Pricing Power for Direct Marketers

by John Berry, Extension Educator, Lehigh Co.

Agricultural marketing activities account for over 17% of the nation's gross national product.  Additionally, roughly eighty cents of every consumer food dollar goes to cover marketing expenses.  Clearly, performing some marketing chores are a possible source of increased revenue for food producers.

Is $1.00/lb the "right" price?  Well, it depends...

However, when we take on the chores of marketing many challenges must be expected. Academics tell us marketing consists of product, promotions, placement, and pricing.  One aspect of marketing that generates many questions is the function of pricing.  "What should I be pricing my melons at?" is heard on many visits to local farm markets.  This leads me to suggest that prices and pricing must be a well thought through piece of your overall marketing plan.

I firmly believe cost of production is the basis of calculating price.  If our price does not at least cover our cost of production we are not even trying to break even.  My mantra is "I can sit on the porch all day and be broke. I don't need to work and be broke."  As an integral part of the marketing plan, price must be flexible enough to meet the competition and adjustable to changing situations.  Having a clear idea of your marketing objectives and the target market for your products makes selection of a "proper price" easier.

Is the Point Profit?

As we get comfortable with setting and adjusting our retail prices, we can start to consider if we are trying to maximize total profits, or the profit per unit.  Are you willing to take a lower price if you could sell more units?  The following table gives you a picture of this "game."  The first row states that if your margin is 10% and you reduce your price 5%, it will take an increased sales volume of 100% to meet your planned revenue goals.

Current				Required %
% Profit		% Price		Increase in
Margin		Reduction		Sales Volume
10		5		100
15		5		50
15		10		200
20		5		33
20		10		100
25		5		25
25		10		67

An effective pricing strategy reflects four factors:

• Your cost for each product.  Retail price needs to cover the cost of the good itself and ideally include a profit in addition.
• Possible sales response to price change.  Many consumers are aware of the going market price.  We do need to understand how our most significant buyers might respond to price adjustments.
• Costs and prices of the competition.  If my cost of production and thus price, is higher than my real competition's selling price; why would customers buy from me? This is where we start to talk about "value" and not price.
• Probable responses from the competition to what you do.  Many successful businesses pay attention to competition.  How might the alternative sources of your products respond to your prices and any price adjustments?

Proper pricing is essential to long-run business success, and pricing is as much a marketing concern as an accounting one.  Additionally, pricing strategies can be a measure of management effectiveness.  Ultimately, as we develop effective pricing strategies we harness the power of retail farm marketing.  We are able to more easily reach our enterprises' marketing and financial goals.

How Do We Meet Consumer Food Expectations and Demands?

by John Berry, Extension Educator, Lehigh County

As I explore conditions with which "my" direct-to-consumer farm marketer clients manage their enterprises, the most frequently noted comments center on understanding the changing and apparently flexible nature of consumer expectations.  Sometimes, we expect our buyer to think and act similar to ourselves. Often, they do not.

Looking at recent research on consumer purchasing behavior we came across the below summary. This USDA summary compares how consumer buying behavior compares to scientific food use recommendations. The article titled Americans' Food Choices at Home and Away: How Do They Compare With Recommendations? offers the following highlights:

• Grocery purchase data reveal that consumers underspend on fruits, vegetables, and whole grains and overspend on refined grains, fats, and sugars/sweets, compared with USDA food plan recommendations, a pattern that showed little change from 1998 to 2006.
• Food consumption data point to an even bigger challenge to improving diet quality: away-from-home foods now account for one-third of daily caloric intake, and they are not as healthful as at-home foods.
• New government and private industry initiatives to make food labels and point-of-purchase information ore relevant, understandable, and motivating may help consumers choose more healthful foods.

For us direct-to-consumer farm marketers - this study (and others) makes me wonder how to best promote the safe nutritious foods available at our markets. The challenge may be the "more relevant, understandable, and motivating" concept made in the 3rd bullet point above.  Let's look at how we might enhance customer communications efforts to reassure and reach these vital business partners.

1. Relevance - consumers have more than enough places to receive product knowledge and products. Our main task is to stay up-to-date with what our current (and potential) customers' desire and then communicating product benefits in a casual, non-intrusive manner.
2. Understandable - we can turn to the dictionary here for a straight-forward look at how to approach shaping our customer buying habits. The Webster's dictionary offers the following when describing "understandable": accessible, coherent, graspable, legible, decipherable; plain, simple, fluent, well-spoken. All these descriptive words suggest the use of words, concepts and calls to action that are at the reading and comprehension level appropriate for our expected shoppers. There may be little need for industry jargon and fancy terms.
3. Motivating - consumers have a wide range of factors affecting what drives their food purchasing habits. It can be a continuous struggle between what I believe is significant and what I believe is within my means. Understanding and motivating the purchasing activity within your market can be quite powerful.

