, late season prices for your production.  For example, early season tomatoes may sell for $15-$40 per box as opposed to $10-$20 per box during periods when other producers are harvesting field grown tomatoes.
Peppers growing in a high tunnel

I know one grower who produces strawberries into September and October in his high tunnel.  I asked him what price he can expect for locally grown strawberries in October.  His answer was "Whatever I want."  This marketing strategy has worked very well for his operation.

Greenhouses may be used to start plants in early spring to reduce the cost of purchasing plants on the open market.  You can also produce more plants than you need for your operation and sell the excess to other producers or your customers at farmers' markets.
Crops growing in a greenhouse

Greenhouses will also extend the harvest through the fall and beyond as long as you can produce the crop(s) and still remain profitable even when including heating costs.  You will need to track all costs and keep your budgets up to date to be sure you still maintain the profit margin you desire.

I know this is a busy time of year, but you can still have a tunnel installed in time for fall use.  You should determine if you can market the additional production and what prices you may receive.  The research may expose an additional marketing opportunity for your operation and result in additional income and profit for the year.