Cost-Plus versus Value-Based Pricing for your Farm Products
What is the right price for your Farm products? With data aggregated across millions of orders, Barn2Door has gathered a lot of insights into pricing products for Farm direct sales. Determining the appropriate price point of your products is essential to running your business. The price you set will affect your product’s perceived value and has the power to affect a customer’s likelihood to purchase.
There are two primary models that Farms typically follow when setting prices: Cost-Plus or Value-based. While each model offers its advantages, there are different factors to consider when determining what’s best for your Farm products and business goals. Whether you’re just starting out, looking to increase gross revenue, improve your net margins (profits), or be more competitive in your market (to stifle other market players), here’s what you should know before attaching a price tag to your Farm products:
Cost-Plus Pricing
Cost-Plus pricing is a quantitative model that is derived by taking all the costs of growing and harvesting a product (labor, inputs (seeds, water, animal feed) and operating expenses, etc.), then adding a “mark-up” to make a profit. This is often considered the simplest way to determine a “fair” price, and with this model, it’s easy to justify price increases – if your input costs rise, the costs of your products should rise too. This pricing model is great in a market when you’re unsure of demand, have no direct competitors, or your Farm is a new entrant in an established market (and you’re opting to capture market share with the lowest price while still covering your costs). What’s most important in this situation is that you’re covering your costs in their entirety while still turning a profit.
Even though it seems like a simple approach, a Cost-Plus pricing model often overlooks hidden costs, which are not properly allocated across all your products that can (and will) reduce your margins (e.g., your overall real estate debt service and tax obligations). This model can also put you in direct competition with commodity products and items found at the grocery store, which should generally be avoided.
Ultimately, competing on the “lowest” price reduces your Farm products to a commodity - putting you in direct competition with big-box grocers and conventional agriculture. As 94% of buyers prefer to shop locally, the Cost-Plus pricing model neglects to consider the value customers place on a relationship with your Farm. For example, 1lb of bacon at the grocery store may cost, on average, between $7-$8. However, we know Farms that charge $15+ for 1lb of bacon and still sell out!
Watch: Pricing Your Products for Profit & Ease
Value-Based Pricing
Value-based pricing is a qualitative model based on the perceived value of your products, including factors such as your Farm brand, trust, customer loyalty, and practices. It’s easy to forget how much price plays a role in buyers' understanding of the value of a product. What we know to be true among customers' perceptions is the higher the price, the higher the quality.
Your products are high-quality, locally grown, and you’ve put countless hours into cultivating the land, taking care of your animals, and upholding different practices and certification requirements to produce your products. That’s why you can justify charging a premium for the high-quality products you produce!
Today’s largest buying segment are millennials (ages 25 - 39 year old), 80% of whom are willing to pay more for sustainably-produced goods. Value-based pricing ensures that your Farm is maximizing the amounts a buyer is willing to pay for your products (not limited by underlying quantitative factors).
Here are two reasons why Farmers often choose a Value-Based pricing model to increase their revenues and optimize their profit margins:
Quality: Most customers won’t care about how much it costs to grow and harvest your products, but they will care about its quality. By explaining the unique quality of your products, showcasing your certifications on your website, discussing the practices you use on social media, and aligning your Farm business with local associations, you will build trust, improve transparency, and increase the perceived value of your products. Depending on the perceived value of your products, you can often charge up to 2x - 3x the amount of products at the grocery store.
Read: 3 Ways to Communicate the Value of Products to Customers
Listen: Keeping up with Demand by Doubling Sales (Again) with Tom Bennett
Convenience: Customers are used to paying for convenience, which is why 93% of Americans have purchased through Amazon. Farms that offer convenient access to products through a simple point-and-click-purchase experience, Direct Delivery, and convenient Pickup locations, drive more sales than those who do not. Customers understand that the price they are paying also includes the convenience of receiving your products on their doorstep. Charge a higher price to cover the cost of your time delivering products and ensure your efforts are profitable (note, Amazon charges $9.95 for Grocery delivery). Customers’ are willing to pay for the convenience of accessing your products anywhere, anytime that works with their busy schedules.
Read: How to Run a Convenient Farm Pickup Service
Read: Data to Fuel a Profitable Farm Delivery Service
The Verdict
Everyone eats every day, and the demand for food is persistent despite any economic or political trends. A Cost-Plus pricing model isn’t suitable for most Farm businesses, given the time to quantify and attribute all of your costs (especially in an inflationary market). Value-based pricing, however, has the power to increase your Farm profits and develop a strong brand perception, but it should be measured and tested thoughtfully. Finding the balance between a premium Value-based pricing structure while not pricing yourself out of your own market is key. Remember, it’s much harder to raise the price of your products than it is to lower them. Your Farm products and the time committed to your business are valuable assets - treat them as such!
Barn2Door provides an all-in-one solution to grow and manage your Farm business. If you’re curious to learn why successful Farms run on Barn2Door, watch this 5-minute video.