The challenges of effective retail farm marketing atop all the other business management challenges are often immense. However, they are not insurmountable. When we focus some of our time on a better understanding of the constantly evolving state inside our customers' heads we are better prepared to influence their purchasing behaviors. As we reassure and motivate our buyers we stand to have a more positive experience ourselves.

Real-Time Monitoring of Your Farm Equipment

Farmers rely on their equipment everyday to run their farms.  It's imperative to have good data on how each piece of equipment is used and how much it costs to operate in order to optimize machinery to it's fullest potential (read more about machinery optimization in my past post).  

To collect data in real-time, AgCo has developed AgCommand, a device that collects data about a specific piece of equipment and delivers the information via a cellular modem and GPS in the device to the AgCommand website.  The website gives reports that track engine hours, fuel consumption, operator efficiency, equipment health info, and field-specific machine information. Reports can be used to monitor and control operating costs and for planning, billing, and maintenance scheduling.  This kind of information would be very helpful in making decisions on how to best use your machinery.

Figure 1.  Example map of a farmer's land and an AgCommand report on the working time of a piece of equipment.

Another great feature of the AgCommand system is geofencing.  As Farm Industry News describes it, geofencing "allows the user to build a virtual fence around equipment using GPS coordinates. So when equipment leaves the fenced-in area, the telematics system sends a text message or e-mail alert. This can help avert theft, or simply let you know that your planter, sprayer, or combine has finished work in a field and is moving on to the next. Similarly, telematics curfews can alert you when a machine is started after working hours."  

As a farm business owner, have you ever heard of or used the AgCommand system or something similar?  Are you willing to try this new technology?  Of all of the reports and information generated by the system, what is of greatest importance to you?  Can you think of any other data not mentioned here that you would like a system like this to collect?  Are you ready to embrace this new technology?

Finding Local Foods on Your Next Road Trip

As you're driving down the highway on your next road trip, take a look at the signs advertising what food options are available at the next exit.  Almost all of the food options are fast food.  Obviously, fast food is convenient and predictable, but what if you want to eat something different?

SHFT, a multi-media platform company, recently released a smart phone app called Food Tripping to help consumers locate local foods (watch the video below for a brief summary).


Food Tripping uses GPS to locate local restaurants, juice bars, farmers’ markets, microbreweries, etc.  Users can search by location, name, popularity, and category (see Image 1).  Each listing gives the address, phone number, category, website, directions, and "sharing" capabilities (via email, Facebook, and Twitter).  You can also view a list of past businesses you've visited when you "check-in" or "add to favorites".  Think of it as Foursquare just for food.

Image 1.  Food Tripping app displaying farmers' markets in the St. Paul, MN area.  Photo from Supermarketguru.com

As an ag business owner, how will this new app help you?  This sounds like another great way to bring new customers to your business without any cost to you.  The app is free (available on iPhone and Android devices) and anyone can make a free listing for a business.  All you need to do is click the "suggest" button and fill out a very short form with your business's info.  Once approved, your business will be listed in your area.  Why not take 5 minutes out of your day to create a listing and get some free advertising?

As a consumer, would you use an app like this to visit a food business in a town you're unfamiliar with?  As an ag business owner, have you listed your business on other apps (like Foursquare)?  Has your listing attracted new customers?

US Ag Exports at an All Time High

Last week, the USDA released some wonderful news about agricultural exports.  From fiscal years 2009 to 2012, $478 billion in US ag products were exported, the highest 4 years in history.  Even better, 2013 is expected to break this record.

In a blog post by the USDA, these record-breaking sales were highlighted with a few examples.  2012 was the first year ever for China to reach an agreement with the US to accept shipments of US pears.  In this short time since the agreement was reached, China is expected to become one of the top five importers of US pears in just 2 seasons.  

Ship carrying containers full of US exports overseas.

Also, the Foreign Agricultural Service (FAS), Agricultural Marketing Service (AMS), Food Safety and Inspection Service (FSIS), the Animal and Plant Health Inspection Service (APHIS), and the US Food and Drug Administration (FDA) are collaborating on a certification program for exporting processed eggs and egg products like omelets, frozen egg patties, crepes, hard-boiled eggs, and mayonnaise.  These new market opportunities could reach an estimated $500 million in sales for producers.  

If you are an ag entrepreneur and are interested in exploring export opportunities, it's imperative that you DO YOUR RESEARCH as you would with trying any new opportunity for your business.  Some important questions to think about:

1. Is there market demand for my product internationally?  Read about conducting market research in The Guide to Farming.
2. Would I need to alter my product at all before selling it?  For example, think about local tastes, package/portion size, and religious cultural beliefs  (like Halal or Kosher certification) that might deter future customers.
3. What laws do I need to follow in order to get my product exported?  Check with your state for more info about this.  Here is info for Pennsylvania producers.

