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.

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.

Promo Prices--When is Enough Enough?

Everyone loves a sale, right?  This might be your strategy for getting customers into your store, but can you have too many promotions?

In a Supermarket Guru article from earlier this year, frequent promotions and more consistent pricing strategies are explored.  Seventy-six percent of retailers are sending more price changes to stores in 2012 as compared to 2011 shows research from Retail Systems Research (RSR).  With these numerous price changes, it seems retailers are promoting a hyper-promotional environment.  

Why is this happening?  Retailers were surveyed by RSR and the findings show:

• Increased price sensitivity of consumers (67%, up from 58% in 2011 and 46% in 2010).
• Increased pricing aggressiveness from competitors (51%, up from 48% in 2011 and 38% in 2010).
• Increased price transparency—the impact of comparative price shopping (47%, up from 40% in 2011 and 11% in 2010).
• Need to protect our brand’s price image (42%, up from 38% in 2011 and 28% in 2010).
• Need to provide consistency in price across channels (27%, down from 32% in 2011 but up from 6% in 2010).

One outcome the article describes is that " 41% of retailer executives surveyed say their companies have become more promotions-driven in 2012, up from 31% who said this in 2010; only 12% focus more on everyday low prices, the findings show...Yet among retail winners (with comp-store sales growth in excess of 3% annually, says RSR), the simple discounting of high-low pricing (38%) and Everyday Low Pricing (25%) are the primary pricing levers. Only retailers classified as losers (annual comp-store sales growth under 3%) used a hyper-promotional strategy (18%)."  The survey didn't explore beyond pricing and promotions, so a hyper-promotional strategy isn't the only reason these stores might be considered "losers".  It is also important to think about what services, assortments, convenience, and expertise your store offers.  

Learn more about the 4 P's (Pricing, Promotion, Product, and Placement) in the Resource Center of PAMarketMaker.com or in the Value-Added Marketing Series section of the Penn State Farm Business Management page.

As an agricultural entrepreneur, do you run promotions?  How often?  How do your customers respond to promotions?

Do You Offer Mass Customization?

Among the many topics we discuss in this blog, we often write about differentiation and unique products.  One way to take this concept further is to implement mass customization – a way of allowing customers to select from a limited number of components to create product that is “their own.”  An easy way to think of mass customization is to visualize a food gift basket – individual items (e.g., candy, food products, cooking utensils) are bundled together in a container and then wrapped or decorated to match the theme.  Someone had to develop the idea/theme/look for the gift basket – why not let it be your customers?

So, what are some examples of mass customization?

Several retailers have done well with the concept and according to a 2011 Forrester report, and subsequent blog postings, “Mass customization is (finally) the future of products” (http://tinyurl.com/3mgxxoh).  Perhaps you have even been involved in mass customization yourself.

• Have you ever created a colorful blend of M&M’s?  If yes, you had a mass customization experience.  There are 24 colors to choose from.  Not every imaginable color is available, but M&M’s is probably pretty certain that most customers will find a mix of colors that appeals to them.  
• Are you a devoted Converse sneaker customer – one that has a pair in almost every color or style?  Now you can design your own.  Again, you will 24 colors and 24 prints to choose from for the outside body of the sneaker and the same options for the inside, heel stripe, tongue, lining and other sneaker parts.  
• Or, have you ever created a “My American Girl” doll for a young child?  You can select the hair color (10 options for blond hair), eye color (10 eye colors available for blond haired dolls), and hair styles (seven straight and three curly/wavy options for blonds).  

                                   What is the key to mass customization for small or independent ag. businesses?  

Limiting the number of options (e.g., colors, types of items) that the consumer can select from.

Why is this important?  If too many choices are offered it is likely that customers will be overwhelmed with what they can select from.  For American Girl, if all combinations were available (49 hair colors, 3 skin tones, 40 eye colors, and 40 hair styles) customers would have several thousand different dolls to choose from.  Most likely, the colors/prints/options available for mass customization are those that have been popular in the past.  By narrowing the options to a more manageable number the process is much easier for both customer and retailer– hence, it is called “mass” customization.

