Setting prices synthetically rather than analytically

Analysis tries to understand things by breaking them down into their components.

Synthesis tries to understand a thing by combining and processing information in its surroundings.

Do you determine your prices by building them up from their component costs? Or do you look at how your prices will fit into the entire market ecology that they are entering into?

The first method is analytic; the second is synthetic.

The task of setting the prices for your products at farmers’ market seems to be a bewildering exercise for new and first time producers. The advice from academics tends to make each price determination seem like the result of complex calculations that involves collecting data on the many different costs that make up what it “really costs” you to produce that item.

The question you need to ask is: Are you going to “build” your prices by stacking up all your costs and dividing by your yield, or are you going to base your pricing on an acute awareness of what others in your marketplace are charging?

Analytic determination: Consider costs Synthetic Determination: Consider environment
First you determine: Cost of land, mortgage, interest, etc.

  • Taxes on the land
  • Cost of equipment, farm buildings, and implements
  • Depreciation on equipment and implements
  • Fuel & repair cost for running equipment

Materials cost

  • Cost of seed
  • Cost of buying or making compost or other fertilizer
  • Cost of fuel to prepare ground and plant

Labor costs – your own labor & hired people

  • planning
  • planting
  • weeding
  • harvesting
  • prepping for market
  • going to and selling at market
  • keeping track of all these costs
  • taxes on above

Keep track of the above by item whenever the costs vary by item (i.e., it may cost more to weed carrots than summer squash).

Marketing costs

  • market dues
  • cost of driving to market & back

Determine a profit target for the year
Find the total of all the above
Multiply that total by the fraction of the farm that is taken up by the crop you want to determine the price for. If an early crop is going to get a higher price due to its earliness, then consider that early crop separately from the rest of that crop.
Divide that number by the units (pounds, bushels, bunches, etc.) that you expect that crop to produce.
This gives you the price you should be charging per unit for that item.
Repeat for each of the items you grow.

  • Not in a vacuum. Understand that most times you are introducing a product into a marketplace  where that product already exists, either from other farmers at market, at roadside stands, or at supermarkets. Therefore your price will often be perceived in relation to prices that others charge for the same or for analogous products.
  • Not price alone. The price of your product is but one of dozens of variables that shoppers will use to decide on their purchases. Other, often equally important factors include the quantity it is offered in, its overall appearance, the friendliness of you and your sales staff, the level of trust you have engendered in your shoppers, whether your display is full or almost empty, what day of the week it is, whether it is raining, and more.
  • Give ‘em a deal. You may want to offer certain items as “loss leaders” to attract shoppers to your stand where most of them will continue to do the rest of their shopping. Alternatively you may want to offer a small-volume price as well as a lower bulk price.
  • Adjust your prices to fit the market. Either ignore what others close to you are selling things at, or adjust your prices to take others’ pricing into account. At least be aware of the pricing environment that your shoppers see themselves in.
  • Adjust your prices to reflect your supply. When item is scarce, you can get a higher price, but when it is abundant everywhere, you need to lower your price in order to sell an appropriate amount relative to your production.
  • Sum of Niches ≠ Mass Market. Going after the mass market is going after the lowest common denominator among your shoppers. This is very different than looking to simultaneously satisfy multiple distinct market niches, where you specifically attempt to appeal to different niches of shoppers. You see your shoppers as a salad and not as a stew.
  • Static demographics are a myth. How any segment of the public behaves now will be changed by the education you engage them in as you sell. Every demographic segment is dynamic.

In some ways, synthetic pricing may seem like a “seat of the pants” approach, but it is far from that. Rather it is process that begins with a best price guesstimate based on your current understanding of what the marketing environment you are entering is like, what it will bear, how your quality compares with that of others, etc. Then iterate (repeat) the process often at market and re-evaluate the previous pricing decisions. This isn’t to suggest that you change your prices at each market, but rather that you be aware at each market of where your prices fit into the range of other prices that shoppers will find there.

In synthetic pricing, the process of determining a price is impacted by a multitude of phenomena, many of which are completely non-monetary. For example:

  • If you are bringing all you can and still sell out before the end of market, you should raise your price.
  • If something isn’t selling well, rather than adjusting the price, move it to a new location in your stand.
  • If you have a lot of something, keep the unit price the same, but offer deals on purchasing multiple units, or purchasing it in bulk.
  • Don’t get stuck in the math: Make your prices so they add and multiply easily.
  • Don’t use human psychology as a weapon against your customers: Don’t end your prices in 9, 4, etc.
  • Give shoppers a generous amount and consider that extra as part of your promotional budget.
  • Keep most of your prices the same throughout the season. Change only certain prices as the first of the season gradually turns into an abundance; tomatoes, cukes, and corn may be perceived as worth more early in the season. Continuity of pricing makes your job of remembering prices easier.
  • Put your price label right on your display container; many folks won’t bother to ask you or to look around to find the price and they will walk on to your competitors.
  • If demand is low there is psychological pressure to lower your price. Look around. If demand is low for everyone, then ignore that pressure to drop your price; it’s just a slow day. However, if you are the only one with slow sales, find out what you are doing wrong!
  • If you are going to be a professional retail marketer, assume the responsibility to find out what others around you are getting for their produce and what their quality is like. Drastically undercutting prices also drastically undercuts good feelings.

About Tom Roberts

When I started attending the Brewer Farmers’ Market back in August of 1983, my sole concern was being able to sell the produce my farm was growing at a good price. After attending market for a year or two, I began to realize that how the market was organized had a great impact on my sales. And how the market was organized also influenced how it made decisions about dues, new members, what could be sold at market, and how it promoted itself—and this, too, had an impact on my sales. So I got involved in the market’s steering committee and began to understand how various market members thought the market should operate. Some wanted a market czar, some wanted everyone to be allowed to do their own thing. But everyone seemed to agree that if the market as a whole did well, then so did they.