As an ag business owner, do you currently export any of your products?  If so, to what countries?  Do you have any important observations about exporting?  If you are not currently exporting, have you ever thought about it?  Why or why not?

Is Smartphone Usage Hurting Retailer Sales?

For those who own smartphones, you know how easily you can use one to compare prices.  This practice, known as "showrooming",  is great for customers' wallets, but hurting sales at brick and mortar stores.  A store in Australia specializing in gluten-free items has taken a rather extreme measure to prevent showrooming.  The store is charging anyone who comes in the store a $5 "just browsing" fee, which is returned if the customer buys something.

Charging customers a fee to look around your store is definitely an extreme measure to prevent showrooming.  You can expect this to anger potential customers, so I would not suggest going such an extreme route.  But what can you do to curb showrooming?  First, it's important to understand why consumers are using their phones.  In a survey conducted by Perception Research Services International, 53% of consumers use their smartphones to compare prices, read customer reviews (49%), check for sales/coupons (48%), and searching for product information (48%).  Consumers want to know they're getting a good product at a fair price.  For example, Target monitors competitors' prices on 30,000 products to be competitive.  They also recently introduced a policy that will match online competitor pricing.  

Grocery customer using a smartphone to compare prices.

In the article "Showrooming, Not Online Transactions, Is Real threat To Grocers", experts report that less than 5% of customers actually use the price match policy; it's more so used to gain customer trust in pricing.  CITI Research explains that "“the most successful retailers are developing a fundamental understanding of the difference in order to avoid a race to the bottom as some have feared with online price matching.” 

As a food retailer, do you see a lot of customers using their smartphones while shopping?  Do you actively compare your prices with online retailers to stay competitive?  Do you offer a price matching policy?

Starting a Farm? Get Prepared!

by Lynn Kime, Sr. Extension Associate

When beginning any new enterprise, many decisions need to be made prior to planting or purchasing the first animal.  These decisions require research and developing an enterprise budget to be sure the venture will be profitable.  Depending on the scope of the enterprise, a business plan will assist with the decision making process, especially if this is your first venture into production agriculture.  To make the transition easier, think about what you have a passion to do.  Having a passion for the production makes the entire process more enjoyable.  A list of topics to consider prior to beginning include:

• Marketing
• Production
• Harvesting and storage
• Risk management
• Environmental regulations
• Where to find information

 Before beginning any production, you need to know if there is a market for what you plan to produce and where that market may be.  Another marketing decision is whether you are going to market wholesale or retail.  Wholesale marketing may be the easiest, but may not provide enough income to sustain your enterprise.  Retail marketing will take more time to develop as you will need to develop relationships with potential customers or find a farmers' market that has enough traffic to market you production.  One recommendation is to start small and grow into your market.

There are usually several production options for any livestock or crop you plan to produce.  For example, if considering producing beef cattle, will you raise grass-fed or a more conventional grain and hay program?  For horticultural crops, will you use plasticulture or be organically certified?

Do you have the time to produce and harvest what you plan to produce?  Even one acre of some crops requires 30-40 hours to harvest and many more to produce.  The production will need to integrate into your proposed schedule.  Also, will you need to store a portion of the crop prior to marketing and do you have these facilities?

Any production contains risk.  You are at the mercy of the weather, markets, and inputs that you cannot control.  There are insurance products you can take advantage of to help alleviate some of these concerns.

All municipalities have regulations that may impact your plans and production.  The first step for you is to contact your local municipality to determine if what you are planning fits into their regulations.  Another place to visit is your local Conservation District office to see if there are any environmental regulations that will impact your plans.

Penn State's Agricultural Alternatives publication series is an excellent place to start your research into a new venture.  There are now 64 publications in the series and we cover many topics targeting the small-scale and part-time farming community.  These publications are between four and twelve pages long and any topic covering production of livestock or crops has a budget included.  The publications are not in-depth production guides, as indicated by the length, but are designed to allow the reader to make a better informed decision about the potential of the enterprise.

We have an extensive listing of livestock, fruits, vegetables, and farm management publications.  The farm management publications cover business start-up, business planning, marketing, and risk management topics.  These should be viewed first when considering a new farming venture.  The information contained in these publications is necessary when starting a business.  They will guide you through the process of the new venture and provide the information to allow you to become successful.  There is also a section covering where to find much more in-depth information into the topic covered.

You can access these publications here.  There is a link to a PDF file for easy printing on the web pages that do not link directly to a PDF.  I encourage you to check out the website and discover what the project has to offer.  By using these publications and the included budgets you will be better informed about the time, capital, and equipment needed for the enterprise; all issues you need to consider when starting a new venture or enterprise.