Points to Consider in Pricing a Product

Albert E. Essel

Virginia State University

Petersburg, Virginia

Agriculture Marketing Overview

Developments in Agriculture Markets

Traditional vs Consumer Oriented Marketing

Managing Market for Profit

Role of Price in Marketing

Developing a Successful Pricing Program

Developments in Agriculture Markets

More Consumer Orientation

Increased Direct Marketing

Increased Integration

Increased Contracting

Increased Demand for Food and Environmental Safety

Global Markets

Changing Role of Government

Traditional vs Consumer Oriented Marketing

Focus on production; Focus on customer;Operate within budget needs in target market, Use existing marketing; Evaluate costs and benefits' channels to dispose of meeting needs products; Assemble product, price, place, and accept market prices, promotion mix to satisfy needs

Managing Markets for Profit

Evaluate Market Opportunities - Size, Potential, Trends, Select Target Markets, Customer Needs, Profiles

Develop Marketing Mix - Product, Price, Distribution System, Advertising and Promotion Plan,

Evaluation, and Feedback

Role of Price in Marketing

Conveys Image

Coordinates Markets

Influences Revenue and Profitability

Proxy for Value

Influences Market Share

Developing Successful Pricing Program: Process

Set Pricing Objective

Study Demand

Determine Costs

Analyze Competition

Select Pricing Strategy

Determine Final Price

Developing Successful Pricing Program: Pricing Objective

Maximize Sales Growth

Maximize Revenue

Maximize Profit

Maximize Price (Market Skimming)

Quality Leadership

Developing Successful Pricing Program: Demand

Quantities Sold at Different Prices in a Given Period

Difficult to Estimate

Factors Affecting Demand

income

prices of other goods

number of buyers

tastes and preferences of consumers, time, etc.

Developing Successful Pricing Program: Price Sensitivity

Measured by Price Elasticity of Demand

Elasticity = % Change in quantity / % Change in price

>1 Elastic - Raising price lowers revenue

<1 Inelastic - Raising price increases revenue

Customer Price Sensitivity is Affected by:

Number of substitutes

Uniqueness of product

Percent of consumer budget spent on product,

Perceived quality

Developing Succesful Pricing Program: Costs

Consider all costs

Total costs = Production costs + Markeing costs

Total costs vary with quantity produced

Separate costs into fixed and variable costs

TC = Fixed costs + Variable costs

Fixed costs (FC) - buildings, machinery, etc.

Variable costs (VC) - seeds, fertilizers., supplies, etc.

Unit costs + TC/Quantity (Q), Unit costs vary with quantity

Developing Successful Pricing Program:

Analyze Competition

Major Competitors - Location Competitors' Product, and

Features Offered

Competitors' Prices

Competitors' Costs

Competitive (Cost) Advantage

Market Barriers/Regulations

Developing Successful Pricing Program: Pricing Strategy

Many Methods Exist for Pricing a Product Pricing may be based on costs and/or demand

Cost-based pricing easier for farmers

Common Strategies Used by Farmers Include:

Pricing at the market

Cost-plus pricing

Pricing with break-even analysis

Pricing with contribution margin

Pricing Strategy: Pricing at the Market:

Price According to Competitors' Prices

Adjust for Quality Differences

Advantages:

Simple to use

Disadvantages:

Ignores costs and demand

 

Pricing Strategy: Cost-Plus Pricing

Selling Price + Unit Costs + $ Markup

or

Selling Price + Unit Costs / (1-desired % Markup)

Advantage:

Easy to use

Disadvantages:

Ignores demand and competition

Discourages efficiency

Pricing Strategy: Cost - Plus Pricing -

Example

Suppose an Enterprise Budget for Hydroponic Greenhouse Tomatoes Shows the following:

Variable cost per pound = $0.77

Fixed costs per pound = $0.29

Total costs per pound = $1.06

If the Farmer Wants a 20% Markup, then Selling price = Total costs per pound = 1.06

1-desired% markup)(1-0.20)=

$1.33 / pound

Developing Successful Pricing Program: Profit Equation

Profit = Total Revenue (TR) - Total Cost (TC)

= (Price x Qty) - (Fixed costs + Variable costs)

= P.Q - (FC + v.Q)

When, TR - TC > 0 Profit

= 0 Break-even

< 0 Loss

Pricing Strategy:

Pricing With Break-Even Analysis

Profit = Total Revenue - Total Costs + 0

= P.Q - (FC + v.Q) = 0

Break-even price = FC + v.Q + (Profit=0)

Q Break-even Q = FC (P - v)

Where, P = Selling price, Q = Quantity, v = var. cost per unit, and

FC = Total fixed cost

Pricing Strategy: Break-Even Analysis-Example:

The Hydroponic Greenhouse Tomato Producers Projected Budget Shows the Following:

Annual production (Q) = 25,200 lb.

Variable costs per lb. (v) = $0.77

Total fixed costs (FC) = $7387

Break-Even P

= 7387 + (0.77 x25,200) + 0 / 25,200

Suppose that the farmer wants to earn $5000 profit, then,

Selling Price =

7387 + (0.77 x 25,200) + 5000 / 252000 = $1.26/lb

Pricing Strategy:

Pricing With Contribution Margin

For Each Unit of Product:

Selling Price = Fixed costs + Var. costs + Profit

Selling Price - Var. costs = Fixed costs + Profit = contribution margin

 

Selling Price = Variable costs

(1 - contribution margin percent)

Where, contribution margin % is % of selling price or sales revenue left to cover fixed costs and profit after variable costs are paid

Pricing Strategy: Contribution Margin - Example

Suppose an Enterprise Budget for Hydroponic Greenhouse tomatoes Shows the following:

Variable costs per pound = $0.77

Fixed costs per pound = $0.29

Total costs per pound = $1.06

From past enterprise budgets (income statements), the farmer's contribution margin percent is 35% of sales.

Selling Price =

Variable cost = $0.77 = $1.18

(1-cont., margin%) (1-0.35)

Developing Successful Pricing Program: Setting Final Price

Other factors to consider in establishing final price include:

-price

-psychological factors

-discounts, promotions, etc.

-macroeconomic conditions

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