1. Making It Happen: Profitability and Success The Carrot Project

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

4. 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.

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

6. 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

7. 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!

8. 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?

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

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

11. 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

12. 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

13. Costs – Into the Ground (per bed per season)
Labor
Starting seeds hour
Watering hour
Transplanting hours
Laying Mulch 1 hour
Staking hours
Weeding 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

14. 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

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

16. 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

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

18. Questions?

19. 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?

20. 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 ✓ ??

21. 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 $
Revenue per bird $
Profit per bird $

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

23. 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

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

25. 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

26. 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

27. 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

28. 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

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

30. 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.

31. 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

32. 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?

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

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

35. 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?

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

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

38. 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)

39. 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?

40. 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

41. 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

42. 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?

43. 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 = $50,000
Breakeven Sales = $ 50,000/(1-65%)
= $ 50,000/35%
= $142,000
@ $22/bird = 6,454 birds
Projected Revenue = birds * $22 per bird
= $110,000

44. Questions?

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

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

47. 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?

48. 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

49. 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

50. 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?

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

52. Client Services Coordinator
Thank you!
Stay in touch!
Kira Bennett Hamilton
Client Services Coordinator
(617) x 9