Making It Happen: Profitability and Success The Carrot Project

Day 2 Is This The Right Price? Should I Add a New Product Line?

Disclaimers The numbers in this presentation are fictitious and used for illustrative purposes only. Some numbers are rounded for ease in calculation. As you set up your own accounting systems, you will need to adjustments based on your own business and growth needs.

Agenda Review of Day 1 Case Study: Parsonsfield Farm Pricing Strategies Competitive Analysis Breakeven Analysis Group Discussion

Day 1 - Recap Can I pay my bills? Should I make an investment? Understand your expenses (variable and fixed) What profit do you need? Cash Flow Budgeting Should I make an investment? Scenario Planning Sensitivity Analysis

Framework for Today’s Session Do I know how to price my products? How do I determine if a new product line makes sense? Financial Toolbox Breakeven Analysis Cost of Production Curious about the toolbox, but can save that for later. It is cute!

Process to Answer These Questions 1. Set your prices What is your cost of production? What does your competition charge? That is, what will the market bear? Understand Gross Margin After you cover the production costs, what’s leftover for overhead and profit? What is your overhead? How much margin do you need to cover your overhead? How much do you need to sell? Decide Know your gross margin and what you need to sell, does it make sense?

Pricing Strategies - Overview Cost of Production Highest Priced Competitor Profit and Overhead Pricing Sweet Spot

Pricing Strategies – Cost of Production Highest Priced Competitor Profit and Overhead Pricing Sweet Spot

Calculating Cost of Production Getting the Crop in the Ground (by acre/row) Labor Expense Expenses Getting the Crop Out of the Ground(by case/pound) Packaging Labor – Harvest/Packing

Example: Tomatoes Measurements: 1 Bed = 10 – 30 foot rows Yield ≈ 40 pounds per week Harvesting Season: 8 week Conversions: 1 Bed = 10 Rows ≈ 320 pounds 320 pounds ≈ 13 – 25 pound cases

Costs – Into the Ground (per bed per season) Labor Starting seeds .5 hour Watering 4 hour Transplanting 2 hours Laying Mulch 1 hour Staking 2 hours Weeding 2 hours Supplies Potting Soil/Trays: $100 Seeds: $30 Stakes: $30 Black Plastic/Amendments: $50 Total Time = 11.5 hours @ $15/hr = $172.50 $382.50÷320 𝑝𝑜𝑢𝑛𝑑𝑠 $382.50÷13 𝑐𝑎𝑠𝑒𝑠 Total Supplies = $210 Total Cost Per Bed: $382.50 Cost Per Pound: $1.20 Cost Per Case: $29.42

Summary Cost of Production Item Cost Per Bed Cost Per Case Cost Per Pound Into the Ground $332.50 $29.42 $1.20 Out of the Ground Total Cost Of Production

Costs – Out of the Ground (Per Case) Labor – Per Case Harvesting 15 minutes Sorting/Packaging 10 minutes Total Labor Cost @ $15/hour $6.25/case Supplies Packaging $.60/case Total Cost – Out of the Ground $6.85/case

Summary Cost of Production Item Cost Per Bed Cost Per Case Cost Per Pound Into the Ground $382.50 $ 29.42 $ 1.20 Out of the Ground $ 6.85 $ .53 Total Cost Of Production $ 36.27 $ 1.73

Highest Priced Competitor Tomatoes Cost of Production: $1.73 Highest Priced Competitor Profit and Overhead Pricing Sweet Spot

Questions?

Group Discussion What is Mary’s cost of production? What is her gross margin per bird? (revenue minus cost of production) Do you think she can meet her profit targets by year 5? Why or why not?

Mary’s Cost of Production Expenses Cost of Production? Chicks $ 11,000 Feed $ 38,000 Supplies $ 5,000 Processing Rent $6,000 Phone & Internet $1,000 Liability Insurance $ 1,000 Fuel, R&M $2,000 ✓ ✓ ✓ $300 * 20 = 6,000 ✓ ??

Mary’s Cost of production Chicks 11,000 Feed 38,000 Supplies 5,000 Processing Labor 6,000 Total Cost $ 60,000 Total Birds Sold 4,000 COP per bird $ 15.00 Revenue per bird $ 20.00 Profit per bird $ 5.00

Pricing Strategies: Competitive Analysis Cost of Production Highest Priced Competitor Profit and Overhead Pricing Sweet Spot

Competitive Analysis - Process List out competition List Features/Benefits What features do you have, that your competition does not? What features does your competition have, that you do not? How do different features impact pricing or perceived value? ”All things being equal”… how do you compare? © JULIA SHANKS FOOD CONSULTING l WWW.JULIASHANKS.COM

Who is your competition? Direct/Like Indirect/Replacement © JULIA SHANKS FOOD CONSULTING l WWW.JULIASHANKS.COM

List Competitors and Prices Mary Whole Foods Meat Market Farmers Market Stillwater Stop and Shop Price Per Pound $5.00 $4.00 $6.50 $1.99

What are their features? What makes the competition special? What makes Mary special? Convenience Organic vs Free-Range Butchered Connection with farmer & community Fresher Pastured GMO- Free

Comparing Like to Like Mary Whole Foods Meat Market Farmers Market Stillwater Stop and Shop $5.00 $4.00 $6.50 $1.99 Organic √ Free Range/ Pastured P F Direct from Farmer Butchered

Comparing Chickens to Chickens Mary Whole Foods Meat Market Farmers Market Stillwater Stop and Shop $5.00 $4.00 $6.50 $1.99 Organic √ Free Range/ Pastured P F Direct from Farmer Butchered

Assign a Value What premium can you charge for different features? Organic -- $2.00 Free-Range/Pastured -- $1.00 - $2.00 Direct from Farmer -- $2.00 Butchered -- $2.00

Assign a value Mary Whole Foods Meat Market Farmers Market Stillwater Stop and Shop $5.00 $4.00 $6.50 $1.99 Organic √ +2.00 Free Range/ Pastured P F +1.00 +$1.00 +$2.00 Direct from Farmer Butchered -$2.00 The competitor has the feature; you don’t. If they didn’t have it, there price would be lower… all things being equal. You have a feature, the competition doesn’t. If they did, they could charge a higher price… all things being equal.