If you explore these or other examples of mass customization you may notice that the price point for the completed product is higher than off-the-shelf (not customized) products or the total price for all individual pieces used to make the final product.  Why is that?  Since you are offering customers a convenience (1. for assembling the components, 2. for coming up with the concept) and there are added labor costs for putting the final product together – you need to account for these “costs.”

So, what can an ag. business do to capitalize on mass customization?  

If you are not already offering customers the option to build their own gift basket – it is suggested that the interest in giving gift baskets will continue to be strong – this may be a way to foray into mass customization.  Gift baskets can be offered for a number of holiday (Valentine’s Day) and non-holiday (anniversaries, thank you) occasions.  So, the possibilities are endless.

Dean & Deluca is an example of a retailer that allows customers to build baskets in-store and on-line.  Consider a customer who wants to buy a thank you gift for a friend who is passionate about coffee.  Well, Dean & Deluca can help with that.  The gift giver starts the process by first selecting the container (limited number of options available).  Each container holds a certain number of items based on each item’s size which helps the customer determine how big the final gift will be and not overstuff the basket.  Wrapping and decorating finish the product’s look.

What are a couple of other mass customization options for ag. businesses?

• Table-top Christmas trees have been a popular for a number of years – the convenience they offer customers is very appealing.  Consider offering customers the ability to designing their own decorated table top tree.  Allow them to select from three or four species, three or four decorations styles, and three or four container options.  
• Offer customers mass customization for planters, containers, or small landscape designs. 

Look though your own inventory and think about how you could help customers create a product that has been customized - just for them.  

Price Competition: Shoppers Value a Bargain!

Do you know a bargain hunter? You know, the type of person that is drawn to a "SALE" sign like a moth to a flame...  Most of us know one or two, I'm sure.  I learned a little more about these people last week, thanks to a paper presented at a conference by some researchers from Washington State University (Li, McCluskey, and Mittelhammer).

The research team analyzed the responses to "permanent" price drops (that is, those that were due strictly to supply and demand conditions) versus promotional, or short-term, price drops.  They used data from supermarket scanners, so they were able to analyze real transactions under real market conditions.  They did this for several different types of vegetables.

Guess what they found...  Consumers were more responsive to short-term price decreases than they were to permanent ones.  This suggests that promotions may be a better method to generate increased sales than being viewed as having low prices all the time.  On the other hand, it also means that promotions that happen too frequently may cause customers to pull back when a promotion isn't underway.

This phenomenon doesn't really surprise me.  I may or may not be related to a bargain hunter and I have come to understand that the purchase is more than the purchase.  Getting a bargain is a badge of honor; a story to tell friends, family, and co-workers.  I get that.  But there may be other factors at play.  In a stagnant economy like this one, we see shows like TLC's "Extreme Couponing" become popular.  To get these types of bargains, it often means buying in bulk.  So hoarding, or "stocking up" is a factor that drive sales during promotions.  (For something like vegetables, this may mean freezing or canning, so be sure to offer tips on how to do that.)

There's good science and economics behind pricing strategies that include short-term promotions.  Business owners should think about using them frequently, but not so much that they become the norm.  Watch sales (in dollars and quantities) to see how effective the promotions are.

Surveys of mid-Atlantic consumers conducted by Penn State researchers part 12

As a food producer, setting a price for your product can be difficult. When setting a price, you must consider product production costs, competitors, target customers, and product qualities. One example of a production cost (and subsequent product quality) is producing certified organic products. In 2010, Penn State researchers conducted a study on consumer purchasing habits. One question asked participants how much they would be willing to spend on a pound of certified organic apples compared to a pound of non-certified organic apples priced at $1/pound.

As you can see by the graph below, 32.1% of respondents said they were unwilling to pay more for organic Gala apples. Conversely, 57.6% indicated that thy would be willing to spend at least $1/pound for organic Gala apples.



This survey only asked respondents about organic Gala apples, but this specific example can be helpful in understanding consumers' willingness to pay for organic produce in general. To read more about this study, please read the press release.

When pricing your organic produce (or any product), you must carefully position your price to attract the most buyers. It is extremely important to inform and remind consumers about the product attributes and proposed benefits of your product through appropriate advertising and in-store promotions. Want more help in pricing your product? Check out our Value-Added Marketing Series. We have a publication titled "Product Pricing: What Do I Charge?" which will give you some good info on pricing your product!