Smart Pricing Strategies

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March 2001

Smart Pricing Strategies

by Wen-fei L. Uva, Senior Extension Associate Department of Applied Economics and Management, Cornell University

Pricing is an important piece of smart marketing. The price a farmer receives depends largely on the distribution channel used to sell the product. Farmers are usually price-takers at terminal and wholesale markets. For farmers, one of the major attractions of direct marketing is the opportunity of gaining control over the prices they can charge. Yet frustration often arises when trying to determine prices, and one of the most difficult problems in direct marketing often centers around the all-too-common practice of price-cutting. Price provides income, guides the quantity supplied and demanded, serves as a signal to customers, and transfers ownership. Questions one should ask before determining prices include: How much do the competitors charge? How much are customers willing to pay? Does the product have additional value for which the price may be raised? What is the cost to produce the product? And if you slash prices (below competition), how will you maintain profitability? The most basic element of pricing is to know your costs, including variable costs and fixed costs. Variable costs are cost items directly related to production -- plants, seeds, fertilizer, labor, packaging, etc. Fixed costs are cost items that do not vary with production volume, such as rent, taxes, management salaries, and cost of capital. The price of one item should at least cover variable costs in the short run and need to cover both variable and fixed costs in the long run. It is important to establish a gross margin that will cover the total costs of growing and

marketing the product and provide a satisfactory profit for the business. Gross margin is the difference between the cost of the product and its selling price.

Gross Margin % =

Selling Price - Cost ∗100 Selling Price

Retail Price ($) =

Cost of Goods Sold ($)...