Adjusted Price Mary Whole Foods Meat Market Farmers Market Stillwater Stop and Shop $5.00 $4.00 $6.50 $1.99 Organic √ +2.00 Free Range/ Pastured P F +1.00 +$1.00 +$2.00 Direct from Farmer Butchered -$2.00 Adjusted Price $6.00 $7.00 $5.99

Decide What do you think of Mary’s competition? How does her price compare? Is she competitive? Overpriced? Underpriced? Why do you think that? What is the right price for Mary?

Applying Concepts What is your cost of production? How would you calculate it? What does your competition charge?

Using Cost of Production to Understand Break-Even Given your cost of production

Gross Profit - What’s left over to pay bills Revenue – Cost of Production = Gross Profit Example Each pound of tomatoes costs $1.71 to produce If you sell it for $3.00 per pound, your gross profit is $1.29 How many pounds, how many $1.29’s do you need to cover your overhead?

Gross Profit vs. Gross Margin For every $1 you, sell, you get 43 cents for overhead. Variable Cost = 100% - 43% = 57%

Gross Profit vs. Gross Margin Profit is the dollar amount Margin is the percentage.

Setting Goals (Your Break-even Point) (Gross Margin) * Break-even Sales = Fixed Costs + Desired Profit (100% – Variable Costs) * Breakeven Sales = Fixed Costs + Desired Profit Break Even Sales = Fixed Costs + Desired Profit (100% – Variable Costs)

Where do the numbers come from? Sales Goal = Fixed Costs + Desired Profit (100% – Variable Costs) Review Previous Year’s Numbers: Categorize Each Expenses as Fixed or Variable Overhead or Cost of Production Fixed Costs = Overhead Expenses. Note as $$$ Variable Costs = Cost of Production. Note as %%% What was your cost of production? What was your revenue? Desired Profit What do you need to pay your bills? What do you want to reinvest?

Fixed vs. Variable Costs Fixed Costs: Variable Costs: A periodic charge that does not vary with business volume. Insurance Rent Bank Fees An expense that varies with production output and/or revenue. Seeds and Seedlings Animal Feed Labor/Payroll

Mary’s Costs – Fixed or Variable Expenses Fixed or Variable? Chicks $ 11,000 Feed $ 38,000 Supplies $ 5,000 Processing $ 6,000 Rent $6,000 Phone & Internet $1,000 Liability Insurance $ 1,000 Fuel, R&M $2,000 Variable Variable Variable Variable Fixed Fixed Fixed Fixed - ish

Profitability: What will it take? How much revenue do you need to cover expenses and still generate a profit? Variable Costs (expressed as a percentage) Chicks Feed Supplies Processing Fixed Costs (expressed as a dollar amount) - $15,000 Rent Insurance Farm Overhead Desired Profits - $35,000 What do you need to live?

Break-even – New Pricing Break Even Sales = Fixed Costs + Desired Profit (100% – Variable Costs) Variable Cost = COP/Sales Price 14.25/22 = 65% Fixed Costs + Desired Profit $15,000 + 35,000 = $50,000 Breakeven Sales = $ 50,000/(1-65%) = $ 50,000/35% = $142,000 @ $22/bird = 6,454 birds Projected Revenue = 5000 birds * $22 per bird = $110,000

Questions?

Discussion: Step 3 What do you think of Mary’s opportunity to sell to this wholesale customer? Can she afford to lower her price?

Evaluating New Opportunities Same Formula, Minor Adjustment What will it take to cover new (fixed) expenses 𝑩𝒓𝒆𝒂𝒌𝒆𝒗𝒆𝒏 𝑺𝒂𝒍𝒆𝒔= 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 (𝟏𝟎𝟎% −𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕𝒔)

Mary’s Breakeven (New Opportunity) Variable Cost = COP/Sales Price 14.25/20 = 71.2% Fixed Sales Costs $60/week * 50 weeks = $3,000 Breakeven Sales = $ 3,000/(1-71.2%) = $ 3,000/28.8% = $10,435 Projected Sales = $20,000 What do you think?

New Opportunity – Does it make sense? Variable Cost = COP/Sales Price 14.25/20 = 71.2% Fixed Sales Costs $60/week * 50 weeks = $3,000 Projected Revenue = $20,000 Cost of Production $14,250 Selling Cost $ 3,000 Net Contribution $ 2,750

Case Study - Learning Points Pricing Strategies: Understand Cost of Production Know what the competition charges Improving Profits Increase sales Increase gross margins Decrease production expenses Breakeven: Understand how expenses change Variable vs. fixed Know your profit goals

Discussion – Implementing New Habits Do I know how to price my products? How do you calculate your cost of production? Do you know who your competitors are? What information do you need to gather? How do I determine if a new product line makes sense? What costs do you need to cover? What is your breakeven point? Do you have the tools you need? What do you need (TA/Coaching/Numbers) to evaluate?

Evaluations and Survey Post–SBQs Survey FSA Borrower Training Survey How do I put this into practice? Financial Management Calendar webinar Recorded at www.thecarrotproject.org TA & Coaching Contact kbh@thecarrotproject.org

Client Services Coordinator Thank you! Stay in touch! Kira Bennett Hamilton Client Services Coordinator kbh@thecarrotproject.org (617) 674-2371 x 9